Box D: Recent developments in household deposits
Household deposits within the banking system have grown strongly since the GFC. In dollar terms, household deposit growth has outstripped household credit growth for most of the period since 2009 (figure D1), a key factor allowing banks to reduce their reliance on wholesale funding, particularly from offshore. With more recent data suggesting a reversal in this trend, this box examines the underlying drivers of strong household deposit growth post-crisis and considers whether banks may have to rely more heavily on alternative funding sources in the future.
Figure D1: Household credit and deposit growth (% of GDP)
Source: Statistics New Zealand, RBNZ Standard Statistical Return.
Strong growth in household deposits is likely to occur when there is a rapid increase in the amount of money in an economy and households choose to hold their money in bank deposits. In a modern and open banking system, such as New Zealand’s, money is created when commercial banks extend loans to customers, and credit their deposit accounts in return, and when money is transferred into the banking system from abroad.1 Conversely, money is destroyed when households repay principal from a loan and when money is transferred abroad.
These factors have helped drive money creation in New Zealand in recent years. Household credit growth has been strong, partly due to high house price inflation, which generally causes households to borrow more heavily. In addition, net inward migration is at record levels, with over 67,000 more people moving to New Zealand than leaving in the year to March 2016. Statistics New Zealand estimates that over the past year, this net inflow of migrants has brought around $500 million into New Zealand (figure D2).
Figure D2: Migrant transfers (annual total)
Source: Statistics New Zealand.
This estimate, however, may understate the amount of funds that migrants bring to New Zealand. Survey data indicate that around one third of migrants have assets of more than $100,000, some of which will remain offshore for some period as migrants typically shift their assets to New Zealand gradually. Therefore, we expect the measured value of migrant transfers to increase over time, particularly since the strength in net migration is likely to persist, adding to the New Zealand deposit base.
Money created by credit growth and migrant transfers will typically enter the financial system in the form of bank deposits, but whether the money remains as a bank deposit depends on household behaviour. In recent years, households have consumed less of their income, with some of the increased saving remaining in banks as household deposits. When looking at the factors behind this trend, there is reason to believe it may continue for the near-term.
The ‘baby boomer’ generation is starting to enter retirement age, and some will be looking to trade down their family home for something smaller. The difference in price between properties bought and sold can result in a large bank deposit being created, especially for Auckland retirees downsizing outside the region. As ‘baby boomers’ are in or approaching retirement, it is likely that a proportion of the deposit generated will remain within the banking system rather than be quickly spent. This may partly explain strong growth in high value deposits recently. With the demographic effects well under way and house prices continuing to grow strongly, this trend suggests household deposit growth is set to continue.
Precautionary motives have also caused households to increase their saving rate. While some savers have chosen to save using bank deposits, it appears that a significant number of households have instead chosen to save by paying-down mortgage debts. This form of saving limits net credit growth, but has little impact on household deposits. Additional debt repayment is expected to continue while households remain cautious, for example due to weak commodity prices and low global growth, and interest rates are at low levels.
In addition, some households may have chosen to save using investment alternatives to bank deposits. Post-GFC, bank deposits appear to have been favoured over non-bank deposits and other investments due to their relative safety and increased household caution. But more recently, the value invested in domestic equities and other investment vehicles has increased, suggesting that households may be viewing them more favourably. Kiwisaver balances, for example, continue to increase as more people join the scheme. However, it is difficult to disentangle flows into these investments from revaluation effects (which can be large in the case of equity markets). Nevertheless, deposit growth could slow if risk appetite increases, or if financial market volatility subsides.
In summary, it appears that strong credit growth and net migration has increased the amount of money in the New Zealand economy, and is likely to continue to do so for the near future. This has helped generate strong growth in household deposits, as many households have chosen to use bank deposits to save part of their income or proceeds from house sales. But the flow of money into household deposits could reduce in the future, for example, if households’ appetite for other savings instruments increases or inward migration falls.
It is uncertain how banks would respond to a decline in deposit growth. They could, for example, sustain the current growth rate in credit by becoming more reliant on less stable sources of funding, such as international wholesale funding, or they could reduce the supply of credit. The implications for the resilience of the banking system, and the macroeconomy, will depend on the response taken. The Reserve Bank will therefore continue to monitor the growth in household deposits and the potential impact on the banking sector.
1 Money can also be created in a number of other ways, such as banks purchasing government bonds or banks issuing debt or equity. For further discussion, see McLeay, M, A Radia and R Thomas (2014) ‘Money creation in the modern economy’, Bank of England Quarterly Bulletin