Why are our Term Deposit rates so much lower than the major banks?
The single most common question or criticism we have received over the past year relates to the rates we offer for Term Deposits, and in particular the ones most popular with Kiwis (1 to 6 month terms).
I originally addressed the issue in a blog post back in May 2008, where I said that what I believed was happening was largely a case of supply and demand. The major banks in NZ had to look to retail deposits to fund their lending activity and I suspected they were having to do so on a loss making basis.
Since I wrote that piece, nothing has changed insofar as the pricing strategies (the rates they pay for TDs) of the major banks – they are still paying very high rates for retail deposits. This focus on retail deposits was originally driven by the Global Financial Crisis (GFC) and the fact that wholesale sources of money had dried up, so banks had to look to retail deposits to fund their lending activity.
Over the course of 2009 many central banks around the world, including New Zealand's Reserve Bank, have been talking to banks and promoting retail deposits as a preferred source of funding because the money is deemed to be more sticky i.e. retail customers tend to leave their money in the bank for many years, as opposed to wholesale sources of money which can be quite volatile and liquid. In some cases central banks have gone to the extent of providing targets for banks with a view to potentially regulating the proportion of their funding which must come from retail deposits (to date some discussions have been around the 70% mark).
What this has done, despite access to wholesale monies becoming easier than last year, is add fuel to the competitive pricing that the banks need to employ to ensure their share of what is a relatively small pool of retail deposits in NZ (by my calculations – approx $100 billion NZD).
As I said earlier, there were many people who doubted that banks would be willing to take a loss on their retail deposits to guarantee the funding. However some of you may have seen the comments from Mike Smith (CEO ANZ Banking Group) in the Dominion Post where he said “Banks' fight for deposits 'ridiculous'” and Jenny Fagg (CEO ANZ National Bank) stated that the competition was unsustainable.
Don't take this as being a case of me saying "I told you so", but I thought you'd like to hear another bank's perspective on what's driving the term deposit rates at the moment.
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