Savings

Financial savings, debt and monetary assets during the pandemic







Post no. 256

Financial savings, debt and monetary assets during the pandemic

Published on 02/11/2022

The increase in monetary holdings of the non-financial sector in the euro area and the United States during the pandemic is explained by the strong increase in financial savings linked to public transfers and the sustained growth of loans, and in particular (in euro area region), state-guaranteed loans. Portfolio shifts strengthened monetary dynamics in the United States, while dampening it in the euro zone.

Chart 1. Sources of variation in household monetary assets in the euro area (Variation in annual flows as a % of GDP)Source: Euro area sector accounts, ECB.

Note: The graph shows the change in monetary assets (orange line) resulting from changes in net financing capacity, financial investments and liabilities (bars). Other liabilities include other accounts payable. Other financial investments include deposits and long-term debt securities, shares, UCITS units excluding money market funds, insurance provisions and other receivables.

The pandemic has had a very significant impact on the economy, the income of economic agents and financial behavior. Households experienced a very strong increase in their financing capacity (also referred to in this blog as “financial savings”), as well as a strong increase in their monetary assets. The money supply held by households increased by around 9% of GDP in the United States, compared to 3% in the euro zone. The articulation between monetary assets, net financing capacity, issuance of liabilities and portfolio arbitrages in the euro zone and in the United States can be formalized by the following identity:

Currency = Net lending + bank borrowings + other liabilities – other financial investments.

The money supply held by a sector is built up through financial saving (net lending), borrowing or issuing other liabilities (eg stocks and debt securities). It is reduced by non-monetary financial investments (long-term debt securities, shares, units of non-monetary UCITS and insurance reserves).

The increase in household financial savings is due to the combination of very large public transfers and a drop in consumption following the general confinement. It has been the main driving force behind the growth of monetary assets in the euro area and the United States. This increase in monetary holdings reflects the massive issuance of public debt purchased by monetary financial institutions (MFIs) and channeled to money-holding sectors through public transfers. However, portfolio changes also played a role, which differed from region to region. In the euro zone, monetary dynamics were dampened by increased purchases of riskier assets: equities, shares in non-monetary UCITS and life insurance reserves. Conversely, in the United States, portfolio shifts towards money, i.e. excluding debt securities and units of non-monetary UCITS, favored the accumulation of monetary assets (see bar purple in graph 2). Bank lending did not play a significant role in any of these areas. In the United States, the Fed’s survey of consumer expectations (March 2021) suggests that a third of the stimulus checks received by households have been used to pay down their debt.

Chart 2. Sources of variation in household monetary assets in the United States (Variation in annual flows as a % of GDP)Source: Financial Accounts of the United States, Federal Reserve Board.

Note: The graph shows the change in monetary assets (orange line) resulting from changes in net financing capacity, financial investments and liabilities (bars). Other liabilities mainly include other accounts payable. Other financial investments include debt securities, shares, UCITS units excluding money market funds, insurance provisions and other receivables.

Despite a decline in their primary income, the financing capacity of non-financial corporations also increased in 2020, both in the euro area and in the United States, due to large public transfers and a drastic postponement of plans for investment. This increase in financing capacity (with a few exceptions, such as in France, which recorded a slight increase in the need for corporate financing) largely explains the growth in hoarding in both regions, investment in financial assets non-monetary being globally moderate. However, the growth of bank loans, particularly in the euro zone, also contributed to the strength of monetary creation. Indeed, many companies hit by the effects of confinement have had to resort to external financing. On the supply side, the introduction of government-guaranteed loans and, to some extent, targeted long-term refinancing operations have helped to ease bank lending to businesses. Growth in US corporate loans was more subdued: companies relied more heavily on corporate bond issues, which rose, and loans to US non-financial corporations were affected by the cancellation program loans under the Paycheck Protection Program.

Chart 3. Sources of change in the monetary assets of non-financial corporations in the euro area (Change in annual flows as a % of GDP)Source: Euro area sector accounts, ECB.

Note: The graph shows the change in monetary assets (orange line) resulting from changes in net financing capacity, financial investments and liabilities (bars). Other liabilities include shares, debt securities and other accounts payable. Other financial investments include deposits and long-term debt securities, units of UCITS excluding money market funds, shares, insurance provisions and other receivables.

Chart 4. Sources of variation in the monetary assets of non-financial corporations in the United States (Change in annual flows as a % of GDP)Source: Financial Accounts of the United States, Federal Reserve Board.

Note: The graph shows the change in monetary assets (orange line) resulting from changes in net financing capacity, financial investments and liabilities (bars). Other liabilities include shares, debt securities and other accounts payable. Other financial investments include debt securities, UCITS units excluding money market funds, shares, insurance reserves and other receivables.

Updated on 02/11/2022 14:56

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Bank of France published this content on February 11, 2022 and is solely responsible for the information contained therein. Distributed by publicunedited and unmodified, on February 11, 2022 3:17:03 PM UTC.

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