“Stupid” German Money? Bonus Interest Rate Payments on Savings Deposits During the Stagflation of 1967 to 1984

The deregulation of interest rates in 1967 gave West German banks the opportunity of price discrimination among their customers. In the savings deposit market, banks used secret bonus payments paid on top of the regular interest rate to compete for funds. This article explores the practice of bonus payments using two case studies: the Sparkasse Bielefeld (1970 to 1975) and the Volksbanken in Harburg county (1979 to 1984). Both cases are analyzed both qualitatively and quantitatively. Informed by the case studies, I estimate that between 10 and 20 percent of savings deposits in West Germany received bonus payments at the peak of this practice. Banks limited the extent of these payments primarily by exploiting and reinforcing a strong asymmetry in the price transparency between savings accounts and other financial assets. Thus, the main advantage of bonus payments for banks was the exclusion of uninformed savers with larger accounts rather than the exclusion of small savers.