FT Alphaville " Behind the headline, Spanish deposits edition Data from the European Central Bank showed that €74bn of deposits left Spain in July. This was a 4.7 per cent drop from June, which seems rather a lot for just one month. The figure for August, released on Thursday morning, revealed that a further €17bn had headed out the door. While this so-called deposit flight is being reported as putting pressure on the Spanish government, the data behind it isn't quite as concerning as one would imagine. In FT Alphaville's previous post, we explained where the big headline comes from, so now let's discuss some of the underlying trends behind it. Spanish bonuses in June To get a basic issue out of the way, let's quote from "What An Employer Should Know About Spanish Payroll" by Patersons Global Payroll: In most of the collectives agreements there are 2 Extra Payments (July or June + December). Or perhaps taking it from the Spanish language itself: paga extra o extraordinaria -> = additional payment of a month's salary or wages made to Spanish workers in June and December In other words, the most likely months for impressive drops in deposits are July and January, as June and December are likely to experience significant bumps from a lot of workers getting paid twice as much as usual. Accounting for securitisations FT Alphaville guided you down this rabbit hole before. To quote from the September 10 note by the Flows & Liquidity team JPMorgan that we covered at the time (emphasis ours): The above meaning that a little under half of the decline in deposits over the last year or so isn't even "real" - at least in the sense of how most people would think of deposit flight: From these deposits at Spanish banks by securitized vehicles, only a small portion is "real," the vast majority of these deposits represent an accounting entry. That is, a big portion of securitized vehicles are "retained" to be posted as collateral with the ECB. But even for those securitizations that were sold to investors and not "retained," accounting regulations force Spanish banks to record the full debt securitizations on their balance sheet, which in the liability side appears as "deposits from other financial institutions." OK, so that's where those types of deposits come from - the fact that the entirety of these vehicles are reported on balance sheets. But why is the liability entry (deposits) going down? Regular amortizations, as principal is being repaid, are running at a max pace of 5% per annum, so this factor cannot explain more than €15bn of shrinkage. The bulk of the shrinkage is likely driven by early redemptions/restructurings, i.e. the bank buys back the loans, as a result of two forces: 1) rating downgrades as the lowest of two ratings falls or is about to fall below the ECB's thresholds (BBB for RMBS, A for ABS); 2) recent ECB collateral rule changes which require banks to have homogenous securitizations (either mortgages or SME loans but not a mixture). In the words of Alanis Morissette: "isn't it ironic, don't ya think?" And no, we don't mean funny coincidence, we mean ironic. The ECB effectively back-stopping Spanish banks, and having increasingly looser collateral rules for borrowing, has triggered restructuring of securitised assets. This restructuring, alongside normal redemptions in the ailing securitisation space, has hit "deposits" in Spanish banks. Retail depositors reallocated OK, start back to the headline figure and we still have the other half of deposit decline to talk about (that has nothing to do with securitisation). This other half is primarily comprised of households and corporations. These are the types of deposits most people would think about when they read scary headlines about deposit flight from Spain. Let's kick off with some data from the Bank of Spain (it goes up to July): Have a good look. Do you feel frightened? Do you feel like this should pressure the Spanish government? Well, let FT Alphaville scare you by making the time period that the graph covers much shorter and adding a second y-axis. Also note how you can now really see the bumps in the June and December numbers from that extra month of pay we mentioned above: Ohhhh, well, now that's scary. Like boo! At least it is until we tell you about "pagarés" and a bit of Spanish legislation... "Pagarés" are short-term retail bonds. SocGen's Carlos Garcia Gonzalez explains their significance in a note published last week: The change in regulation of high yielding deposits has moved a part of the deposit market to "pagares," short-term retail bonds that are not accounted for as deposits. For instance, since September 2011, Pagares grew from €18.8bn to €79bn in August 2012. A big proportion of this growth relates to retail placements as reported by each individual bank. RD 24/2012 has again changed that regulation (high yielding deposits are no longer penalised, and we expect an acceleration in growth rates of private sector deposits). To understand what's going on here, you need to know that last year the Spanish government effectively started penalising high yielding deposit accounts via a change in the tax code. The concern was that banks were competing too heavily for deposits, and this would ultimately cause harm to them all. So consumers upped sticks and invested in pagarés instead, since those didn't suffer the same penalty. Frankly, the best explanation of all of this was a comment on Tyler Cowen's Marginal Revolution blog by a reader with the handle Span-American: I think the Spanish data is biased by a tax change that took place in 3Q2011. Spain increased the tax on interest paid on CDs, causing a shift to short-term bank-guaranteed bonds that are issued at a discount to par and don't pay interest (pagarés). To the extent this is happening, funds are not leaving the Spanish banking system, and I suspect may be distorting the deposits data. Of course, these pagarés are not guaranteed by deposit insurance, so the holder doesn't have the same credit security. Here's the growth in pagarés, using data from Bolsas y Mercados Españoles for the amounts outstanding (given that the series goes up to September, we assume it's as of the beginning of the month): RD 24/2012″, referred to by Gonzalez is a royal decree that removed the penalty on high interest rate deposits, starting from September 24, 2012. It is anticipated that the amount of pagarés will start decline and deposits (i.e. CDs) will go up again. Perhaps we're already starting to see the effect of this in the August figures released today and retail investors stop rolling over into new pagarés as the current ones mature. Spanish deposits not looking so flighty now? Well, one more thing: Corporations The green line in the above chart doesn't make up as big a proportion of deposits as the blue line (households) do, but the drop in July was even more impressive. Deposits went from €191bn to €175bn, an 8 per cent fall in just one month, compared to the 1 per cent that the €74bn did for households. Now, we think Point #1 explains a fair amount of the drop in deposits held by corporates - you can't pay employees their extra month if you, as a corporation, don't have the cash. The thing that makes the figures potentially concerning, if there is a real downward trend, is that the money may be leaving the Spanish banking system for real, rather than being put into pagarés. As for why corporates are moving their cash piles, Gonzalez reminds us, "at mid and end of June there were two downgrades of Spain (Moodys and S&P) so many corporate need to move their money." FT Alphaville reported on this trend two months ago. To quote a note from Citi that we covered at the time: Large corporate and institutional clients, who are more sensitive to heightened market risk and deteriorating counterparty credit risk, withdrew funds from the large Spanish banks. During 1H12, BBVA saw a decline in CIB deposits of 10% versus end-2011, Santander 9%. By contrast, HSBC's CIB deposits were +3% hoh. Now, the punchline By now we hope that you've started to have a healthy scepticism of deposit flight from Spain, even given our last point. August figures from the Bank of Spain showed that deposits by households decreased by just 0.31 per cent. As for corporations... they increased their desposits, by 2.31 per cent. All of which is not to say that the situation in Spain shouldn't worry you. Of course it should. But you are looking at the wrong metric. Related links: Where Spanish deposit numbers come from - FT Alphaville About that flight of the Spanish deposits - FT Alphaville The corporate deposit flight from Spain - FT Alphaville This entry was posted by Lisa Pollack on Thursday, September 27th, 2012 at 15:53 and is filed under Uncategorised. Tagged with Deposit flight, Deposits, Spain.