Banks Add Almost $300B in Cash

The cash position of Canada's domestic banks, which typically grows at a few percent a year as the carefully tuned balance sheets of banks keep up with economic growth, almost doubled in the first few months of 2020, growing from $310 billion at the end of 2019 to $604 billion at the end of April. This is money that is not being lent out and not being invested. It's just sitting there, in deposits with other financial institutions, gold, and tucked away with the Bank of Canada.

Source: OSFI

The Largest Banks Lead the Way

The cash position of all Canadian banks grew by $293,114,764 between the end of 2019 and April 30th, 2020. That figure includes all federally-regulated financial institutions, including the big five banks, smaller banks like Haventree and Bridgewater, one federally-regulated credit union (Coast Capital Savings) and some small residential mortgage providers.

If we break down where the gain comes from, a pretty stark pattern emerges:

Source: OSFI

94% of the gain has been absorbed by the "Big Five" Canadian banks. If you prefer to think about the "Big Six," that number climbs to 99%. Just two banks, Royal Bank and Toronto-Dominion, accounted for $186,351,989 of that growth, or 64%. Those two institutions make up a huge fraction of the Canadian market, but have gobbled up an even bigger fraction of the gain in liquidity.

Where is the Money Coming From?

The money is coming from a huge growth in deposits that is not being offset by a corresponding growth in loans. 

Banks have seen their deposits (which are on the liabilities side of their balance sheet) rise sharply since the beginning of the COVID-19 pandemic. Domestic banks averaged a 10% growth in deposits in those five months, a figure that would be a banner year for most. In 2019, for example, Canadian banks saw their deposits grow by an average of 5%. Meanwhile, banks have seen their loan growth fail to keep pace. Canadian banks have seen their loan books grow by just 3% this year, a significant fraction of which is attributable to individuals and businesses drawing down their credit lines and (you guessed it) depositing the money in banks.

Money that's flowing into banks but not out of them tends to accumulate in the "liquid assets" part of a balance sheet, and a reserve of unspent "dry powder" starts to form:

This is no way to run a bank, which normally operates by paying depositors a low rate and lending that money out at a slightly higher rate. Deposits that sit on the balance sheet don't earn a significant return, which hurts a bank's profitability and eliminates its appetite for deposits. 

And What Does it Mean for Cash Management?

In short, it's not good for those trying to get competitive deposit rates from Canada's largest banks. They have all the liquidity they need, and probably won't pay up for deposits until they start writing loans or otherwise investing the cash on their balance sheets.

We don't have the same data available for credit unions, because only Coast Capital Savings is federally-regulated and therefore required to disclose monthly results to OSFI.  It's tough to draw conclusions from just one credit union, but it is notable that Coast Capital did not see an accumulation of cash early this year.

In total, our impression is that banks, particularly large banks, are unlikely to offer competitive yields on deposits in the near future. We're seeing better yields from credit unions, who may have missed the wave of liquidity that hit the banks, and are encouraging our clients to invest with high-quality credit unions that offer competitive yields.

We'll keep our eye on the regulatory filings that OSFI publishes. If we see the deposits and cash balances of banks start to come back down, or the loan books start to expand, we expect to see bank deposit rates to become more attractive.

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