Ever wondered how the savings interest rate is set? In this article, we explain what factors come into it.
Anyone who saves money in a savings account with a bank generally receives interest on those savings. Savings interest is the compensation our clients receive for keeping money in their savings account. They are paid this compensation because ABN AMRO uses their savings to lend money to other clients. Clients who borrow money from us pay interest to the bank. In the unusual situations we have seen over the past period, savings interest rates may drop to (nearly) zero or even below zero. Like other banks, we set savings interest rates based on the following factors:
As outlined above, we use savings to lend money to clients. Besides clients’ savings, we also have other sources from which to raise money we can lend. For example, we also borrow money from other banks or major (financial) institutions, such as governments and pension funds. In addition, we borrow money on the capital market. The interest we pay on those borrowings affects the savings interest rate we can offer our clients.
Savings interest is usually lower than the interest clients pay on loans such as a mortgage and an overdraft. This difference is necessary to cover our costs, such as the costs of our services, including staff and computer systems, our spending on the development of new products and services for our clients, but also the costs involved in our mobile app, Internet Banking and our Tikkie service. Another example is the costs we incur in relation to our participation in the Dutch deposit guarantee scheme, which protects up to €100,000 held by a client with a bank licensed by the Dutch central bank (DNB) in the event that the bank goes bankrupt.
On top of that, we also build up buffers for a rainy day. Finally, just like any other company, we want to make money from our services, so as to guarantee the continuity of our services for the long term.
When there is not enough money available in savings to meet demand from clients for mortgages and loans, we have to go out and borrow money to be able to lend money. We do that by raising money on the capital market or by incentivising clients to save more by offering a higher interest rate. At the bottom of this article, you will find an explanation of why mortgage interest is not charged at the same rate as we pay savings interest.
When savings are kept in a savings account for longer on average, we can lend this money out for a longer period than when the savings are only in the account briefly. This also has an effect on the savings interest rate.
Due to competition, savings interest rates are not the same at all banks. If ABN AMRO offers an interest rate that is much lower than our competitors’ rate, chances are that savers will switch to another bank. On the other hand, if our interest rate is much higher than our competitors’, we will attract more savings. A situation where clients entrust more in savings to us than we can lend may be a reason to lower the savings interest rate.
It is worth noting that the above factors may be different for different customer groups. This is partly due to differences in competition, savings behaviour and savings volume. As a result, one customer group (e.g. Private Banking customers) may receive a different interest rate than another customer group (e.g. other business or private customers). Differences in interest rates between customer groups may also change over time as these factors change over time.
Besides costs and profit, there is another reason why mortgage interest rates are higher than savings interest rates. Savings interest rates and mortgage interest rates differ greatly from each other in terms of how long they apply for. If we lend your savings as a mortgage, it will generally be for a number of years. When you put money into your savings account, however, you want to be able to withdraw it at any time. This means that we must always have money available so that you can withdraw your savings.
Furthermore, mortgage interest rates have a mark-up to cover the risk of a client not being able to repay the amount borrowed. We also use the difference between interest charged on loans and paid on savings to hedge this risk.
