New Zealand bank customers (both household and corporate) have only $42 bln deposited with banks for one year or longer.
That represents just 15% of the total deposits we hold at banks.
Collectively, we are short-termists. In fact, very short-term.
And that is a problem for banks because their regulator requires them to have at least 75% of their funding with a maturity of 1 year or more.
Banks square that circle by borrowing wholesale for longer terms. They need that longer wholesale funding to meet their Core Funding Ratio minimums.
“Core funding” is an estimate of the funding of the bank that is stable and can be assumed to stay in place for at least one year. This includes shareholder capital, but it also includes a substantial part of the less-than-one-year deposit base as well based on estimates of the “replicating portfolio”.
Much of our short-term money just rolls over endlessly. It is lazy money.
Banks model this behaviour and have a high degree of assurance that customers won’t be withdrawing it suddenly. In other words, they ‘know’ it will still be there in a year (based on past experience). It is that proportion of short-duration money that can be included in their “core funding” calculations.
The “face value of funding by residual maturity” (L3) is overwhelmingly dominated by very short terms. 85% is there for 6 months or less as at July 2016.
A year ago, that ratio was 83%. Five years ago that ratio was 87%. The ratio has changed little over time.
To put this deposit data into perspective, here are the current components and how they relate to total loans and advances banks have made.
|Bank deposits||July 2014||July 2015||July 2016||growth|
|a broad reconciliation||$ bln||$ bln||$ bln||% pa|
|Total household deposits (C17)||129.9||145.1||156.8||+8.0|
|Total deposits of companies/Govt/orgs||98.7||105.3||116.6||+10.8|
|Total customer deposit funding (L3)||228.5||250.4||273.4||+9.2|
|Wholesale funded component||82.4||81.2||88.7||+9.3|
|Total loans and advances (L2)||310.9||331.6||362.1||+9.2|
Housing loans are growing by +9% pa according to C5 data, business loans are growing by +6.6% pa and rural loans by +5.5% pa.[Thank you to Steven Hulme for referring to this data yesterday.]