Building Societies Association
Feature
What does the savings ratio mean for building societies?
Adrian Coles, Director-General, BSA|
Contact: Adrian Coles Date: 30 Jul 2010 |
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Over the last few quarters the personal sector saving ratio has risen sharply, from -0.9% in the first quarter of 2008 to the latest figure of 6.9% in the first quarter of 2010. Building societies (and many banks) are savings based institutions and it might be felt that “more savings” would be good for the sector.
In fact this is to misunderstand the meaning of this particular economic indicator. The saving ratio is a net figure – that is it represents gross saving minus borrowing. If personal sector gross saving, for example, goes down, but borrowing goes down even further, the saving ratio will go up. This occurs even though, in this example, what most people would regard as “saving” has fallen.
Similarly, the years in the middle part of the last decade experienced a low saving ratio, even though deposit flows (which are just one form of saving) were much higher than they have been more recently. Of course, the higher level of gross saving was offset in the saving ratio calculation by much higher levels of borrowing.
These small examples show that the key issue for building societies, and retail banks, that attract most of their funds from the personal sector but also lend most of what they have attracted to the personal sector, is not the level of the (net) saving ratio, but the levels of gross saving and gross borrowing. If these two figures are very large, but equal, the saving ratio will be zero. However, there will be lots of opportunities for building societies and retail banks to attract deposits and lend the money they have attracted. However, if the saving ratio rises because gross saving falls, but borrowing falls even more rapidly (or there are net repayments of borrowing) there will be far fewer commercial opportunities for building societies and retail banks.
Often, economic statistics don’t mean what they appear to “say on the tin”. In the case of the saving ratio further investigation is always required to assess whether a rising or falling saving ratio is “good” or “bad” news for building societies.
