Where are all the deposits coming from?

It has been a while since the last mailbag but I got asked a cracking question over the weekend so it is definitely time to share another e-mail with the wise readership of MacroBusiness. Today’s e-mail comes from a reader Harrison who is wondering where all the banking deposits are coming from.

Just wondering if you can help me out with something that is confusing me. I understand that loans create deposits which is why M3 has grown so much over the last decade, however the banks are telling us that they are now seeing a surge in deposits at a time when credit growth is very low. Can you explain to me exactly where these deposits are coming from? I have asked around a few economists I know and they tell me it is because people are selling their assets but isn’t that just a transfer from one party to another? Without an increase in credit that doesn’t seem to make sense unless the buyers are foreigners. Maybe I am missing something. Can you help me out?

So it’s time to put your thinking caps back on and see if you can help Harrison out.

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  1. they sell assetes (shares, property and like)and go to percieved safer assets (bank deposits) and no dept during times of uncertinty this will also reflect the aging demographic as they move to safer assetes.

    • The question is however is who do they sell them to ?

      If I buy an asset off you for $100 dollars and we both have Australian bank accounts then the amount of deposits in the banking system is unchanged.


      • Further to that, Australia has a net foreign investment in the stock market. i.e. there are more foreign investors investing in the ASX than Australian investors in overseas markets. It is part of the reason the AUD falls along with the stock market.

        So when the ASX is falling as it is, it implies there are Australian funds buying shares off foreign investors.

      • person who buys house takes credit (new money is created), person who sells puts money in the bank as deposit. Just year ago person who sells would use that money to take even more debt but not anymore. That is why credit growth is slowing while deposits are growing

        • Agree. Read somewhere that govt is currently swimming in CGT revenue on investor homes being sold.
          A house bought 10 yrs ago for $150k sells for say $350k today.
          That means about $170k profit & $30k tax bill (say marginal tax rate 30%).
          Seller deposits $170k (less any debt), buyers gets $330k debt (assume say $20k deposit).
          Govt pockets $30k.
          All round jam for nothing except for last buyer.

  2. Deposits come in all shapes and sizes. In this enviroment people are buying less useless stuff, and they are paying down debt faster.

    $1000 paid off a home loan today is another $1000 available to lend tomorrow – ratios have already been met on those funds.

    Broadly speaking the change in the rate of credit growth should be inversely proportional to the change in the rate of savings growth. IE. a negative direction in credit growth will equal a positive direction in growth of deposits.

    Banks do not pay a high premium for all credit funds. They pay a premium for term deposits, but they get much of their deposits for free, and in fact we pay them to hold our funds – but that is another topic.

  3. The government is spending (ie giving to the private sector) more than it is getting back in taxes. So the private sector is getting a surplus. As you rightly say, any money spent by the one entity in the private sector is just received by another entity in the private sector. The increasing private sector surplus lies in deposits. There is no where else for it to go.

    • But government going into red maybe not the case of more spending but more a case of falling tax receipts and other revenue sources primarily driven by private sector credit creation

    • +1

      This would be the most plausible answer. As the AU Fed Fov is running deficits since about 3 years, this causes the credit side of private bank balances (which contain the deposits).

      IMO it is important to realise that:
      – stock market transactions (whether in a crash or hype) do not change the money supply; the transaction amount simply moves from account A to B
      – people paying off debt results in a LOWER total money supply (deposits decrease (on credit side) and outstanding loans decrease (on debit side))

      The interesting thing is here is the deficit. Last FY 2010-2011 fed budget deficit was AUD 50 billion (10% higher than previously expected). Well, in terms of the FY 2011 budget itself (AUD 350 billion), that is a stunning deficit 14.3% !!!!

      Just let that figure sink in for a moment – the Gov has to shave off 14.3% from its spending to balance the budget. That is huge …

      No wonder Swan is hell-bent on trying to improve that – talking about Labour economic credentials.

      • This seems to be the best thought out explanation and explains a lot of economic behavior in other countries. Particularly where private debt is anemic and the deleveraging process is effectively stopped by government borrowings effectively substituting the private sectors borrowings.

        In addition the growth in deposits I’m not sure refers to the whole banking system – but rather the big 4 banks (i.e the distribution of the pie is different). I see a lot about banks saying they are growing their deposit base.

        Foreign money never leaves the Australian banking system – just the account is held by a foreigner.

        Putting it simply for deposits to grow new money must be created somewhere. If it isn’t private sector debt it is government sector debt.

        That’s my understanding anyway.

    • Seems like a reasonable source of new funds for the private sector to add to deposits (without requiring pricate credit creation). It also helps explain the downtrend in deposits as a source of bank funding since the late 1990s.

  4. It’s realative? As bank assets (loans, and whatever fractional multliple they’ve had applied against them) are repaid, then so are the covering liabilities, leaving the savers still with their physical deposits, but against a smaller system debt ie: there’s ‘more’ savings.

  5. Ah Ha

    It’s because the Credit = Deposits ‘Balance Sheet’ does not ‘Balance’

    Lots of AUD deposits are owned by big foreign banks who are happy to have the Fx volatility risk (becuase it’s chump change to them) whereas the Aussie Banks can’t have the Fx volatility or they would get their equity wiped out on a 10 cent Fx movement.

    So the Credit = Deposit is based on historical Fx at the time the money was created.

    Aussie Banks fund our very large private sector Net Foreign debt that has accumulated over the past 40 years of persistent trade deficits.

    Leigh Harkness should be able to help out with answering this question in more detail.

  6. Bank loans and bank deposits have completely different supply & demand curves. Just because a bank credits a deposit when it makes a loan (assuming the loan isn’t taken in currency) doesn’t mean growth in bank loans determines growth in bank deposits (and visa versa). Nobody borrows to hold money on deposit.

    Bank deposits are growing because private sector saving & liquidity preference is rising. Growth in bank deposits varies with saving, the interest rate & the deposit taking banks willingness to provide deposits (which depends on profitability).

    • >Nobody borrows to hold money on deposit.

      That may be true, however if I take out a loan to buy a car then the deposit goes to the car dealer ( at least in the short term ).

      So my loan creates a deposit somewhere in the Oz banking system.

      • It does end up in the banking system (if not withdrawn as currency). But that doesn’t mean an increase in bank loans will automatically increase bank deposits. The public have to be willing to hold savings as deposits.

        You could have an increase in credit growth and a nominal fall in deposits. Or a nominal increase in deposits and a fall in credit growth.

        • >The public have to be willing to hold savings as deposits.

          I am not sure what you are suggesting here.

          If you have a look at the amount of currency in circulation as compared to total deposits the number is very small.

          Can you explain where else the public would be holding this money ? Are you suggesting some sort of “non-deposit” accounts ?

          • I don’t think I fully understand what you are getting at either.

            I didn’t say the public had to be willing to hold “money” as deposits. I said they had to be willing to hold “savings” as deposits (as a store of value).

          • The credit ends up either in deposits, taxation, or current account deficit.
            Where else can it go? Genuine question BTW.

  7. At least some of it probably comes from people like me who have a substantial monthly surplus of cash earned from providing our labour after all outgoings. The share market is not currently attractive, neither is investing in property, and I am already at the tax concession limit into super…. so I certainly park a lot more of my money in term deposits each year. It’s a poor return when inflation is taken into account, and the fact there is no tax concession on my deposits, but it does guarantee the money will still be there when needed. There must be quite a few baby boomers like me still in the workforce who are doing the same thing.

  8. “Nobody borrows to hold money on deposit.”


    I do

    The security for the AUD loan is a deposit in a different currency!!!

  9. Yes a surge in deposits can be Fx driven

    To be clear

    Australians own all of the ‘Credit’ but Australians DO NOT own ALL of the ‘Deposits’

    Alot of ‘Credit’ was created at an AUD/USD Fx of ~70 and became the ‘Deposits’ of foreign banks.

    The foreign banks DON’T CARE that the Fx rose to 108 and has fallen back to 98.

    The Australian Banks DO CARE about that amount of volatility, because it would wipe them out.

    We are talking about several hundred BILLION of deposits that can move in price by 10% over a few weeks

    That is the entire equity of one bank!

  10. not speaking fluent “economist”, could I get some confirmation as to whether I am understanding you all correctly….

    a) the credit = deposits balance is all out of whack because people are paying of debt/credit as much as they can, and alhtough usually the banks would balance this out by using that money to be able to issue more credit.. they cant get anyone to take on more credit no matter how hard they try

    and b)foreign banks and fund managers are storing cash here because 1/ our dollar value seems to be holdi ( or rerated) and 2/ we still have an interest rate

    thanx in advance 🙂

  11. Before I think about this could we get some definitions?

    How is Harrison defining “deposits”, what data is he looking at when comparing “deposits” to “credit growth.” Does that data include other categories that are falling e.g. is he looking at an aussie version of this:


    Note that similiar behaviour (If I’ve understood Harrison correctly) is being seen in the USA where the rise (i.e. rise faster than “normal”) in M1 and M2 in the USA was due to a rise in deposits — despite stagnant credit. Haven’t dug into this but have read some pundits calling it European money.

  12. I’d say it comes from where it always came from: work. people spend less and save more.

    However: in the usual FRB money expansion theory (debt->deposit->debt) the only way for total quantity of money to actually decrease (other than defaults on loans) is if somebody uses his deposits to pay debt. If you do that then this money is destroyed, it gets out of the system.

    So I suspect people currently prefer to save or maybe use an offset account rather than actually use their cash to pay down debt.

  13. All those first home buyers who aren’t actually buying because they can’t afford to, or are worried about their job etc, so money that would otherwise be going to paying off a loan is being saved?

  14. My 2 cents…I used to spend money on shopping for useless things and now I save. I also pay down my debt. Many of the people I know are in this trend.

    Does this indicate that deposits are increasing and funds are not circulating in the economy? I am not qualified to make that assumption

    • >Does this indicate that deposits are increasing and funds are not circulating in the economy.

      Not circulating – definitely.

      But the question is about increasing. As you say you are paying down debt. That shouldn’t increase deposits in the banking system because it distinuishes existing debts. That is actually deflationary.

  15. Its really simply.

    Government deficits = private sector savings. Someone mentioned earlier whether this occurs without bond issuance – the answer is it does not matter.

    The private sector is a net recipient of net government spending. This either increases the deposit base, or reduces credit growth (in Australia’s case, both).

    The corresponding entry is central bank reserves which are drained by issuance of government instruments(ie: Repo’s bonds, etc). These are bought by banks (asset to the bank) to offset the increase in liabilities(deposits by private sector).

    For more, read this

    • What makes this even more interesting is that the RBA has repeatedly commented on increased deposit growth in bank funding composition, but never mentioned the relationship with the government sector.

      They seem to focus on competition for deposit funding as a cause, but it simply can’t explain an increase in the balance of deposits.

      So do the RBA understand this relationship? One would assume they do. So why not disucss it? Is it too political for them? Why not be straight about it?

      eg here http://www.rba.gov.au/speeches/2011/sp-ag-280611.html

      And why do they not discuss this in relation to the trends in the household savings ratios? The cautious consumer?



      • Rightly said BB – of course the RBA knows the details, but publicly saying ‘thanks to the Gov deficit, the deposit balance is rising’ won’t make friends in Canberra.

        A similar thing can be seen when it comes to inflation. The RBA seems to indicate the inflation figure always comes somewhat as a suprise, yet when you look at the stats, it’s not difficult to observe the very close relationship between the M3 total and inflation – which makes sense: the more commercial bank money is available to the public, the higher the pressure to spend on a set of finite goods.

        Meaning the inflation for the near future can be quite reliably forecast be just looking at how M3 develops. If the RBA REALLY wanted an inflation below 3% the solution is easy: just limit M3 growth. But the RBA’s policy seems to be to just make everyone (primarily foreign parties) belief they’re hawkish and concerned about inflation while in reality its board (non-independent captions of industry) is more lenient towards inflation and M3 growth.

        Now to curb the Gov’s huge 14.3% deficit – what kind of tax might the Gov need to do just that ? Carbon tax anyone ? 🙂

        • RBA can not control M3 – bank money is created endogenously. RBA stopped targeting money supply in the 1970’s (a subtle point most academics still have not recognised).

          Also, I’m not sure I agree that higher M3 = higher inflation (if that is what you are saying). This all supposes velocity is constant – yet in the US at least, velocity is anything but constant. See here

          • Hey bb nice to see you back . Did follow you at debtdeflation . I see that you have embraced the MMT position a bit more.

            How come you dont post about the cost of construction relationship to high housing prices here at MB.

            This is one thing that hasnt been talked a lot here at MB

          • Great discussion !!

            Just one point from Dr Mitchell’s post


            “The government may decide to issue an interest-bearing bond to encourage saving but operationally it does not have to do this to finance its deficit. If the savers transfer their deposits into bonds their overall saving is not altered and it has no implications for the government’s capacity to spend.”

            This is an important set of sentences, because it separates what MMT says “can” occur and what “actually” occurs.

            Does the government issue a bond for every dollar it spends in deficit? If so, then it is technically removing deposits from the banking system if australian deposit holders use their savings to purchase government bonds. This may not have a net effect on the public’s savings position , but it would have an effect on deposits available to the banking system.

            Thoughts ?

          • Well what is the bonds are bought by foreign banks in exchange of their holding of AUD. That would flow into the system and increase the deposit base?

          • Indo I said

            “if australian deposit holders use their savings to purchase government bonds”

            >Well what is the bonds are bought by foreign banks in exchange of their holding of AUD.

            Do you mean a secondary market operation ? I am a little confused by this statement.

          • The RBA may not officially target M3, but indirectly through the inflation target, they do. I agree on the velocity point, but on average the correlation is quite noticable. I’ll try to prepare a graph from the RBA stats ….

            Although I agree commercial bank money is created by the commercial banks (and not the RBA), the RBA do have an indirect way of controlling M3 by using the rate instrument or by tightening the criteria when buying securities from the commercial banks either under repurchase agreement or

            The easier or cheaper it gets for banks to obtain central bank reserves, the easier or more lenient the banks are towards extra credit growth and thus M3 growth.

          • Sometimes interest rates are ineffective in encouraging the growth of M3 as seen in US with its ZIRP.

        • “Now to curb the Gov’s huge 14.3% deficit – what kind of tax might the Gov need to do just that ? Carbon tax anyone ?”.

          I think you’re on to something. There is no other genuine reason to continue with the imminent introduction of the carbon tax – zero effect on global emissions reduction and the last thing businesses and households in the domestic economy need (or want) in the current climate of global economic uncertainty. Common sense would dictate a deferral but perhaps government deficit considerations not.

  16. Additional comment to the above – I left out the effect of the CAD. CAD effectively transfers domestic savings to foreign accounts. However our CAD ($33bn) is less than the underlying cash deficit ($47bn) resulting in higher domestic deposits.

    • Similarly M3 and inflation. M3 can result in higher imports from, in this case, China. So higher M3 in this case does not add to inflation. In fact in the overall scheme of things it results in a LOWER overall average inflation.
      Don’t start me again on the NEXT stage of that series of events.

        • The Flare was more than Doomid
          And the Beat was more than Greedy
          And the Czars stir their-laire playing commitment with no clues

          The Bull were running wild
          Because their Big and Mean and Sacred
          And the Builden were playing flickit with no use

          The next Dawning we choke up,Dam,with an Eleventh hour dive.
          Well their we were struck importing spare.
          Where Floats break and Builden’s Rare

          And there were so many fewer questions.
          When Stars were still just the Holes to Heaven.MmHmm.

          Cheers BB MB De

  17. Swann has been acknowledged as the worlds greatest treasurer, so everyone is now feeling content and confident. The increase in M3 is from people digging up the cake tins of cash that that they stashed away in their backyards (or under the mattress) from when Keating made his bannana republic call.

  18. This may sound trivial ( in both nature and amount of money). I was talking to a Greek taxidriver the other day – Melbourne is the second largest Greek city in the world. He said that all his relatives are withdrawing all available money out of Greek banks and investments, and lodging them in Australian banks with Australian relatives. This would show up as an increase in savings.

    • Its sounds absurd but that doesn’t increase AU$ deposits. All that happens when a Greek thinks he has transferred his savings here is that someone else becomes the owner of his Greek deposits in Greece and he becomes the owner of AU$ deposits in Australia previously owned by someone else. No Euros or AU$ actually move country.

  19. The reason in deposits could be due to the following:

    1) Corporate (ex mining) retaining cash in the bank without investing – reflected by low sentiment
    2) Individuals playing in safe and spending less and saving more – cautious consumer (especially boomers)

    I’m not so sure about the govt deficit spending explanation. As the funds are borrowed from the market/banks there should not be a net increase in deposits.

    Separately, whenever the asx tanks there is a jump in deposits – look for Oct08 and Aug11 net increase.

    Looking at RBA data (D3 MONETARY AGGREGATES) the rate of deposits do show a jump from OCT08. The trend is quite striking.

    At the same time CDs and current account balances have stagnated since Nov2007.

    The boomers and corporates are the two largest cash generators in Oz. When these two don’t spend, deposits should build-up rapidly as it is the case.

    • A currency issuing government DOES NOT borrow funds from the market place or Banks.

      They spend first, and issue bonds (by choice) later. New “money” is spent into existence- which is why it is increasing deposits.

  20. Banks acquire funds to lend from several sources – deposits, equity, short and long term borrowing both domestic and foriegn. The growth in domestic deposits is being offset by falls in short term borrowings. Domestic deposits are welcome in this case, as it is persumed less flighty and less likely to be affected by liquidity problems.

    • Incorrect.

      Banks create deposits at the moment a loan is created.

      All other deposits come from government spending (net of the CAD).

  21. Transfers from the public sector to the private sector will add to deposits held by the private sector if the public spending is financed by foreign borrowing or by the creation of (unfunded) liabilities with the Reserve. If the public sector finances its deficits by borrowing from the private sector, there will be no net change to private sector deposits.

    Suppose for the moment that the Reserve Bank has stopped creating new money and the banks have stopped creating new loans and the public accounts are in balance. Even so, it is possible for net deposits with the banking system made by households to increase.

    In an economy with an open capital account, such as ours, simplistically the banking system can have two kinds of liabilities – money deposited by local households and businesses; and money borrowed by the banking system from overseas. What has been occurring in Australia is that the composition of the these liabilities has been changing. The banking system has been reducing its external liabilities (repaying its overseas loans, especially its short-term loans) and increasing its domestic liabilities (savings deposits have increased).

    The change in the composition of liabilities occurs independently of the composition or level of bank assets, though of course the total assets and liabilities will axiomatically always balance.

    To take another case, if the level of banking assets falls (say, as borrowers repay their bank loans) liabilities in the banking system will also be reduced. This will be reflected as either a reduction in foreign liabilities or domestic liabilities or both. (In practice, the system is balanced daily by adding to or withdrawing from reserve accounts, but over time the level of liabilities and assets will be brought into balance.)

    The matter of which liabilities are reduced is distinct from the reduction in banking assets.

    Likewise the net assets of the banking system could be increased (as new loans are created) and this will also result in an increase in bank liabilities. These liabilities could consist of both new domestic deposits or new offshore loans, or both.

    • “Transfers from the public sector to the private sector will add to deposits held by the private sector if the public spending is financed by foreign borrowing or by the creation of (unfunded) liabilities with the Reserve. If the public sector finances its deficits by borrowing from the private sector, there will be no net change to private sector deposits.”

      May I question that ? Consider the following example:

      event A: Gov sells bonds for amount M to a commercial bank in exchange for central bank reserves (both commercial bank + Gov bank with the RBA)
      event B: Gov spends amount M in society

      These 2 events result in the following balance sheet mutations for the commercial bank:

      event A:

      + bonds @ M
      – RBA reserves @ M

      event B:

      + RBA reserves @ M

      + deposits balance @ M

      These 2 events have resulted in an increase of the deposit balance, without the creation of new reserve liabilities/money. Because Gov bonds are virtually treated as ‘money’ and as such assets to commercial banks, they allow the deposits to swell (because the Gov pays the private sector when spending).

        • This is certainly true if the public sector borrowing is funded by means of the banking system purchasing bonds and paying for them by a transfer from reserves.

          But if the bonds were subscribed by the public and paid for by withdrawing cash from their bank accounts, there would be no difference in net deposits.

  22. The question my previous answer leads to is how is money moving from short term money markets to domestic deposits? Domestic deposits are mum and dad type efforts. Sher term money markets are business, government, foreigners, super funds, managed funds, I guess. More guessing, mum and dad are fed up giving money to others to manage, and are putting money into high interest accounts with government guarantees.

  23. WOW thanks DE, I didn’t think I would get this sort of treatment.

    There is so much information here for me to digest. Thanks to all who contributed.

    I must admit I am a novice but from what I can work out the from the comments is that because Australia runs a CAD the net savings of the private sector will be the Govt deficit – CAD. This will be added to deposits in the banking system.

    Depending on the choices of the private sector these deposits will be used to support lending during “booms” ( the private sector wish to hold wealth as non-financial assets ) and then return as deposits when the reverse is true.

    I assume that is why we are seeing rising deposits at a time that asset values are falling? I realised now that the same occurred during the first GFC.

    I hope I haven’t misunderstood anyone’s information.

    Thank you again.. Especially DE for hosting my question.

    • No problems Harrison..

      It was a good question and I think many people would have found the discussion interesting and hopefully educational.

      The more people who understand how the economy actually functions the better, your question was certainly helpful

  24. To several posters above,

    How does household pay interest on a bank loan ? answer:from deposit.

    If the government sells treasury securities (bonds, bills, and notes) to the household sector – how does the household sector pay interest on a bank loan ?

    It is better to have the government spend without borrowing, ensures households have sufficient deposits to pay interest on a bank loan – at the same time have central bank push the overnight interest rate up toward the target rate, by selling treasuries to banks, who pay with reserves (thus swapping bank reserves for treasuries).

    • Firstly, the government does not borrow. It issues a bond. The issue is by choice. A Subtle but important point.

      Now, private sector loans (and interest)can be repaid three ways;
      1. Debtor (borrower) transacts with creditor (depositor). This reduces deposits and debt equally destroying private sector “money”. Best example is someone buying a house for cash, from someone who has a mortgage.
      2. Government spending to debtors (Rudd Stimulus was a good example). Some money goes to indebted Households who reduce debts. Banks replace these diminishing assets (lower loan balances) by acquiring government bonds. So the private sector still reduces its loans while the government remains an issuer. The Banking sector acquires the bonds.
      3 Current account surplus. Private Australian citizens accumulated net foreign savings via the external accounts. This is the least preferred method to reduce price debt.

      • price debt? = Private debt?
        If I am correct in THIS assumption…..
        That statement depends on whether you consider the External Account to be an unlimited free source of funds. Which is where I get out of my tree with Bill Mitchell and MMT.

        If we were running permanent Current Account Surplus, say as per Japan, you would be correct.
        Where we run a seemingly permanent CAD, accomapnaied by asset sales to make up the deficit, a CAS would be a damned good idea so that we had less fragility as a result of less Foreign debt and we were not forced to keep selling off all our industries and assets to keep the currency at some acceptable level.

        Acceptable to whom would be a good question but another topic.

  25. I have another question that is puzzling me. There have been two sets of data recently that do not seem to correlate.

    1. National delinquency rate – as calculated by Moody’s – rose to 1.67% from 1.36% in the year to June (broad based declines in all states – as reported here).

    2. The national savings rate, as reported by pretty much everyone increasing to approach ~10% from negative territory not too long ago.

    Just wondering, given our large proportion of home onwership, how savings rates can be very high whilst delinquency rates worsen in a low unemployment environment…

  26. very simple: it’s residual from previous credit expansion. According to S.Keen modeling deposits lag credit about 12 months.
    So, take a credit expansion chart, post on it deposit growth with 12 month lag- and here you go. Enjoy…while it lasts 🙂

    p.s. experiment with nominal or yoy (mom).