Banks: evolution of deposit and credit rates

The article assesses the effects of the consecutive market rate changes instituted by the central banks of the four Visegrad countries recently.

The central banks (CB) of the four Visegrad countries have changed their official market rates several times recently. From the data on page 5, we will try to see how the central bank rates have influenced the credit and deposit rates of these countries’ banks over the last three years. In Poland, the Czech Republic, Slovakia and Hungary the banking system is in excess liquidity and the monetary instruments used (two-week deposits, CB bills, etc.) are designed to reduce this liquidity. The Central Bank reference rate does not therefore reflect the cost of refinancing, but the rate at which the banks can, for a short period, deposit their liquidity surplus at the central bank. This differs fom the Eurosystem in which the European Central Bank, through its “main refinancing operation”, regularly provides liquidity to the financial sector.

For households, the difference between the consumer lending rate and the deposit rate has hardly changed.

Actually, the deposit rate closely follows the decrease in the CB rate, as is clearly illustrated in all four countries (Poland, Czech Republic, Slovakia and Hungary) over the 3-year period. At the end of the period the case of Hungary shows that the deposit rate can also rise when the central bank rate is increased. However the credit rate changes are not so obvious, as it is necessary to analyse both consumer credit and mortgage rates.

Consumer credit rates appear to be the least flexible rates, as can be seen in Hungary and Poland where there has been a slower decrease in the consumer credit rate, creating a disparity of more than 10 points between the CB rate in mid-2003.

However the home loan rate mirrored a drop comparable with that of the CB rate in Poland and Hungary. This is probably due to more reliable collateral but also because part of this rate can be subsidised (Hungary). In the Czech Republic and Slovakia, where the absolute level of the rates is significantly lower, the variations are slighter, but nevertheless the decrease in the CB rate is also not fully passed on to consumers.

Corporate loans have benefited most from the credit rate decrease but nevertheless credit to households has grown more rapidly. In all the Visegrad countries the finance companies’ terms closely reflect the fall in the base rate. In Slovakia, this fall is even greater than that of the official market rate. However, in spite of these favourable developments, it is loans to private individuals (cf Review Elargissement N°46) which have grown most strongly whereas corporate loans have stalled in several countries (Poland, Czech Republic, Slovakia). Why?

Firstly the banks – which carry a significant level of bad debts (Poland) or are still going through the aftermath of painful reorganisation (as in the Czech Republic and Slovakia) – have adopted a careful and selective attitude towards local SMEs as well as towards certain sectors like shipyards, mines, iron and steel industries in Poland for example. They are all competing for the best risks whilst at the same time demand is also being reduced by weak investment (-6.8% in Poland, -0.9% in Slovakia, +0.6% in the Czech Republic in 2002).

In addition, the dissemination of information and transparency in accounting, which are essential to good risk management, have still to improve, whereas the procedures for calling in loans are sometimes ineffective. Insolvency procedures are however undergoing reform in the majority of the CEE countries, which might improve the situation to some extent.

Finally, the State borrowing requirement (in 2002, the public deficit reached 5.5 % in Poland, 9.5% in Hungary, 7.1% in the Czech Republic and 6.7% in Slovakia), by offering less risky investment opportunities, creates a “crowding out effect”.

For more analyses of the EU’s enlargement process, see the

enlargement website of DREE.