Coronavirus spurs rush to cash not seen since GFC

Ironically, the surge in households putting more money into bank cash accounts comes as bank deposit rates sink to new record low levels.

The rush to cash by professional and private investors during the depths of the pandemic crisis is only equalled by a similar spike in bank deposits seen during the global financial crisis (GFC), the ratings agency Moody’s said on Wednesday.

New figures from the prudential regulator show a remarkable “spike” in authorised deposits across the financial system in March as financial institutions, superannuation funds and households sought solace in the balance sheet strength of the major banks.

The report follows earlier signals that investors had also moved to hoard cash outside the banking system over the period with reports of safe deposit boxes being booked out across the country.

While the majority of cash hoarding has been related to individuals, Moody’s suggests the bank-based cash deposits lift has been due to a combination of factors led by financial institutions placing cash raised in the money market from trading in treasuries.

Separately, super funds have been preparing for a potential liquidity squeeze as the unprecedented early release superannuation scheme came into action. Up to $20,000 can be taken out of super by individuals pre-retirement over the next two financial years.

The rush into cash by households suggests both a shift to a more conservative approach to money and the wider effect of the national lockdown, which put a lid on many forms of spending, including entertainment and travel.

The figures will almost certainly be followed by a spike in the national savings rate when it is next reported - the figure had soared to nearly 10 per cent after the GFC and had dropped as low as 3 per cent in recent times.

According to Moody’s, the spike in bank deposits has been sufficiently strong that it will be beneficial to the major banks where deposit funding is the cheapest and most reliable form of funding - however the ratings agency says it will not lead to a structural improvement in wholesale funding requirements under current conditions.

Shane Oliver, chief economist at AMP Capital, says: “We would have to expect that these trends will continue - if not accelerate.

“Among households it is possible that savings have not really taken off just yet as the cushioning of government assistance programs such as JobKeeper make a big difference, but we know that after the GFC the savings rate rose steadily over many months and this may re-occur.”

Ironically, the surge in households putting more money into bank cash accounts comes as bank deposit rates sink to new record low levels with many accounts now paying near 0.01 per cent and the best rates barely clearing 1.00 per cent.

Nonetheless, savers will be attracted to the government guarantee on bank deposits which run to $250,000 per person per bank.

“Banking system deposits increased 5.5 per cent ($64.6bn) in March, driven mainly by a spike in deposits from financial institutions, which contributed 59 per cent of the increase. This coincides with the Reserve Bank of Australia’s (RBA) monetary stimulus actions in response to disruptions caused by the coronavirus ... Additionally, the economic disruption has led to corporate customers drawing down on existing credit lines with banks to support working capital.

“Some of these funds have then been placed on deposit with the banks, explaining the increase in corporate deposits. Household deposits have also increased during this period, most likely due to a reduction in household spending,” Moody’s suggests.

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