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Global Savings Glut: Is The U.S Banking System Drowning in Liquidity?

Are we experiencing a global savings glut issue? The global financial system is rife with too much liquidity that has drowned attractive investments.

With global central bankers still struggling with easing policies, much is still needed to get all the credit they have printed into the economy. This means the current problem isn’t a lack of credit. Rather, it is where to put it, which is indicative of the excessive financial liquidity in the system.

Large Corporate Depositors Have Been Turned Down

Over the past months, major U.S banks and financial institutions have turned down deposits from large depositors such as corporate accounts. Instead, they have directed them to deposit elsewhere because they aren’t sure what to do with the money in the current volatile financial atmosphere.

What About the RRP Facility?

The RRP facility (often referred to as the “lender of last resort”) represents the central bankers and large financial firms that lend to medium & small banks, and other money markets. And as a consequence of the overly liquified banking system, major banks and financial institutions in the U.S have deposited a record $600 billion in excess money into the RRP Facilities.

This is indicative of the global savings glut that has been fueled by banks and lenders not being able to get credit facilities into the economy. And keep in mind that banks love it when the interest rate is high. The current situation I however marred with speculation and inequality. That is, major banks would rather deposit excess money into the RRP facilities at zero percent interest rates than shelve it to accrue interest (which they will owe to clients).

Declining Loan Numbers

As mentioned above, banks thrive more when loans are of high interest. This is the impetus that fuels banks to offer more credit facilities. And remember that the difference between the interest they pay to depositors and the interest they accrue on loans is what comprises a profit to the banks. The problem however is the liquidity issue that’s preventing banks from making as many loans as they used to. To put that into perspective, only 61% of loans as of 1st June were from banks. This is a slump from 75% that was recorded in February last year – the steepest decline in decades.

But How Did We Get Here?

The liquidity issue has been in the pipeline for quite some time. And the big reason why banks are facing challenges with identifying attractive investments (especially with loans) is that individuals, businesses, and large corporations can directly access cheaper money from yield-starved investors. And this is happening at an astonishing pace either through issuing shares or bonds.

Therefore, as the loan numbers keep diminishing and cash deposits continue to grow, low-profit margins are anticipated at the banks. And worse still, as major banks and financial firms keep shoveling money to the RRP facility for a reprieve, rates could run into negatives (through payment of fees to depositors) in the long term, which isn’t sustainable for banks.

Moreover, the treasury stimulus expenditure to the citizenry via the government bank accounts means all these monies would trickle down to the local state governments, small commercial banks, through the money market funds, and eventually to the citizens. The net effect being, the existing savings glut is anticipated to get even worse.

GDP Growth Slows More Than Expected in The Eurozone

In the first three months of 2022, the Euro Area economy grew by 0.2 percent quarter on quarter, the worst pace since the union emerged from recession last year and well below market estimates of a 0.3 percent increase.

While the French economy paused, growth in Spain (0.3%) and Germany (0.2%) more than offset a contraction in Italy (-0.2%).

According to preliminary Eurostat data, the war and subsequent commodity price increases reduced growth by 0.1 percentage points, despite the European Commission forecasting growth of 0.3 percent quarter-on-quarter just before the Russian invasion.

GDP increased by 5% year over year, up from 4.7 percent in the previous quarter and in line with expectations.

Source: EUROSTAT // Edit by: The Decision Maker)

Great Britain: Cost of Living Rises, a Survey by The Office of National Statistics Reveals in April 2022

According to a study released by the UK’s Office for National Statistics (ONS) on Monday, over nine out of ten respondents, or 87 percent, reported an increase in their cost of living in March compared to the previous month.

The ONS said in a statement that this ratio is up 25 percentage points from about six in ten adults, or 62 percent, in November 2021.

In March of this year, nearly four out of ten people (43%) said it was difficult to pay their energy costs, while 23% said they had trouble paying their household payments.

“In comparison to a year ago, higher energy and housing prices have resulted in more persons expressing some difficulty paying typical household bills,” the statement stated.

Overall, 17% of adults say they are borrowing more money or utilising more credit than they were a year ago.

In March of this year, 43% of individuals said they would be unable to save money in the next 12 months, the highest figure since March 2020, when stringent quarantine measures were implemented in response to the coronavirus epidemic.

(Source: Office for National Statistics // Reporting and edit by: The Decision Maker – Banking & Finance editors)

Japan’s Corporate Default Risk Highest in Years

Japan’s corporate debt, which is the debt level to the Gross Domestic Product (GDP) is at its peak since 1990. On the backdrop of this report from Capital Economics May 16, it is projected that defaults could surge, impacting heavily on small banks and regional financial institutions.

The Pandemic Effects

The corporate debt in Japan has been rising over the years, with highs of over 200% being sustained, but the swift downturn as a result of the coronavirus pandemic has contributed to negative consequences to multiple sectors of the economy, which are struggling. The latest financial stability report of the Bank of Japan suggested that companies in sectors such as food, service, accommodation, and transport are at high risk of defaulting. Worse still, the probability is expected to rise sharply over the coming years.

The Covid-19 pandemic singlehandedly contributed to a 9% annualized rise on debt securities and loans from non-financial institutions in Q4 of 2020. Sources at Capital Economics further indicate that loans from banks incurred 0.3% losses on existing assets in the same period. And what economic analysts are worried about most is, to what extent are the firms in struggling sectors of the economy going to be able to repay the borrowed money?

Profit Margins for Japanese Banks in Focus

A comparative analysis on an international scale shows that Japanese banks have one of the lowest profit margins, as stipulated by the country’s lending regulations. This consequently implies that, by international standards, they have quite a limited ability to deal with the rising defaults on loans.

Marcel at Capital Economics notes that during the peak of the pandemic, most companies obtained loans that were government or publicly backed by lenders as credit guarantors. The concern going forward is what will befall such companies when such governmentbacked public transfers come to an end this fiscal year.

In context, the public transfers to struggling companies accumulated to Y14 trillion (about $123.5 billion) in the fiscal year that ended in March. And based on records from the Bank of Japan, this figure amounts to 3% of the Gross Domestic Product.

What Sectors Are Hit Most?

According to Capital Economics, Q4 of 2020 saw food and, transport and accommodation sectors slump by an annualized 15%. This represented a steeper drop compared to 5% as was recorded in other sectors. This means that despite the reprieve of the anticipated post-pandemic boom, the aforementioned sectors would remain in trouble, seeing as to how far the country (and the globe) is from achieving normalcy.

The overall implication is that struggling firms will resort to piling up more debt to survive the effects of the worst recession in decades. But with alarm bells being sounded on the increased probability of corporate defaulting, chances are firms will struggle to obtain funding and some will eventually fail to cope with the situation. However, Marcel points to this hypothetical scenario as long as businesses remain shut and sales stay low. In which case, firms might be able to paper over the cracks, but not for much longer.