European Investors Inexplicably Choosing Local Banks and Lower Interest Rates

March 13, 2015Bankingby EW News Desk Team

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Europeans, and particularly Germans, appear to be choosing nationalism and convenience over higher returns on investments. The European Central Bank (ECB) recently announced its decision to keep its interest rates at historically low rates, hurting returns on relatively safe investments like those offered by banks. Nevertheless, many Europeans are sticking with these investments instead of moving their money abroad.

Interest rates in deposits and loans vary widely from one European nation to another, but many banks pay depositors different rates in different countries. For example, Deutsche Bank pays 0.75% to Italian customers, but a mere 0.1% to its German members. While recent movements towards centralized European banking should mean that such discrepancies are outdated, the reality is very different. In addition, many Europeans seem to be okay with that, preferring to accept rates in their local bank rather than insist on shifting funds to another location for the higher returns.

Theoretically, such a shift should be relatively simple to execute. Every European nation guarantees all deposits up to $106,000, and no nation has yet failed to follow through on this guarantee, regardless of its own financial woes. Taking the money across a border is easy for European citizens, typically requiring little more than providing identification. Some banks even allow customers to shift locations online or by request at a branch.

The reasons for moving money in such a fashion are undeniable. In nations like Italy, some of the best deposit accounts return 1.6% interest rates. Portugal has its own at 2%. Meanwhile, Germany tops out around 0.5%. Still, for reasons that remain unclear, most are failing or refusing to take advantage of these simple strategies to improve their returns.

Moreover, such techniques should appeal to Germans who have invested the equivalent of nearly 55% of the nation's gross domestic product in deposit accounts like savings accounts and term deposits. Most prefer not to invest in property or stocks. Still, they are not taking advantage of these discrepancies in return rates.

Some speculate this odd behavior is due to a sense of nationalism, and that keeping the money invested in local banks is better for the economy. Others believe it may be a matter of convenience or, fundamentally, laziness. However, as noted, many of these banks are multinational affairs that have made this process easy, particularly in the modern digital age. Similarly, the shifting of money between countries depending on need means keeping it on deposit in one nation versus another is likely of little real benefit to the economy of that particular nation.

Still, sentimentality versus national self-interest seems to influence the decision-making process for many Europeans. What this tendency will mean as European banking becomes more uniform and centralized remains an unknown. However, it does make for an interesting and surprising insight into the financial motivations of different population groups in the European Union.