The key interest rates of the European Central Bank (hereinafter the ECB) are the call rate for the main refinancing operations and the interest rates on the marginal lending facility and open offer of liquidity deposit overnight or open marginal deposit offer. The main refinancing rate since2016 is 0.00%, the marginal lending rate is currently at 0.25%, and for the deposits, the facility has been negative since 2014 and currently stands at -0.50% (the last change was made in September 2019). The latter is crucial for the excess liquidity of banks, which mainly include the cash deposits of clients.
In the last period, the cash deposits of depositors have been increasing in terms of deposits from both households and legal entities. Deposits in banks are deposits available for recall or a vista funds, time deposits and overnight deposits. According to Bank of Slovenia, households had a total of EUR 22.1bn deposits at the end of November 2020, which increased by EUR 1.7bn in 2020 (by comparison: at the end of 2008, these funds were EUR 13.4bn). At the end of November 2020, the legal entities had deposits in the amount of EUR 7,7bn which have increased by almost EUR 1,0bn in 2020. The reasons for this level of increase in resources can be found in historical facts because the Slovenians were under the strong influence of the Germanic economic model and we are still very conservative today in regards to consumption and investment. With economic growth, household purchasing power has also increased, and after the last major financial crisis, legal entities have mostly restructured and today maintain a certain level of short-term liquidity. The current covid-19 pandemic is likely to slow the growth of household deposits, especially in the segment of legal entities, and the issue of further changes arises in the roll-over of negative interest rates by commercial banks to their depositors.
In terms of profitability and internal policies of commercial banks, it is expected that the negative interest rates paid by commercial banks to the ECB for redeemable deposits and certain short-term deposits will be passed on to their depositors. Debt interest, which is just another term for negative interest rates, are already charged to legal entities and some other business entities by commercial banks. The first one transferring the burden to depositors was our biggest systemic bank in 2016, with a negative deposit rate of more than EUR 3 Mn. Today, most commercial banks charge this kind of commissions for legal entities (called high-level account balance management, account management, etc.) and at our largest bank is charging 0.04% per year for average monthly balance amounts of between EUR 0.1 Mn and EUR 0.5 Mn up to 0.08 % per annum for amounts over EUR 5 Mn. It was only a matter of time before banks introduced debt interest to households, however, it should be emphasized the stronger emotional attitude of households towards their savings.
As already said, Slovenians are quite a fiscal conservative concerning their income, and so we are also looking for conservative investments in which to invest our savings. Despite the last major financial crisis and very turbulent times in the Slovenian banking sector, from the liquidation of two commercial banks, the cancellation of subordinated securities to the repeated recapitalisation of banks with taxpayers’ money, confidence in the Slovenian banking system has not diminished to the point that bank customers are starting to look for other forms of an investment than a deposit. The introduction of the debt interest will for sure affect their decisions to transfer part of the funds from banks to other forms of investment, but the volume of this move remains to be seen. Secondly, the question arises as to what kind of conservative investments the bank’s customers have at their disposal today. Banks are mostly limited in their offer to deposits and mutual funds. Thus, in addition to the aforementioned investments, only investment in real estate and related projects and less direct entry into stock markets remains as an option for conservative investors (households and legal entities). I assume that the current cryptocurrency market situation and commodities are not interesting to conservative investors.
Real estate investments generate an annual return of around 4.6%, and the average interest rate of bank deposits to a year is currently around 0.04% per annum (this situation has been going on for the last four years). We would expect the savings of quite conservative clients to move into the real estate market, which has largely not happened. The pandemic crisis, at least for households, will be an additional reason not to invest in investment properties for some time. Even though according to the Statistical Office of Slovenia, in the period 2016-2020 the annual inflation rate was 4.5% and consequently, due to rising prices, the value of money decreases, the volume of assets of households and legal entities in banks is not decreasing. In conclusion, we can see that in Slovenia most households and legal entities are still lacking in knowledge about the possibilities of growing their savings. Traditional investments, where deposits in banks are primarily included, remain a basic form of investment in the eyes of conservative investors. Despite the introduction of the bank negative interests, which our biggest bank has announced for April 2021, and is likely to be followed by other commercial banks, I think there will be no massive relocation of savings. But those who decide to do so will ask themselves the question: Where to invest one’s savings? We will certainly not find an answer to this question investing in bank products. The possibilities for achieving stable growth while keeping the structural stability of savings are considerable, as the market for financial instruments has been extensively reshaped in recent years – including the alternative investment market. However, it will certainly be necessary to raise the awareness and knowledge of Slovenians about alternative forms of investment.