European banks are rightly being criticized for failing to pass on interest-rate increases to customers. But is it any wonder they’re so unafraid of losing business? Compared to their US counterparts, European financial institutions often face less competition from alternative cash-like investments.
Years of negative interest rates in the wake of the 2008 financial crisis resigned Europeans to not enjoying a return on their savings, and they’re only slowly waking up to better opportunities for their more than €9 trillion ($9.8 trillion) of consumer deposits. The average interest rate on easily accessible household money is just 0.23%.
In the US, investors have plowed $1 trillion into money-market funds over the past year, lifting total assets to more than $5.5 trillion. More than one-third of that money is from retail customers who view these funds as safe and attractive substitutes for bank deposits.
Money-market funds invest in diversified pools of high-quality short-term debt instruments, offer daily liquidity (i.e., the money is easily accessible), and a yield much closer to the prevailing central bank interest rate.
European money-market funds have seen more modest inflows: Total assets amounted to just €1.5 trillion ($1.6 trillion) at the end of March, and this is almost entirely corporate and institutional money. Less than half is denominated in euros, with the remainder split between sterling and US dollars.
The positive spin is Europeans are happy with their banks and have felt no need to shift their money as Americans did following the collapse of Silicon Valley Bank in March.
A more compelling explanation is Europeans are risk-averse (up to €100,000 of deposits are insured) or unaware of other convenient places to safely park their hard-earned cash — or both.
Many Europeans don’t have a brokerage account usually required to purchase a money-market fund, and they hold a higher share of their wealth in bank accounts than Americans.
Money-market funds are a “US phenomenon,” ING Groep NV Chief Executive Officer Steven van Rijswijk told investors in May. “We don’t have that here in Europe.”
“While money-market funds are available in Germany, they have never been successful in the retail market and are probably not widely known,” Deutsche Bank AG analysts wrote in an April note regarding the country’s “highly sticky” deposits.
That stickiness is costly for savers. My Sparkasse (savings bank) offers just 0.5% on regular deposits — far below the European Central Bank’s 3.75% key interest rate.
Though I could obtain a much better deal from a rival bank, these new customer offers typically expire after six to 12 months, and I’d then have to shop around again.
I could also earn more interest by locking up the money for a period — my bank is offering more than 2% on 12-month term deposits — but I might need cash at short notice to purchase an apartment.
Hence recently I’ve been looking into money-market funds, short-dated bond funds and similar cash-like financial instruments, and the options are quite appealing. Annualized seven-day net yields for Europe-domiciled, euro-denominated money-market funds rated by S&P Global Ratings averaged 3.4% in the second quarter; they were 4.4% in sterling and 5.1% in US dollars.
“Money-market funds are an attractive asset class for investors that aren’t only looking for returns, but also liquidity and stability,” according to S&P analysts Michael Mango and Andrew Paranthoiene.
European money-market funds have jargon-heavy descriptions and often invest in short-term bank borrowings, which retail clients might be more wary of compared with government IOUs (which US money-market funds tend to purchase).
In 2008, money-market funds were buffeted by withdrawals, triggering warnings about the risks to financial stability. Reforms that came into force in 2019 strengthened liquidity buffers; although the European sector experienced outflows during the pandemic, funds were able to meet those requests. Discussions about further reform are ongoing.
I’m not alone in thinking these and other alternatives to bank deposits deserve a closer look. I’ve noticed an uptick in German savers sharing tips about the joys of “Geldmarktfonds” (money-market funds) on Reddit. Money-market funds were among the most bought active funds by clients of broker Hargreaves Lansdown Plc in July.
Meanwhile, European fintechs have begun offering customers the ability to move uninvested cash into money-market funds and similar low-volatility assets. Revolut Ltd.’s high-interest flexible accounts use Fidelity International money-market funds, while money transfer company Wise Plc’s interest feature uses BlackRock Inc. government liquidity funds, for example.
After checking the options available via my online brokerage, I ended up purchasing a money-market fund, two ETFs that track the €STR benchmark for banks’ overnight borrowing costs, and a pair of short-duration German and European government bond ETFs. Please note these aren’t buying recommendations, and such investments aren’t without risk.1
Here's some general advice though: Pay attention to currency — US dollar money-market funds yield more, but if the greenback loses value your returns could too; keep an eye on annual service fees, and be wary of parking too much cash in money-market funds over the long-term as returns are likely to lag investing in stocks.
For the first time in a generation, Europeans can now earn a return on their savings, but they won’t if customers do nothing. If more cash moved into some alternatives, Europe’s banks might be inclined to pass interest-rate increases on to savers sooner.
1Some readers will wonder why I bought so many funds. I wanted to get a feel for various products and didn’t want to put my eggs all in one basket. And yes, I still have my German bank account, I just don’t keep as much money in it.
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