MELBOURNE, Australia – Australia and New Zealand (ANZ) Bank economists see trouble for the economy ahead of the deteriorating growth rate of bank deposits amid the increasingly strong demand for credit.
Economists from the biggest bank in Australia are warning everyone that there would be a headwind that would significantly impact the economy with the slowing growth in bank deposits during a period when there is a strong credit demand. Economists from the bank also warned that it might be necessary to reign in bank lending going forward.
ANZ bank is Australia’s most popular bank offering car loans as well as bank accounts, personal loans, home loans, credit cards, insurance, superannuation, debt consolidation, and many other banking options. The bank offers both secured and unsecured car loans for new or old cars and other vehicles as well. ANZ also offers a variable rate car loan with the highest interest rate.
ANZ secured car loans are subjected to its normal lending requirements and criteria, which is available for financing new, used, or demo cars or other vehicles. The secured car loan terms from the bank have a minimum one-year term and a maximum five years term.
The recent data published by the Reserve Bank of New Zealand (RBNZ) showed that bank deposits from households grew at its slowest rate in 2019 for the last nine years. The new figures also showed that the growth rate for housing loans had reached its peak level since mid-2017. Banks refer to the significant discrepancy between that deposit growth rate and the credit demand rate as a funding gap.
In the ANZ NZ’s Weekly Focus publication, economists from the oldest bank in New Zealand said that the recent slowdown in the household bank deposit growth rate matters.
ANZ economists explained that banks require deposits to fund their lending offers. They further stated that the recent increase in the funding gap of banks is a matter that they are taking a close eye on.
Economists added that in the current economic environment, getting the deposit growth has proven to be difficult. And while banks can tap into their non-deposit funding for lending, that part has limits, economists say. Trying to close the funding gap in banks is expected to result in constriction, to some degree, in the current credit conditions, especially at the period when there is a strong credit demand. With this, economists have warned that a headwind might be in the pipeline that could significantly impact the economy.
However, economists explained that the slowdown in household bank deposits might not be as obvious as one might think. They said that overall, the primary reason for this issue is the change away from foreign ownership of local housing, the increasing popularity of managed funds in reaction to the lower interest rates, and the bigger use of cash. Economists say that all these factors have contributed to the divergence between bank deposit and credit growth as of late.
However, finding out how and to what extent these factors have impacted the increasing funding gap in banks is difficult and would require a lot more digging, economists explained.
But, according to economists, whatever the concrete reasons are that significantly aided the slowdown in the bank deposit rate, eliminating the funding gap could be a massive breeze for the economy going forward. They also likened the possible changes to the funding gap that developed in 2017.
ANZ economists that banks can use their wholesale funding markets to help lessen the funding gap, but there are some limitations to this as well, especially because of the rules from the Reserve Bank. The loans to bank deposits ratio is also a critical standard that investors are using as well as in the assessment of ratings used to evaluate the liquidity of a bank. This approach, as explained by economists, of using wholesale markets for increased funding can impact the perceptions, especially on risks, which will ultimately cause a rise in fund costs.
The economists also said that while banks can increase their deposit growth to help minimize the funding gap, the scope of these efforts through a higher interest rate is restricted. They further added that this move would likely cause a rise in funding costs as well as put pressure on margins.
ANZ economists also stated that banks could take alternatives like bridging the funding gap by rationalizing their lending offers. They explained that it could be possible by either expanding their price, which is offering higher lending rates or openly reducing their lending availability.
Either way, economists explained that with the current extent of the funding gap, they expect that the lending offers of banks will need to be controlled, at least to a certain degree.
They say that the pressure in the current financial condition caused by the gap will likely negatively impact economic activity. Economists say that the condition is already looking damper because of these reasons.
Economists added that data from surveys on both banks and businesses showed that it has become more challenging to get credit. And although not all of this is due to the slowdown in bank deposit growth, there is no major implication that the condition is about to reverse in the foreseeable future.
They also stated that the potential implications of closing or minimizing the gap would be significant to economic activity. The prospective credit cost and its availability could become less flattering for businesses and households.
Further, economists said that with the need of banks to reach for the balance between lending and deposits, the route to both lending and deposit rates is expected to diminish should the Official Cash Rate start to go even lower.
Meanwhile, economists explained that the majority of the current credit growth is primarily due to people wanting to go on debt to build or buy homes, invest in real estate, or expand their capacity.
Further, economists said that it remains unclear how long these disturbances and gap will last. And while they are hoping that these are only brief disruptions, many businesses are going to need credit to help tide them over, and now is not a good time for the banking system to not have enough resources to do so.