Billion dollar cash jump indicates stockpiling by nervous households

Sunday, 10 May 2020

Some nervous households stockpiled cash in the run-up to the nationwide coronavirus lockdown.

Cash in the hands of the public was up by just over $1 billion from the end of March 2019 to the end of March this year.

That jump was larger than trend increases in cash as the population and economy grows, and compared to a rise of just $175 million in the previous 12 months.

Banks say the spike of cash in the hands of the public, which includes cash held by businesses, may be partly to do with cash stockpiling by households.

But the message to the public from bank top brass, the international ratings agencies, and the Government, is there's no need to panic about banks failing as they have enough capital to get through the current economic crisis.

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Finance Minister Grant Robertson said there was no reason to fast-track the planned deposit guarantee scheme to promote confidence in banks.

“As highlighted in recent statements from the Reserve Bank and the banks themselves, New Zealand’s financial system is sound, with strong capital and liquidity buffers,' Robertson said.

'The Reserve Bank has been in constant communication with the retail banks and the New Zealand Bankers’ Association, and are confident that they are well-placed to respond to the impacts of Covid-19.'

New Zealand was unusual as one of the few developed countries not to have a deposit guarantee scheme designed to protect households from catastrophic financial loss as a result of a bank failure.

Instead, New Zealand was currently committed to what's known as 'Open bank resolution' in which depositors could face a 'haircut' and see some of their money used to recapitalise a failing bank, though some market-watcher do not believe that any Government would allow that to happen, and would step in and use taxpayer money to bail a bank out.

Despite that, a deposit guarantee scheme was slated to be introduced in 2023.

But, Robertson said: “New Zealand’s financial system is sound and functioning well so there is no need to rush into anything.'

He would not confirm whether behind the scenes work was underway to be ready in case the swift introduction of a deposit guarantee scheme was necessary.

But, Robertson said: 'The Government has shown during the Covid-19 situation that it is prepared to act swiftly if needed.”

The last time New Zealand introduced a deposit guarantee scheme it happened very quickly in 2008. When the global financial crisis struck, New Zealand banks were heavily exposed to offshore funders, and as panic set in, taxpayers had to guarantee banks to ensure they could continue to access international money markets.

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Since then, banks have been required to beef up their balance sheets, and rely much more on funding from New Zealand depositors.

The Reserve Bank issued a statement to assure depositors there was no need to panic-stockpile cash.

'New Zealand’s financial system is sound, with strong capital and liquidity buffers,' it said.

'The Reserve Bank has been in constant communication with the country’s retail banks and the New Zealand Bankers’ Association, and we are confident that they are well placed to respond to the impacts of coronavirus.'

Former Reserve Bank Head of Financial Markets and member of the Official Cash Rate advisory group, Michael Reddell saw little prospect of politicians letting retail depositors lose their money in a bank failure, and favoured a deposit guarantee scheme as a way of requiring depositors to pay for that protection in the form of a modest annual insurance premium.

He was opposed to rushing a deposit guarantee scheme into place.

'The permanent deposit insurance scheme needs proper debate and the benefit of a full select committee process,' he said.

'So, if the government suggested that they would carve out that bit of the Reserve Bank Act reforms and look to have a scheme in place a year from now then that sort of fast-tracking I could probably support.

'What I wouldn't support is something rushed through without careful scrutiny that would become the scheme we are stuck with for decades.'

'Short of that, I think we would be better if (as they probably are) officials just focused on contingency planning for a deposit guarantee under the Public Finance Act if serious problems arose here.

'That would be an explicitly temporary opinion and need not compromise good policy work on the longer-term scheme design.'

The spike in cash in the hands of the public comes at a time when commentators are predicting Covid-19 will hasten the decline of cash as a form of payment.

Under alert levels 4 and 3, contactless payment for goods and services became the norm as businesses sought ways of doing business while minimising the risk of infection.

The Reserve Bank expected the level of cash in the hands of the public would begin to normalise over the coming weeks and months.

'We had anecdotal reports from banks of an increase in large cash withdrawals by a small number of customers in the week or so leading up to lockdown,' Reserve Bank spokesman Brendan Manning said.

'Looking at data from the five major banks the total value of cash withdrawals (all customer segments, over counter and ATM) in the seven days before lockdown (to 25 March), was about 10 per cent up on the seven-day period ending on 26 February, four weeks earlier.

“Westpac NZ noticed a manageable increase in cash withdrawals in the lead-up to the Level 4 lockdown period,' Westpac spokesperson Max Bania said.

'We prepared for this anticipated increase by replenishing machines with cash more frequently. This is not an unusual occurrence, as we regularly plan for localised increases in cash withdrawals for major events such as concerts and sporting events.'

Once lockdown came in, cash withdrawals from ATMs plunged, but continued, and despite cash passing from hand to hand, many households intended to carry on using it for purchases.

'Cash withdrawal and deposit activity reduced significantly during the Level 4 lockdown period,' Bania said.

'We have however started to see an increase in activity across both deposits and withdrawals since the lockdown ended.”

ANZ saw more money withdrawn in the lead-up to lockdown, but with fewer people taking money out, the amount each customer took out was higher.

'We saw a small decrease in cash withdrawals from ATMs and branches in the month leading up to Level 4 compared to February, but a small increase in the total amount,' said spokessman Stefan Herrick.

'Since 26 March, cash withdrawals have fallen 55 per cent,' Herrick said.