Money supply indicators recover after turmoil in the banking sector

The money supply dynamics in December was impacted both by the payout of compensations to the depositors with AS "Latvijas Krājbanka" and the sharp demand for cash currency generated by rumours in the first half of the month.

In December, the majority of guaranteed deposit compensations were paid out (by the end of the month, 300 mil. lats or 90% of the total amount to be compensated) and largely ended up as deposits with other banks. As a result, the total amount of bank-attracted deposits did not change substantially from the perspective of two to three months. Total money supply was influenced more by the amount of cash currency in circulation, which in December grew 10.4% and reached a record high by the end of the month– 1 040 mil. lats. Even though the clamour regarding the demand for cash currency died down quickly, its amount in circulation remained high until the end of the month due to seasonal factors.

The total amount of loans in December dropped 2.3%, with business lending down substantially and household lending down moderately: more than in previous months affected by repayment of previously received loans as well as by banks writing off bad debts. The overall annual rate of bank loan portfolio drop thus increased to 8.3%. In household lending, both housing and consumer lending were down.

Money indicator M3, which characterizes the amount of cash and noncash currency in the economy, grew by 2.9% in December, with the M3 annual growth at 1.7%. The balance of domestic deposits attracted by commercial banks grew in December, primarily on account of household deposits – since the deposits of the suspended bank were concentrated mostly in the household sector, deposit compensations pushed up the total amount of household deposits while those of businesses grew only slightly.

In the next few months, lending activity will remain low since the solvency of businesses oriented toward the domestic market will not change substantially whereas the desire of exporting businesses will be dampened by pessimistic predictions about the economic situation in the euro area export markets. The deposit dynamics in the first months of the year will be positively impacted by the return to deposit accounts of the cash currency that was put in circulation during the clamour period as well as the payouts of the remaining compensated deposits of "Latvijas Krājbanka". Yet as a result of the negative level of deposit real interest rates and certain amount of caution, it is mostly the more liquid demand deposits that will grow. 

APA: Purviņš, V. (2020, 01. dec.). Money supply indicators recover after turmoil in the banking sector. Taken from https://www.macroeconomics.lv/node/2260
MLA: Purviņš, Vilnis. "Money supply indicators recover after turmoil in the banking sector" www.macroeconomics.lv. Tīmeklis. 01.12.2020. <https://www.macroeconomics.lv/node/2260>.

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