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Just at the moment the bank is looking like an increasingly temporary place to park your money. David Hargreaves has a look at the latest deposit statistics

Just at the moment the bank is looking like an increasingly temporary place to park your money. David Hargreaves has a look at the latest deposit statistics

We probably shouldn't be surprised at the sight of people shunning term deposits, given what's happening with interest rates.

But somehow it feels surprising. Just a change in the order of things I suppose. Something you need to adjust to. And the question that arises is: Is this the end for bank term deposits as we know it?

For a long time there TDs were something that retired folk particularly depended on for income.

Now we are quickly approaching the point that even 1% rates will soon be a thing of the past.

Imagine putting a cool $1 million in TD for a year at 0.9%. The gross return (pre-tax) would be $9000, or $173 per week across 12 months. That is a gross return! 

What this is all going to do to banks' funding will be interesting to see. 

At the moment we are early in the game but it would seem clear that fairly sharp declines in the amount of money put on term deposits will be ahead of us.

The deposits by sector figures from the Reserve Bank are currently painting a weird and wonderful picture. Thanks to the Covid crisis there's lots of money sloshing around, it is to be presumed in large part due to the impact of the wage subsidy money and also the Reserve Bank's quantitative easing programme.

If we go back to February and the start of the Covid crisis the total deposits held by banks - that's everything, including businesses and government - was $365.7 billion. As of September this had risen to $394.2 billion - which is a 7.8% rise in seven months.

Within this total figure, the total amount in savings accounts over the same period rose from $87.2 billion to $105.2 billion, which is a rise of some 20.7% across those seven months.

But the rise is even bigger when it comes to total amounts in transaction accounts - or money that's effectively parked. It's risen from $84.6 billion in February to $110.8 billion in September - a whopping 30.9%.

That, however, is 'parked' money that's available at any time for the business or individual, whatever, to withdraw. How about term deposits?

Well, in total, including businesses and all, the amount held in TDs in this country peaked at $196.6 billion in August 2019.

In February this year the total amount held in TDs was just a little below the record level, at $193.9 billion. But since then about $16 billion has been pulled. As of September, the grand total was at $178.2 billion, which is a drop of 8%.

If we switch our focus to the householders and what they are up to, it appears the deserting of TDs is something that is only now getting under way in earnest.

Household term deposits also hit a peak in August last year, with $103.9 billion held. 

Fast forward to February and the start in earnest of the Covid crisis and there was $100.9 billion held by households in TDs. Over the next few months the figures went up and down a bit, and by June there was again $100.9 billion. Since then what looks like the start of the exodus has begun, with the amount in household TDs falling around $4 billion, which is an around 4% fall. And the rate of withdrawal is increasing, with over $1.6 billion coming out of the TDs in September alone.

There's still plenty of money being 'parked' by households in transaction and savings accounts, but what that really means at this point is not clear. Household transaction balances have risen from $28.6 billion in February to $38.1 billion in September, while savings balances have risen from just under $55 billion in February to $65.2 billion in September.

It's all going to be a case of watch this space. 

With the RBNZ expected to announce next week details of a new Funding for Lending Programme (FLP) through which it will lend cheap money directly to banks and with the distinct possibility still that we will see a negative Official Cash Rate early next year the immediate prospects for TD fans look ever more grim. 

So, is this the beginning of the end for conventional bank term deposits? It may seem so. What they end up being replaced with though, and what the longer term ramifications are for the banks are questions that lie ahead of us.

Certainly the days of being able to simply put money aside and live off the interest look long gone. And that's going to require a process of adjustment.

These are indeed interesting times. 

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56 Comments

15
up

You need to add to the article there is no deposit guarantee.
So the risk of the term deposit has increased significantly while the return has plummeted to near zero.
Everyone in term deposits needs to have a good read of the OBR Regime on RBNZ's website
https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-reso...

Its pretty much at the point now where you should simply move your money to kiwibonds if you're worried about OBR - either way you're likely looking at negative real returns. Risk premium for bank TD's doesn't stack up in my view.

I hold both. Had some bonus bonds as well but soon to be back in my bank account looking for a place to be parked...at risk of OBR.

The way I figure it, there will be significant signs of stress before any OBR. When you see those signs of stress move your savings from the bank into kiwibonds.

Yes because the nature of a bond is that with increased risk the return increases.
However, with TD's they don't attach to any particular asset and the risk goes up weekly but the return goes down weekly.
This can only happen in an artificial market that is controlled by the state.
Further the state and banks are making it harder and harder to contract in actual cash. See IMF article on why they are doing this....
IMF: Cashing In: How to Make Negative Interest Rates Work
https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interes...

Things are different now as central banks have 'removed' all risk from the markets. Risk free rates are more or less zero. Buying junk bonds by the Fed this year was a sign that they now own the risk and hence the risk free rate is basically nothing.

Yet we both know this isn't true - there's more risk in the system now than there has been at any point through modern history. But you don't get rewarded for that risk because central banks have manipulated the system so much that the economic/financial model is broken.

Anyway kiwibonds will give you the risk free rate without worrying about an OBR that you have with a TD. And you don't have to worry about interest rate movements in terms of pricing it or selling on a secondary market. The kiwibond is really more like a term deposit at the risk free rate, despite what they've called them.

Why would I hold their centrally controlled fiat shitcoin when I can control my own Bitcoin, be self sovereign and have a 0% interest rate and effectively 0% inflation? they literally ignore the one thing that kicked the central bank digital currency thing off.

Absolutely not! Worst thing you could do...look to park cash in money market funds and/or short term bonds 1-3 years. DO NOT go higher on the yield curve at this point. Understand it is extremely difficult to get risk averse yields and most REAL returns are negative at this point and you should invest with caution. Highly recommend emerging markets space.

Personally I have been buying the VOO Vanguard S&P500 Index that has a 0.03% management fee. About to do another tranche this week. You are subject to the USD / NZD cross rate but thankfully the rate is up. It pays around 1.78% trailing yield today but this is sucked up by the FIF Tax whether 5% FDR or CV. So any return will be only the gain in the index.
I am also looking at the few houses that will simply be alarmed and a gardener sent once a month to clean the properties. I have no interest in being a residential landlord so they will simply be a store of value.
Lastly I have moved money to accounts offshore to get a Government guaranteed deposit albeit on USD250k.
So I have made a lot of changes and hold no TDs now just funds on call.

Agree
Money has no value.
Doesn’t leave many options.
Buying a property in a strong location is better than a negative return in the bank.

Serious ques: Did you have to have the equivalent of an IRD number in the country where you transferred money? e.g. Australia. Was it easy to find a hedged deposit to protect against currency fluctuation? Interested in your experience as we are cashing out of TD. After 15yrs of committed savings, we're happy with performance of shares, bonds etc. Happy to take a nominal loss over the next 2-3 yrs after 15 of solid performance. Mostly concerned with protecting principal. Current weighting 40% shares, 60% TD but going to Gov bonds. Thought about a brick and tile place but RTA killed that...

Cheetah.. you do not need an IRD number to set up TDs in USA, Thailand or Cambodia (unsure about Aussie). Don't know if you can hedge against currency fluctuations with foreign banks but if you spread your funds amongst a few countries you are kind of hedging anyway. USA and Thailand has a $250K deposit guarantee per customer, per bank. No deposit insurance in Cambo but ANZ has big presence so MAY be insured under Aussie regs but doubt it. TD rates (called CDs in USA) are close to zero almost everywhere so tax implications irrelevant. GL

I wonder how many people are taking the cash out, and buying a safe?

My issues is currently the banks are actually making more money percentage wise, than savers are, off their own money. Why wouldn't savers instead loan directly to people to buy houses, and cut out the bank/middlemen when you may be able to get 2% doing this, plus security over the house? Or just buy a house and benefit from potential capital gains. I can see why it is causing an asset price bubble.
But I don't think many people understand what is going on. People savings are being devalued by what is going on. They have to get inflation up, which is going to devalue savers buying power even more.

NZ savers in banks are in a bad position due to no bank guarantees, and the low interest rates. They don't really have anywhere to go from here. Also if you buy kiwibonds through some banks, they actually charge you a higher percentage, than the kiwibond returns, so you end up with negative interest rates, and your bank makes a healthy % return for simply being the middleman. So in that case people will lose money buying kiwibonds. Some people may get caught out by this.

Wgtn inv.. you can. It's called peer to peer lending, which has increased in popularity but certainly has its' risks.

10
up

Now would be the time for the government to remove taxes on bank deposit returns. They won't be bringing in much revenue anyway, and it'll help tilt things slightly away from property, just a tad.

When (if?) interest rates go back up, government could think about how it might reinstate taxes on interest returns, if that was the most sensible thing to do.

Nice idea but unfortunately tax on zero is zero!
Long term savings accounts are close to zero. The bonus saver accounts pay less $250 per month on each $1m deposited

Meanwhile, as long as you don't trigger the bright line test.....

Is this the right ploicy ?

RBNZ is literally forcing depositors/Savers, many who are on the verge of retirement to come out from tbeir safe zone and put money in high risk options.

People who havebeen depositor are normall people who do notl ike to take risk and are happy with minimmum return, what RBNZ and government is doing now will come back to roost as are not thinking beyond a month or two.

Everything to protect housing and stock market but what about deposit holders. Dangerous time ahead as No one kniws what they are doing but just following herd mentality of printing and throwing money and has reached to a point that any pull back ever in future will be met with resistance and lead to disaster.

Deposit holders I guess need to realise that they are not what matters to the RBNZ. The RBNZ is penalising savers to force them to spend. And protecting the housing market above all, inflating it actively.

That could explain why shares have gone up a lot despite Covid conditions. Likewise house prices. Some people could end up with less money in a year, than they would have if they just left their money in the bank. Guess that is why people are buying houses, because they feel house prices won't go down.

When we look back in a few years we may find putting a chunk of your wealth in a TD at 1% interest worked out a lot better than putting it into overvalued property or shares. For most, minimizing risk to your capital, should be way more important than the (possible) returns.

This is exactly what I am thinking, but obviously noone knows. Shares for example look over inflated, and seem to now be drifting down again. So potentially some people may have already lost capital, if they moved all their savings out of the bank into shares or an EFT that has dropped. This is why I think people are more comfortable with housing, because a house itself doesn't lose a room, or part of the land when prices drop, and people are also buying and selling houses in the same market. I think NZ has made a huge error in allowing house prices to rise so much, and allowing interest rates to drop and removing restrictions, as a way to stimulate spending.

WI..Agree. Personally I have split my money held in NZ almost exactly equally amongst property, shares, TDs and bonds. The way I see it no matter what happens two out of four of these should at least do OK.
Realized we were making a huge error with housing/immigration as early as the 1980s and didn't like it but positioned myself to take advantage. IMO Govt, RBNZ and building societies (AKA retail banks) are in so deep they will extend and pretend as long as possible but cannot prevent the inevitable. You're right, you can't lose a room but you can lose 30%+ of the value of a house and not recover it for 20+ years. GL

Interesting reading yours and OctoContrarians allocations. I spend a lot of my time wondering what the heck to do. Maybe the staff at interest could do an anonymous piece "how we allocate our personal wealth", I'm sure readers would be genuinely fascinated. Personally I'm 78% real estate, 13% precious metals, with some other bits and pieces in global shares and NZD and Euro cash, Euro P2P loans, I worry that I don't have enough debt. It seems ideal, to me anyway, to hold a serviceable amount preserve the purchasing power of your future income.

fat pat..Because things can get volatile (esp at the moment) and can move very sharply in either direction I prefer to use what is known as negative co-efficiency where if one investment goes up the other likely falls in tandem and vice versa. That way you are kind of insured against significant losses. Specifically if Govt continues QE and ensures interest rates remain low asset price inflation will be high so my property and shares increase but TD and bond returns will be low and the value of my cash held there goes down. If things go the other way and inflation gets high and interest rates increase my property and shares fall but bonds and TDs earn more and can also possibly be used to purchase additional shares and property cheaply.
In a nutshell I usually try to put myself in a position where my investments are almost guaranteed to move in different directions. So I can never maximize but it is also extremely unlikely that I get burnt too badly. Whereas, as with many on this site, who hold most or even all of their wealth in property..... Well IMO, whether they know it or not they are simply recklessly gambling. GL

David,
The only alternative is property or shares. And so the game goes on until the rules of the game are changed.
KeithW

For that to happen mentality of the people in power making decessions have to change.

How...time will tell .....

or bitcoin, as you say the rules of the game are changed.

keithwoodford... thx for the excellent commentary yesterday. Best ever on this site. Looking forward to more please. Thanks again.

Just wondering why managed funds are held in trust while bank deposits aren’t.
Is it a cost issue or something to do with the way they’re structured?
And if they could be restructured to be held in trust would that negate the need for a deposit guarantee scheme?

Managed funds are just an investment vehicle to pool money and allow the manager to charge fees over the investments the fund holds whether property, shares or cash.
They offer no special protection.
If the Managed Funds held cash in a bank and the bank had an OBR the outcome will be the same as for an individual deposit holder.

Is it time to opt out of Kiwisaver then?

If you investigate how Kiwisaver is taxed and the fees charged on it the best plan is to only voluntarily contribute the $1043 to get the Government $521 contribution.
This is assuming you are paying your employer contribution of your salary which appears to be happening more and more.
KS is taxed to the extent in foreign equities at a deemed 5% under the FDR / FIF rules despite foreign equities not paying that amount of cash to you each year. This is a total tax rip off.
If the above applies to you then you would be better off investing any above the $1043 minimum directly via Hatch Invest (Kiwibank) in a low cost index fund such as VOO S&P500. That way you only pay tax on the dividend received of approx 1.78% today and capital gains will be tax free if held long terms. Until you have invest NZ$50k actual cost.

Currently, my employer pays the 3%. Would it still be better to stop payments and only contribute $1043 per annum?

Not if they are genuinely matching the 3%. Stay in
I have friends who thought employers were but after investigating they were paying it.
The reason its worth staying is if you put in 3% and your employer is matching it less tax you cant beat that.
Just make sure you are in a low fee cost passive option to.
If you are young then this is where I would be: A 50/50 split in these and just keep drip feeding in
https://www.superlife.co.nz/investment/sector-funds/us-500-fund?tab=kiwi...
https://www.superlife.co.nz/investment/sector-funds/us-large-growth-fund...

Wicked thanks for the info

Regarding foreign investments, this is a good heavy read;

https://home.kpmg/content/dam/kpmg/pdf/2015/07/Offshore-Share-Investment...

As Oreo has left out quite a bit of info.

But regardless, you should always get advice from a qualified financial adviser, as they will know your situation.

Most of that is irrelevant to Kiwi Saver. It's only for when individuals hold the invest direct.
Kiwi Saver only has one method available to it and that is the 5% FDR under the FIF rules.
The doc is actually a basic summary of the rules.
I would say a qualified financial adviser has little clue on advising on the tax consequences of the FIF regime.
If you need advice on it the only place would be a Big 4 Tax firm.

FIF applies if the individual has foreign investments over 50k (subject to further criteria). And you were giving general advice relating to Kiwisaver.

The Taxation of an individual's FIF investments is irrelevant to investments held in Kiwisaver.
I wasn't giving tax advice I stopped doing this 14 years ago.....Just making comment

pretty sure your employer has to pay

"The reason its worth staying is ..."

No point investing in a Ponzi
Fullstop
spend it now

If your in the S&P500 Via Vanguard that is not a ponzi.....

No! Keep putting in your 3 and getting your employers 3. That is the most efficient tactic.

i put in $1100 to kiwisaver,and got zero from govt, had to complain to the operator who passed it on to government department, but that was three weeks ago and still no funds from government into the kiwisaver account.

Keep on them.
Log into IRD site and see if your contributions are showing.
Also check on your providers statement.
It had to be in the account by 30 June.

RCD... I did the same. Joined KS in July and put in $1100 lump sum to get Govt contribution. Noticed Govt $520 was not there and contacted my provider who told me Govt contribution is added in June each year. Forced the wife to join too. She just received residency and will likely never work in NZ. However, under our fantastically generous immigration policies she can get the KS $520 PA from our kind Govt and eventually regular Govt super as well, all without paying a cent in tax. I guess the tax payer should just be glad I do not leave her and the kids as she would probably get about $600 a week plus electricity supplement, extra food allowance and of course a huge accommodation supplement each week. What a great system!

That's not entirely accurate. If you have your money on deposit with a bank and they fail, OBR kicks in and you take a haircut (the liquidator ringfences a portion of your savings in case they are needed). If your money is in a managed fund and the manager of that fund fails, the supervisor takes over and appoints a new manager and the fund carries on. Your money is protected against corporate failure in the fund but it isn't in the bank. Neither the fund nor the bank can protect against market fluctuations however.

No you have not read carefully what I said above. See a copy and paste.
"If the Managed Funds held cash in a bank and the bank had an OBR the outcome will be the same as for an individual deposit holder."
There is no protection in the event of the scenario above I have described.
OBR event has nothing to do with a fund manager failing.
The fund itself and the manager are separate entities.
For example if your Kiwi saver has funds on deposit at an NZ bank. If the NZ bank has an OBR event. That cash will be frozen as part of the OBR. What you get back a period down the track after a fees fest by various parties depends on how much capital is required. Could well be zero. The Kiwi savers funds on deposit will be treated the same as an individuals accounts. They have no special protection. Same for NZ businesses who have their funds in the NZ bank.

That's correct - but it's not what you wrote.... you stated: "Managed funds are just an investment vehicle to pool money and allow the manager to charge fees over the investments the fund holds whether property, shares or cash. They offer no special protection." That part is not entirely accurate - unless you intended for your post to be read from the bottom up.

Again your not reading carefully. That is exactly what I wrote. I cut and pasted from above.
My answer was in response to a question saying could you used managed funds as a vehicle to protect your bank deposits as they don't have a deposit guarantee.
My statement is entirely accurate.
You have stated protection when a manager of a fund goes broke. That is irrelevant.
My statement that "They offer no special protection" is entirely correct vs you holding the assets the fund holds in your own name. A fund manager does not hold the investments themselves.

Things always change, from the age of CB & Ham Radio to the internet, from the age of live within means, savings, earn interest to the age of free credits, wear now/buy now & don't need to pay (or pay later to make it less stealing kinda) - actually what they taken out is the 'time', because future time=future money. And if we simply run out of it? - simple, print more and more of it. This is the way to go for NZ economy post Covid. Most of those with self interest always touting the word limited resources, sustainability whereas in fact? - the opposite has been advocated for awhile. So? head to the banks, Fin lenders as long as you've got govt some sort of subsidy? - all will be sweet. More $ can be printed by the Banks, it's just a number, most of us will leave in short time, so do enjoy it. NZ have plenty of desirable land area to be borrowed against cheaper foreign currency that seek refuge here, as sure means to plug our ever increasing country drain hole.

0.1% return with Kiwibonds. If someone had a million dollars in them, they would get back less than $1000 after tax, after a year, but also lose access to that money for a year. Surely there are better options out there, when banks can make $20,000 return off that same amount when lending to house buyers?

According to this you are getting 0.50% at kiwi bank on call month to month but can immediately withdraw. So half my cash is there waiting to be deployed currently. It wont last though...
https://www.interest.co.nz/saving/bonus-savings-accounts

I suspect it won't be at that rate for too long. It is so depressing to see rates drop like this. A lot of retired people who were relying on their interest are going to be hurting. It always seems to be the older people with savings that suffer when there is a crisis like this. eg the finance companies collapses in the last GFC. There is no incentive to save.

deposits don't go away, you can swap it with someone for a hard asset but they get the deposit, that's until people start paying down debt and cancelling out debt creation.

This is why I wonder why people refer to "money tied up in houses". Yes, I might owe $xxx from buying a house but somebody else has $xxx in the bank, assuming debt free.

The new MMT, is clearly proven it's effectiveness during GFC period, worldwide with QEs.. then during this multiple waves of (still continuing) Covid19 lockdown. Remember capital movement=people movement. This Pandemic has put a grind halt into that for now.. and learning from that GFC, what we need is NOT a capital/$ flow for investment from traditional method of public funds, leave it to be circulated into housing productivity, the banks $ capital (which is carry an intrinsic status of country sovereignty) can be printed with more QEs out of thin air, now.. please don't be sceptic about it. It is indeed.. every countries have their own sovereign rights via each of their own CB.. to keep on printing this $ number as simple as that ! - Now, don't get me into the future debt/payment mumbo jumbo of it - It's a simple stick/leash for future generations furthering hard work, with imaginative carrot as incentives. And those already procure an RE? simply exercise your future rights, to extract those phantom $ if so needed, by selling it to overseas highest bidder, just remember.. no CGT - NZ is the perfect place for the scheme. The trick is to always hide the land/housing inflationary figures from the normal CPI report and at the same time, give assurance to voters about take & give, being prudent savers etc. it's all about 'timing' to maintain the herd population 'confidence' and also the offshore funding 'confidence' - it's all about NZ image, peaceful, stable, blue/green, stable governance, CB & productivity.. we should maintain that, .. a bit like selling RE, be aware to hide the bad, shows the good stuff. NZ public must take all out of their Banks/$ cash reserve and invested straight out into RE, rest assure.. the more of us into the scheme, the more assurances for future bail out by the govt. in the unlikely event of 'emergency'.