Factors that explain bank deposits’ lack of profitability

The purpose of a deposit is to catch investors’ savings in order to finance investments or to grant financing to other people or companies (credits, mortgages, loans, etc.).

The difference between the interest banks charge on the loans they grant and the interest they have to pay on the deposits they take is what determines their profit.
But, what factors determine the interest that entities decide to pay for those deposits?

We can point on the one hand to the law of supply and demand. It is simple: if citizens save a lot, there will be a lot of money available, therefore they will offer us less interest. Quite the opposite will happen if you do not save: the banks will have to fight for that money and they will offer us a greater interest in order to attract us.

However, the drop in rates and the zero profitability of this products is due to a more important factor. The policy of the European Central Bank to reduce rates, which have become negative, has been decisive. The rate set by the ECB is what the loans will cost to the banks, that is, nothing. Why are they going to pay to obtain money from citizens if they can get it for free? That is why the lower the central bank interest rates are, the less profitable deposits will be.

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