“The share of deposits from non-domestic households in the euro area is small but has grown substantially in recent years,” said European Central Bank economist Matthias Rumpf. He acknowledged that interest rate differentials alone are unlikely to account for this increase, noting that other factors, such as digitalisation and offerings from online banks, may also have played a role. Photo: European Central Bank

“The share of deposits from non-domestic households in the euro area is small but has grown substantially in recent years,” said European Central Bank economist Matthias Rumpf. He acknowledged that interest rate differentials alone are unlikely to account for this increase, noting that other factors, such as digitalisation and offerings from online banks, may also have played a role. Photo: European Central Bank

Cross-border deposits in the euro area rose to €151bn, with Luxembourg as a preferred destination, holding 37% of its household deposits from non-resident euro area households. This trend indicates growing confidence in foreign banks, argues European Central Bank economist Matthias Rumpf.

Cross-border banking is increasing in the euro area, according to European Central Bank economist Matthias Rumpf. In a blog post on 24 October 2024, Rumpf detailed a growing trend among private households to engage with banks in other euro area countries, indicating a shift in trust towards foreign financial institutions. Historically, individuals had been hesitant to deposit their savings outside their home countries, but recent data showed a notable change in this behaviour.

Rumpf’s analysis revealed that private households had made significant inroads into cross-border banking, with total cross-border deposits in August 2024 amounting to approximately €151bn. This figure represented about 1.6% of all household deposits with euro area banks, marking a notable increase from €95bn (1.2%) at the beginning of 2020. Rumpf highlighted that while the current share of cross-border deposits remains relatively low, the upward trajectory demonstrated potential for a more integrated banking and capital market union in the future.

Rumpf explained that one of the advantages of the euro area’s monetary union is the accessibility of financial services across member countries. Many households sought these services for reasons such as higher interest rates on deposits or the availability of more convenient banking products. However, he pointed out that foreign commercial banks had historically experienced low usage rates among citizens, with the cross-border share of total deposits declining until 2005 and stagnating at a low level until 2014. Recently, private households increasingly turned to banks in other euro area countries for deposits, resulting in a significant growth rate in cross-border banking activity.

The data from the ECB suggested that the period between mid-2022 and September 2023 saw a particularly strong increase in cross-border deposits, coinciding with the ECB’s decision to raise interest rates. This indicated that households were likely pursuing better savings conditions, Rumpf reasoned. Nonetheless, the earlier onset of this trend implied that other influences, including enhanced cross-border marketing by online banks, were also at play.

Countries such as France, Luxembourg, Germany and Italy emerged as the top recipients of cross-border deposits from other euro area nations. Notably, Italy experienced the most substantial growth in absolute terms over the past five years, with deposits from foreign sources nearly doubling since 2022.

Rumpf emphasised that Luxembourg topped the list with the highest share of deposits from other euro area countries, reaching an impressive 37%. This significantly outpaced other nations, such as Estonia at 20%, Lithuania at 16%, Malta at 10% and Latvia at 6%, highlighting Luxembourg’s dominant position in attracting foreign deposits compared to its smaller euro area peers. Conversely, Cyprus, Greece and Slovenia exhibited the opposite trend.

Rumpf’s analysis further revealed that balance sheet data could be used to assess the deposits held abroad by each country. In the second quarter of 2024, German households accounted for €51.5bn, representing over one-third of the cross-border deposits in the euro area, followed by France with €15.8bn and the Netherlands with €13.7bn. Both Germany and the Netherlands also contributed significantly to the overall growth in cross-border deposits since early 2020.

Although the share of deposits from non-domestic households in the euro area remained small, it had grown substantially in recent years. Rumpf suggested that higher interest rates and differing interest rates between countries likely contributed to this development, though they did not account for the entire trend. He posited that other factors, such as digitalisation and offerings from online banks, may have also played a significant role in this evolving landscape of cross-border banking.

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