Monday, 24 January 2011

Where are all our deposits going?

An Saoi: Household savings should be the most stable part of the your deposit base. Very few households have access to an Austrian or Swiss bank account - deposits are normally kept close to home for ease of access. Yet Irish household deposits fell precipitously during November declining by 2.4% in just one month. While there has been a continuous decline all year since they peaked in January 2010, November saw the trickle becoming a flood.

Such a movement raises many questions. We were already aware that many savers have moved their cash from the Irish owned banks, not trusting the Government guarantee with savers opting for foreign operators such as Rabobank and, at a more local level, many of the larger better run Credit Unions have also seen a substantial influx of cash. The better off or better connected have always had other options as Kathleen Barrington mentioned in her Sunday Business Post column back in October, and discussed more recently here; however, this is clearly only open to a few.

The reasons for the decline may also be more mundane - depositors needed the cash for general living expenses, or have decided to repay debt with their deposits. However, savers and borrowers are generally not the same people, though many parents may be helping adult children with loans and living expenses.

There is also a possible third reason – the public have decided to open their purse strings and start spending because they believe in Brian Lenihan's words, “we have turned a corner.”

No, I gather you don't believe that either.

The probable causes are a mixture of the reasons mentioned above together with two others: 1) the need by many small and medium business owners to put money back into businesses as loans for working capital have dried up, and (2) migrants taking savings home with them.

The ECB is vainly attempting to wean the Irish banks off their dependence on the interbank market. They are to be forced to reduce their lending to the level of their deposits. by the sale of large parts of their loan books to others, complete with a State guarantee for the purchasers from the Irish taxpayer. The proceeds of these loan sales will of course be used to pay back the ECB. But if the Irish banks have a shrunken domestic deposit base, where is the money to balance their remaining loan books to come from? Loans in 2011 for whatever purpose are likely to be even harder to come by than in 2010.

Assuming that the trend continues, the banks will have a very small pool of savings to draw from for which they will have to pay premium rates of interest. This will force them to withdraw existing short-term facilities as they cannot extricate themselves from their long-term commitments in the form of mortgage loans. Loan repayments received will be used to pay off the ECB, leaving little or no money available for new lending. We are looking at a group of zombie like banks, open but with empty shelves.

December normally sees a substantial rise in household deposits. Therefore any further decline when the returns are published at the month will be disastrous. The snow and ice of December will have prevented the rich from taking their suitcases of cash to Switzerland & Austria. Movements are likely to be driven by domestic factors and it is already suggested that the November trend has continued into December.

However if this trend of deposit withdrawal is to continue through 2011 then the tightening of credit conditions will not only continue but get worse. No new money available for business, no new money for mortgages. The only financial institutions with cash available to lend are the Credit Unions, who are not involved to any degree involved in these two areas of lending.

The Government have consistently said that they had to get involved in guaranteeing the banks to keep cash moving. Well the only cash moving is out of the banks as quickly as possible.

Why should we be worried? Seamus Coffey provided a graphic analysis of the Central Bank trends in a post he did on the October figures available here.

5 comments: said...

Withdrawals in November might mean a variant of your "the need by many small and medium business owners to put money back into businesses as loans for working capital have dried up": folk using the Revenue ROS service could pay their taxes by the middle of November (as opposed to end-October for those filing on paper). Perhaps some businesses did not generate enough cash during the year to cover their tax bills and thus had to draw on savings. If that is so, there might be further difficulties in the coming year.


An Saoi said...

BJG, Thank you for your comment. Perhaps you are correct, the income levy substantially increased the amount of tax paid by self-employed. However it would only account for at most 25% of the decline. I would estimate that total self employed tax paid in November was in the region of €1,000M with a good proportion of that coming tax withheld via PSWT & C45s

Traditionally many professionals have funded their prelim tax payments by way of business overdrafts, which are no longer forthcoming.

The Revenue Commissioners have traditionally not provided a monthly analysis of tax outstanding, however the AHCPS branch in Revenue has stated that non payment by business is growing very substantially.

There was a much smaller decline in 2009 of just €347M.

Damian Tobin said...

One of the few mentions of the banking system in the National Recovery Plan predicts a large financial surplus in the private sector (p. 28), which would in turn take the form of increased deposits & reduced borrowing - resulting in a substantial fall in the loan to deposit ratios of the domestic banking system. These assumptions are as usual not backed up by data. The EU/IMF bailout package indicates a shrinking of the loan to deposit ratio from 160% to 100/120% -this would imply a return to end 1990s loan/deposit levels. Again it appears that these are based on the assumption that loan-books can be run-down and balance sheets overcapitalised to absorb losses (e.g. mortgage defaults), but assumes regardless of current balance sheet insolvency that the funding side remains constant. If the deposit base continues to shrink then the targets outlined in the NRP, let alone a return to "lending as normal" will be very difficult to achieve!

An Saoi said...


Yes, you are completely correct. I cannot see lending "returning to normal"in the sense that Fianna Fáil & certain people in Dept. of Finance regarded as "normal", ever. Even ordinary prudent lending I would suggest is on hold for at least 3 years and probably up to 5 years.

There is a further point, much of the money on deposit with the Irish banks is actually the shares of Credit Union members. If the Credit Unions can get their act together, then they can gain market share by lending and screw the banks at the same time as they withdraw their spare cash held on deposit to lend to their members.

The December deposit figures will be out within a week and will I gather make sober reading and show further losses in deposits.

Hopefully the opposition parties will raise this point during the election campaign as we went into the banks to get them lending again!

I am not sure that the level of mortgage default will be as bad as assumed. Mortgages used purely to buy Principal Private Residences will I think show very low levels of default as parents and others are and will continue to rally around family members in trouble. However it is the cash extraction re-mortgages and buy to rent loans I think will make up the vast majority of defaults.

An Saoi said...

Kathleen Barrington had a further short piece on Anglo's Austrian Bank in this week's paper. Here is a link to it on her own site.

One wonders how much of the Austrian deposits are Irish sourced?