Economic consequences from deposit war not to be underestimated

Banks undertake to cover a portion of the increased financing costs with their profits. This is done by reducing the spread between interests under loans and interests on deposits, COO and Deputy MB Chairman of UniCredit Bulbank Andrea Casini explained in his presentation before the Euroclub of the Bulgarian Chamber of Trade and Industry.

According to April information, the spread between the interests under loans and interests on deposits, which accounts for 80% of the total operating income, has been reduced down to 5.38%. For comparison, a year earlier that indicator was 6.18%. “According to UniCredit Bulbank, despite the deeper recession, Banks must continue to support their clients through an even smaller difference between the interests under loans and on deposits, in this way they directly defray a portion of the increased price of the resource with their profit”, Casini said.

Deposit war – risk for stability

In his presentation he also drew the attention to the dangerous consequences from the so called “deposit war”. According to Casini, the scope of that too strong competition for the local savings between banks puts at stake not only the ability of the system to absorb the recession-related losses, but is also poses a risk to stability.

In a nutshell the risks from the deposit war that leads to greater liability service costs are as follows:

- Obstacle to the introduction of the euro, because according to the Maastricht criteria the level of the long-term interest rates should not exceed with more than 2 percentage points the average for the three member-states with the lowest inflation;

- Still smaller GDP growth;

- Negative impact on employment;

- More pronounced economic losses for their part may lead to higher bad loans levels and at the end of the day banks will be forced to write off more assets

- The worst case scenario includes recapitalization of some banks.

Casini supported the idea for a new stand-by agreement with the IMF which would help the new government create local liquidity and thus tone down the effects from the global crisis. “The risk that the locally generated liquidity can be exported, in order to solve problems of the parent companies abroad, is very limited, given that the European Central Bank has “flooded” the market with EUR 444 billion at the price of 1%”, Casini explained.

Eurofunds – potential that has to be used

Eurofunds are an important tool for dealing with the global recession effects, UCB economics think. They are a potential that must be used especially in the current situation of reduced and expensive liquidity. For the full-fledged utilization of the funds under EU programs Casini recommended using the expertise and expert resources of the banking sector, similar to Italy and Greece.

“The model in which banks mediate eurofunds’ utilization is prone to success. UniCredit Bulbank, for example, as FLAG servicing bank already has public sector experience, it is financially experienced on how to assess projects’ competitive power, it has a broad branch network and competent team responsible especially for the eurofunds”, Casini summed up.

 

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Additional media information:

UniCredit Bulbank, Public Relations and Corporate Communications

Victoria Blajeva, tel +359 (0) 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch

Ekaterina Ancheva, tel +359 894 518 193 , flbufsjob/bodifwbAvojdsfejuhspvq/ch