­­­­­Is deposit build-up positive or negative?

In January 2009, T&T’s commercial banks held a total of $54.824 billion in deposit accounts. Three years and four months later, in May this year, deposits in the accounts of local commercial banks totaled $81.225 billion. 

That means that in the 40 months between the collapse of the CL Financial empire and May, total commercial bank deposits increased by $26.4 billion or 48 per cent.

The breakdown of total commercial banks between January 2009 and May 2012 is interesting: 

• Time deposits declined from $18.27 billion to $14.24 billion, a fall of 22 per cent; 

• savings deposits increased from $19.78 billion to $34.77 billion, a jump of 76 per cent; 

• demand deposits from $16.77 billion to $32.24 billion, or by 92 per cent, and

• foreign deposits from US$2.53 billion to US$3.22 billion, a difference of 27 per cent.

 

 

While it is not a perfect comparison, the total deposits held by the category of customers of commercial banks and non-bank financial institutions defined as "consumers" was $25.24 billion at January 2009 but had jumped to $41.23 billion in May 2012, an increase of 63.35 per cent. Allied with this sharp increase in deposits at commercial banks since January 2009, there has been a steady decline in the rates of interest on these deposit accounts. In January 2009, the ordinary savings deposit rate was 2.125 per cent, while in May 2012 that rate, which is likely to be an average rate based on the returns submitted by the commercial banks, was 0.3125 per cent.  The Central Bank, in its June Financial Stability Report, stated that the median rates on demand and savings deposits remained unchanged at 0.0025 per cent and 0.20 per cent in March 2012 compared with December 2011. Now, given that 82 per cent of the money that is being held on deposit in T&T is being held in demand or savings accounts, the conclusion that can be drawn is that there are thousands of people in this country holding a total of $67 billion in these short-term demand and savings accounts who are content to earn a return of one-fifth of 1 per cent on their savings. With inflation in this country currently running at over 10 per cent, the consequence of the current dispensation is that many of the country’s commercial bank customers would rather see a steady erosion in the value of their savings over time than risk losing their savings altogether.

 

 

What is the cause of the 48 per cent increase in total deposits at commercial banks and the 63 per cent jump in deposits by consumers at commercial banks and non-bank financial institutions? The Central Bank, in its June Financial Stability Report, attributes the build up in deposits to the lack of investment alternatives available to commercial bank customers.

“Faced with limited availability of investment instruments and narrow differentials among interest rates on deposits of varying maturities, depositors opted to hold a larger percentage of their funds in very short-term instruments. “Consequently, while time deposits held by individuals declined by 2.7 per cent year-on-year in March 2012, savings and demand deposits increased by 15.6 per cent and 13.9 per cent respectively. In total, demand and savings deposits in commercial banks grew by 20.5 per cent and 12.1 per cent respectively,” according to the Central Bank in its mid-year review of the financial system.

Is the Central Bank correct in attributing the build up in deposits to the “limited availability of investment instruments?” If the institution was referring to the limited availability of low or no-risk investments, it would be correct but there are other classes of investments that are available to local investors, such as investments in the local stock market, on the secondary bond market or investments in real estate.

 

 

 

Two of the three alternate investments referred to above—investments in the local stock market and in real estate—require a medium to long-term commitment and a certain amount of knowledge of the equity and property markets. Bonds can be held short term but bond investors also have to be very savvy in terms of their investment knowledge. It can be said with some certainty that very little new money has come into the local stock market in the last year and the reluctance by the Government to issue bonds on the local market has taken this asset class off the table. It can be argued, then, that a large number of people in this country would prefer to hold their savings in low-risk and low return deposit accounts, which are losing value every day because of T&T’s high rate of inflation, rather than risk their savings in local stocks where the value of the investment goes up and down. To what extent is this shift in attitude—an extreme aversion to risk even at the expense of capital erosion—related to the events of January 2009? I would argue that based on the evidence, the collapse of CL Financial contributed to a fundamental change in the relationship between T&T nationals and their savings but that the collapse is not the only factor. The last three years have been typified by the extreme volatility of the international markets and a certain degree of  uncertainty about T&T’s economic future caused by the depleting energy resources and the malaise that has enveloped the political economy of T&T. But Clico is definitely important.

 

 

Thousands of policyholders who invested in Executive Flexible Premium Annuities issued by Clico faced the threat of losing their life savings and, up to now, the Government has only been able to provide clarity and a resolution with regard to the $75,000 in cash and the zero-coupon bonds for years one through ten. The Government, unfortunately, has not been minded to make any recent statements about the NEL II issue. It is quite likely that the local financial system will remain in this awkward state of waiting to exhale (or waiting for the other shoe to drop) until there is a full and complete resolution of the Clico issue. Mr Howai would do well to make the resolution of the NEL II situation a top priority. While deposits have grown steadily since January 2009, loans have not. In January 2009, the total loans (gross) extended by T&T’s commercial banks amounted to $45.62 billion, while in May 2012 that number was $48.29 billion—an increase of less than six per cent. And the slowness of commercial bank loans has implications for the rate at which the local business sector is re-investing in the country. The billions of dollars that are being held in short-term deposit accounts is also potentially destabilising as there is a risk of the herd mentality. On the other hand, the fact that there a concentration on savings rather than borrowing for consumption is very laudable and may serve the country in good stead...all things being equal.