After Croatia Post Bank made the there’s always a first time move and raised interest rates on savings, it was only a matter of days before other banks would follow suit. The latest to do so is OTP Bank. However, even without the rise in interest rates, savings in banks have surprisingly increased – surprisingly in that it grew even when interest rates were hovering around zero and inflation reached ten percent.
A pure loss, mathematics would say, but in fear of a crisis, there are big eyes, so the surplus was tucked away where it was deemed safest. According to data from the Croatian National Bank, total deposits as of August this year exceeded 54.485 billion euros – 1.2 billion euros more than at the end of 2022. Of the total savings, nearly 35.4 billion euros is ‘civilian’.
However, a comparison of interest rates on deposits across individual EU member states shows that even with rising interest rates, Croatia is not particularly competitive. Data from the European Central Bank indicates that Croatia is in the lower part of the ranking among Mediterranean countries (which Ireland has also joined). The highest interest rates on savings (for this occasion, we compared rates for households in three categories: deposits up to one year, between one and two years, and for deposits longer than two years) are mostly held by the Baltic states and the Benelux countries.
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However, the latest ECB data is for August of this year, meaning that the statistics do not include the rate hikes in September and October, but as interest rates rise in Croatia, they are also rising elsewhere, so the dynamics are comparable. So, if it is not competitive, is savings going across the border? Are Croatians investing their surpluses in other Union member states where interest rates are higher? How simple is it to open an account somewhere else? Is there a noticeable trend of moving deposits outside the borders of the homeland?
From the Croatian Banking Association, they only respond in principle that after Croatia’s accession to the European Union, citizens with legal residence have the right to open and use an account in one of the EU countries.
– The entire procedure depends on the legal framework of each state and the business policy of each bank. According to the data we have, it can be observed that there are no significant outflows of citizens’ savings. Namely, according to the latest data for August, total household deposits in domestic banks are still about seven percent higher compared to the same month last year – they detail in HUB.
From Erste Bank, they briefly add that Croatian citizens can open a savings account in banks outside Croatia.
– At Erste Bank, we have not noticed such trends, but rather the opposite, the share of term deposits in total deposits is continuously increasing. If someone decides to save in one of the banks outside Croatia, they should certainly pay attention to the terms of savings products, such as interest rates, fees, and so on, as well as the rules and regulations related to deposit protection, but also to the specifics of the tax aspects that apply in those countries – they convey from Erste.
Uninterested Institutions
We tried to find out how much money is deposited abroad, within the borders of the Union, but it turned out that this is higher mathematics for almost all institutions. The ECB responds that they actually do not have such statistics, especially not on the number of savers/companies saving abroad. They only have some partial figures for amounts, and that for the third quarter of 2022, nothing fresher than that. According to that statistic, in other EU countries (they do not specify which countries), Croatian citizens have deposited around 300 million euros, and companies an additional 200 million.
They referred us to the HNB, which responds that they do not keep such statistics. The HNB, in turn, refers to the Tax Administration, which could keep such records for tax reasons, but from that address, they respond that they are not competent for such inquiries and do not have the requested data. Clearly, institutions are not interested in not-so-insignificant data that could (also) indicate a trend, which is why, for example, interest rates began to rise.
Negative Impact on GDP
However, no matter how much the provided figure is partial and inaccurate, part of the capital is still moving outside the borders of Croatia. When everything is summed up and subtracted, is that good or bad?
Boris Podobnik, an economics professor at ZŠEM, says that first and foremost, we must view the pile of deposits that Croatian citizens hold in banks through the lens of investments that are available to citizens.
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—– For investments in real estate, larger amounts of funds are needed, which means that smaller amounts of savings can either be invested in the financial market or remain in citizens’ accounts in banks. The past bad experiences that citizens have had with investing in the domestic stock market make them very cautious today, so it is not surprising that funds are piling up in savings accounts. In other words, if you have tens of thousands of euros in savings, you really do not have investment options in Croatia. But the question is whether you have them in the EU.
Some banks in Germany, Sweden, or Czech Republic offer significantly higher interest rates than those in Croatia, but the deposit protection regulations are not harmonized everywhere, which may discourage Croatian savers from transferring funds abroad. There is also the issue of trust, so it would not hurt to check how a foreign bank operates and whether it offers high interest rates because it has liquidity problems. I believe that a partial outflow of funds to other banks in the eurozone would be microeconomically good for the domestic banking sector, primarily because it would increase competition for deposits from domestic banks.
Indeed, the rise in interest rates on citizens’ deposits can also lead to an increase in interest rates on loans to companies as banks try to maintain good margins. Thus, from a microeconomic perspective, there would be an increase in mutual competitiveness, which is positive because our banks compete with foreign banks. On the other hand, this leads to an increase in borrowing costs for companies, which is bad news – analyzes Podobnik, adding that according to the State Bureau of Statistics, the increase in bank revenues in earlier quarters of this year due to high interest margins significantly contributed to the growth of our GDP.
Therefore, from a macroeconomic perspective, if a significant portion of deposits goes abroad, it would negatively affect future GDP growth.
