Breaking up is good for your savings
Via the excellent Organizations and Markets:
SEOUL (AP) — A South Korean bank is offering to help heartbroken soldiers dumped by girlfriends while away on mandatory military service by providing special interest rates for stilted troops.
Soldiers who can show letters or e-mail proving their break-up to a bank clerk can receive a new deposit plan with better rates and waived service fees.
A friend challenges me to explain this using standard economic tools, i.e. without retorting to 'the world has gone mad' class of explanations.
I'll try to rise to the challenge. Of course, there is always the possibility the bank is making a mistake and will suffer as a result. That said, I can think of at least four ways in which offering lower interest rates to heartbroken conscripts may actually be good for profits:
1. Dumped soldiers may indeed represent better credit risks bacause they are less likely to splash out on expensive gifts to their girlfriends.
2. The 'good-will' and publicity effects compensate for the suboptimal pricing of credit risk by drawing more customers to the bank.
3. To the extent that shareholders' utility arguments include both a private income and a social welfare element, 'socially responsible' undertakings can lead to increased demand in the bank's shares, and the company enjoying a lower cost of capital.
4. Assuming switching banks is costly, consumers optimise their choice of bank intertemporally. Choosing this particular bank may thus be a form of insurance against being dumped in the future.
Am I half-convincing?
Addendum: A reader alerts me that I am actually talking about lower interest rates for loans, while the bank is offering higher rates for deposits (this post was initially titled 'Breaking up is good for your mortgage').
Let me try and rescue this. Explanations #2 and #3 still stand. #1 has to be adapted to say heart-broken soldiers are more reliable savers (e.g. they are less likely to make large, sudden withdrawals or take out unathorised overdrafts. #4 is only relevant to the extent the bank establishes a reputation for offering premium rates to those suffering misfortunes.
Updated analysis aside, I'm still a bit embarassed about my initial attempt to explain the 5th of the last 3 recessions. There's a lesson here: Alcohol and econ-blogging should not mix.
