Study of the importance of deposits for the Belgian economy and the relationship with the financial crisis

You have already read how studies by KU Leuven shattered the myth that savings invested with the banks are asleep. But the study by Professor Nancy Huyghebaert also clearly showed that savings are indeed used by banks to finance the economy, and not for speculative activities. Nevertheless, this misconception is also behind the call to separate investment banks from savings banks.

Professor Huyghebaert made several remarkable findings that shattered this misconception:

• Between 2007 and 2012, each extra euro in savings was converted into one additional euro of credit. This provided the economy with an injection of EUR 87.5 million.
• There was a deposit surplus (in other words: more deposits were received than loans granted) if we only take into account deposits by and loans to the private sector (households and non-financial companies). However, if we also include deposits by and loans to public authorities, there was even a deposit deficit over the period 1996-2012.

At the end of 2012, the deposit surplus within the private sector (households and non-financial companies) amounted to EUR 68 billion. This is equivalent to 18.05% of the gross domestic product (GDP). That is less than at the end of 2005, when the deposit surplus within the private sector peaked at EUR 76.721 million (equivalent to 25.28% of GDP). The deposit surplus within the private sector cannot therefore be attributed to the recent increase in the volume of deposits. On the contrary, it is a structural aspect of the Belgian banking landscape.

However, over the entire period under review, 1996-2012, the deposit surplus becomes a deposit deficit if we include direct loans to public authorities, investments in government bonds and deposits from the public sector in the calculations. At the end of 2005 the deficit was minimal: EUR 6.138 million (equivalent to 2.02% of GDP). In 2012, all deposits by and loans to the private and public sector resulted in a deposit deficit of EUR 7.148 million (equivalent to 1.90% of GDP). Given the extent of the government’s claims on the Belgian economy, and the real impact of the government’s primary expenditures on economic developments, it seems logical according to Professor Huyghebaert that the government debt on the banks’ balance sheets be viewed in the calculation as a form of financing of the economy.

All that therefore indicates that Belgian savings are not asleep, but are indeed being used fully to finance the economy.

Savings deposits are vital to healthy lending in Belgium. Being able to estimate how stable the deposit base is, and what factors influence it, is therefore crucial for the financial sector in its role as lender.

The volume of savings is currently at an historic high. At the end of December 2012, EUR 235.8 billion was outstanding in regulated savings deposits. That is an increase of 58% compared with the end of 2007. All those savings are used in the economy, in the form of loans to households, businesses and governments. Each extra euro in savings that is received is reused in the economy.

Precisely because of this it is important to know how stable the deposit base is. Loans have a longer life than the savings account that is so vital to the transformation function of the banks – the conversion of savings into credit – and in their financing. Furthermore, savings volumes are cyclical, not structural.

Now, however, a growth or decline in the volume of deposits appears mainly to be the consequence of a series of external factors that cannot be directly influenced by the financial institutions. A study by Professor Nancy Huyghebaert of KU Leuven showed that the volume of deposits is extremely sensitive to movements in the economic climate.

According to Professor Huyghebaert, the following factors are decisive for the volume of deposits:

• disposable income (because more income makes individuals save more)
• unemployment levels (because higher unemployment encourages the saver to keep his money available)
• inflation levels
• yields and volatility on equity markets (the more volatile the equity markets, the higher the volume of savings from households)
• interest rate on deposit certificates with terms of more than three years (the ability of households to save increases with lower interest rates)

In her study, Professor Huyghebaert attempted to quantify these effects.

She found that a 1% increase in disposable income generates a growth in deposits of EUR 305 million. A society with more disposable funds therefore leads – to a certain degree – to more savings.

She also calculated that a 1% increase in the level of unemployment would increase the volume of deposits by EUR 2.7 billion. Households’ aversion to risk in times of economic stress probably plays a role in their holding on to more savings. Specifically, a savings deposit has the advantage that the money is immediately available. In times of economic prosperity savers have the confidence to place their money in time deposit accounts, while in difficult times they choose the ready accessibility of the savings account. On top of this, households save more and consume less in periods of economic uncertainty.

Periods of high inflation, low interest rates on deposit certificates and volatile equity markets also encourage families to increase the percentage of income that they save. Shares or deposit certificates may possibly be seen as more attractive investment options for private savers than savings deposits in periods in which high inflation eats away at the returns of savings accounts or shares provide good returns.

Then these customers are quicker to shift their money from savings accounts to the equity market or to deposit certificates. With low deposit certificate rates or high volatility, savers are happier to leave their money in a savings account, waiting for better times. Each of these factors affects the volume of deposits.

Professor Huyghebaert’s study therefore shows that not all savings are the same. It also demonstrates that a shift in one of the components immediately leads to a change in the available financing base of the financial sector. This underlines the fact that it would be unhealthy to build a policy on the current, extremely high volume of savings deposits, as there are no indications that this volume can be considered permanent. The study also shows that changes in one of the components can have major consequences for the volume of deposits. Policy interventions that may cause such changes must therefore be approached with extreme caution.

In her study into the importance of deposits for the Belgian economy, Professor Nancy Huyghebaert puts forward a remarkable proposal for reforming the tax benefit. “Deposits are very important to financial institutions in achieving the minimum liquidity standards under the Basel III capital rules,” acknowledges Huyghebaert. “However, since the third quarter of 2008 both households and businesses have tied up their savings for a much shorter time. This means financial institutions are potentially more vulnerable to a liquidity crisis, and tools that can stabilise deposits therefore merit attention. A loyalty premium for savings deposits can contribute in this regard. We therefore ask ourselves whether it might not be better to lift the current restrictions on the loyalty premium.”

“Besides a loyalty premium, however, other measures are also needed, because savers are probably prepared in extreme circumstances (for example a bank run) to relinquish their loyalty premium to be able to gain immediate access to their savings. It would therefore be useful to examine whether the tax benefit of a savings account could, for example, be linked to a minimum term. In that case, to be able to benefit from the tax exemption, a saver would have to respect a ‘notice period’ of 30 days before being able to withdraw his money from the savings account. Such a notice period would allow banks to estimate their liquidity needs better and earlier, and seek other financing if required. The tax benefit would in this way contribute towards a higher social objective, namely the stability of the financial system. This is an important element for a financial sector that has to finance the economy.”