Why in a time of economic crisis, are the banks swimming in cash?
The COVID-19 pandemic has caused a global economic crisis not seen since the end of WWII. You would be forgiven to think in such times with an unknown future, people might want to get their hands on their money held at the bank. This might particularly be the case when the interest rates they are paying, are less than 1%.
But the reality is, despite the current crisis, the banks are holding more cash than ever before and there are some sound reasons why this is the case.
Due to compulsory superannuation that has been in place in Australia since 1992, funds under management total around three trillion dollars. With the onset of the COVID-19 pandemic, superannuation funds were concerned members withdrawals would spike. As a result, they sold off less liquid assets such as stock and bonds, and put in on deposit with the banks. A great result for the banks with the interest rate they were paying being very low.
Another factor adding to the banks being flush with cash was the result of large companies needed to reassure shareholders and investors that they had cash reserves. To do this, they drew down their lines of credit and placed the money on deposit with the bank.
To the average man and woman in the street, despite the harsh economic conditions and doubts about future employment prospects, they have not run to the bank to withdraw their money. The key reason for this is because the Federal Government deposit guarantee scheme that was implemented during the GFC, remains in place. Consumers are taking comfort knowing their money is 100% guaranteed by the government.
So these confluence of events are the factors which have seen the banks holding very high levels of cash deposits.