Banks the world over are asked why they charge their retail customers so much. In the European Community, several price comparisons have been made for individual products, but no one has yet analyzed overall costs for the retail customer. In seeking to remedy this omission, we must first make certain assumptions.

Guiding assumptions

To compare loans and deposits, we chose the spread that banks earn on these products in relation to a maturity-matched market interest rate. In order to avoid the distorting effect of various stages in the interest cycle, we used matched spreads averaged over time. We also started from present demand structure in individual countries so as to allow for differences in the use of the banking system by retail customers.

The findings

If we operate under these assumptions, the following picture emerges. UK and German banks are the least expensive, offering their services at an overall interest spread/fee revenue of close to 2 percent of their total customer volume. Banks in Italy, France, and the United States demand prices between 2.4 and 2.7 percent. Spanish banks charge their retail customers the highest prices, at over 3 percent.

Underlying factors

A number of factors underlie this ranking (see Exhibit 1):

• For time and savings deposits and mortgages (the products with the greatest volume), the United Kingdom and Germany have earned the lowest spreads for years on average, at well below 2 percent. The countries of southern Europe, by comparison, achieve spreads of around 4 percent on savings and time deposits and almost 2 percent on mortgages.
• Very high spreads are achieved on consumer loans in the United Kingdom, as in the United States, while comparatively low rates are charged by banks in continental Europe.
• For payment transactions and demand deposits, most countries are roughly level, with Spain being an exception on the low end. In France, especially high demand deposit spreads are offset by very low fees. In the United States, the reverse is true.