Why bank deposits are at record highs

Through Joseph Moss, International Banker

Since the onset of the coronavirus epidemic, household and business bank deposits around the world have reached levels never seen before. This is in stark contrast to the equally pronounced Global Financial Crisis (CFM) between 2007 and 2009, when deposit levels in banks declined amid a debilitating global credit crunch. But today, as the pandemic continues to shut down businesses and restrict households, bank deposits continue to swell – and perhaps most worrying is that this expansion shows no signs of slowing down.

“Regardless of your perspective, this growth has been absolutely extraordinary,” Brian Foran, analyst at Autonomous Research, told CNBC in July. “Banks are inundated with liquidity; they’re like Scrooge McDuck swimming in the money. But while deposits had reached unprecedented levels at the time, it has only become even more worrying since then.

Source: Federal Reserve System Board of Governors (United States)

According to the Quarterly Banking Profile (QBP), which provides a comprehensive summary of financial results for all U.S. institutions insured by the Federal Deposit Insurance Corporation (FDIC), deposits increased by $ 635.2 billion in the first quarter of 2021 to reach $ 18.5 trillion. . This is 3.6% more than in the fourth quarter of last year and thus underlines the surprising rate at which deposits have increased in recent quarters. “Among deposit categories, deposits over $ 250,000 (up $ 424.8 billion, or 4.7%) and non-interest bearing deposits (up $ 371.1 billion, or 8.1%) increased the most from the previous quarter, ”the publication also said. “Deposits as a percentage of total assets hit a record high for QBP of 81.8% in the first quarter of 2021.”

The biggest banks in the country, such as JPMorgan Chase and Citigroup, were the recipients of much of this deposit surge attack. On the one hand, these mega-banks have the largest customer bases, so they had to accommodate more deposits from a size perspective. But more than that, these banks also have a strong custodial presence which has proven to be extremely useful in supporting the major asset managers who bought bonds and mortgage-backed securities as part of the easing program. quantitative data from the US Federal Reserve. By serving as custodians for BlackRock and Fidelity, banks have therefore experienced a huge influx of deposits. And government stimulus efforts, such as the Paycheck Protection Program (PPP) to financially support small businesses, also meant that billions of dollars initially ended up in the accounts of the companies that facilitated these loans.

Ultimately, the influx of liquidity became so excessive that several of the largest banks in the United States in recent weeks have advised their corporate clients to withdraw their money from deposits, with JPMorgan and Citigroup recommending money market funds instead. . “A lot of the institutions I talk to are actively examining the value of corporate clients… which, from a global perspective, [are] more or less profitable, ”said Jai Sooklal, Americas co-finance manager at consulting firm Oliver Wyman. Financial Time may’s beginning. These lenders now face particularly difficult headwinds thanks to the recent lifting of a temporary COVID-era rule that excluded U.S. Treasuries and cash from calculations of lenders’ Additional Leverage Ratio (SLR) requirements. . As such, they must now redouble their vigilance to ensure that the amounts of deposits they hold do not exceed regulatory thresholds.

So what is behind this massive flood of liquidity that banks continue to experience? In a word”: Covid. Through interventionist measures such as fiscal stimulus checks, expanded unemployment benefits and business loans, governments around the world have injected hundreds of billions of dollars into the global economy to support household income losses. and small business income. Central banks have also intervened to stabilize financial markets and encourage bank lending through often massive asset purchase programs. But, ultimately, the uncertainty that pervaded economies around the world underpinned the decision by most to store their money in deposits, with more savings activity being spurred by the heightened uncertainty surrounding the pandemic and future economic prospects. This means that businesses and households are significantly less inclined to invest and buy certain types of goods. Citing research by Mody et al. (2012), the OECD (Organization for Economic Co-operation and Development) observed that changes in the unemployment rate – an indicator of changes in economic uncertainty – increase levels of precautionary savings and are likely to persist .

With containment measures preventing certain household purchases in a period when income stability is shaken, more important amounts are redirected to savings and bank deposits. According to Ane Kathrine Christensen, Alessandro Maravalle and Łukasz Rawdanowicz of the OECD Economics Department, these containment measures will most likely have limited the consumption of certain expensive services by wealthy households who tend to spend a higher share of their income. to impacted services such as international travel, restaurants and cultural events.

COVID-19-related restrictions therefore appear to have motivated a greater propensity to save, although this is likely a temporary trend, with the eventual lifting of containment measures expected to once again support stronger demand. “Indeed, so far, deposit growth has been concentrated in the March-May period, when a strict lockdown was in effect in many countries,” observed OECD economists. “Over the following months, until the recent reintroduction of containment measures, the growth rate of household and NFC deposits slowed in most countries, although it remained above the average rate on the same. period in the past five years. “

Some believe that, as the pandemic has raised serious concerns about economic disruption and unemployment around the world, households have increased their savings amounts as a precautionary measure, with much of those extra savings going into deposits. banking. As such, some research suggests that there is a significant correlation between those areas, regions and countries with greater COVID-19 intensity and the level of bank deposits. “Given the well-documented differences in COVID-19 infection rates between counties in the United States and assuming that these differences translate into differences between counties in future income, the perspective of the Precautionary savings suggests a positive relationship between COVID-19 cases and bank deposits in the county. level, ”according to an October 2020 discussion paper from the National Bureau of Economic Research (NBER). “In addition, the increase in local deposits induced by COVID-19 will reduce interest rates on local deposits, as long as there is some segmentation of banking markets.”

In addition, the potential impacts on revenues have prompted companies to hold more cash and increase cash reserves as precautionary measures. Indeed, once the lockdowns were launched across the world towards the end of the first quarter of 2020, several large companies began to accumulate money by withdrawing billions from their existing lines of credit and guaranteeing that money with banks. Corporate bond issuance and government sponsored loan programs have only added to the mountain of corporate deposits in this regard. As the OECD reported in December, the size of resources made available to businesses through government-sponsored lending programs (loans and guarantees) at the time was “over 10% of GDP. 2019 in Canada, France, Germany, Italy, Japan and Spain. and the United Kingdom ”. And while the tax deferral regimes put in place during the crisis may have helped businesses and households increase their liquidity, they may also have sparked more activity to deal with deferred tax obligations. “Tax deferrals are officially estimated to be high in some countries, for example exceeding 13% of GDP in Italy (including the effect of the moratorium on payments to private companies) and nearly 5% of GDP in Japan” , according to the OECD. note economists.

Changing trends in the banking industry during the pandemic are also very likely to be responsible for the excess deposits that are now found on banks’ balance sheets. “Most lenders now prefer to deposit their savings in traditional banks, but have opted… to borrow from faster online lending sites. Digital lending is on the rise, ”financial services firm Garnet Capital Advisors observed in March. “It left the banks with excess deposits, while starving for loans. ”

It should be noted that much of the world is experiencing similar trends in the continued growth of deposits. India, for example, recently reported massive inflows of deposits for the whole year through March 2021. According to the latest position statement from the Reserve Bank of India (RBI) in India, the growth of Deposits from listed banks – that is, banks in the country that meet certain minimum regulatory thresholds determined by the RBI – soared 11.19% during this period. The increase in aggregate deposits is in part attributable to outflows from equity mutual funds, suggesting that investors are turning to more liquid assets in favor of a risk aversion approach, according to CARE Ratings.

But this mountain of deposits is unlikely to remain a problematic feature of the banking industry for too long. “We have had record savings rates since the start of the pandemic, but this influx of deposits is not permanent,” an FDIC official recently admitted. “As the economy continues to grow due to the pick-up in spending by consumers and businesses, we will see a significant moderation in growth. The official added that the agency would continue to monitor trends in filings in the interim. This should be good news for America’s biggest banking institutions. Nonetheless, given the weight of the stimulus packages that have been injected into the global economy over the past 15 months or so, there is every chance that excess deposits will be parked with banks for years to come.

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