Banks are flush and that’s good.

FINANCIAL FIRMS WERE THE ONLY PART OF THE CORPORATE SECTOR ABLE TO GENERATE NET SAVINGS.

A recent report argued that households and businesses in Canada are sitting on $ 170 billion of excess cash — almost evenly divided between households ($ 90 billion) and businesses ($80 billion). It defined excess cash loosely as deposits in banks in excess of their recent trend. It’s clear that both households and businesses, faced with unprecedented uncertainty after the shutdown of large parts of the non-essential economy that threw millions of Canadians out of work, have chosen to hold cash above all other assets. But cash holdings are not a good proxy for total savings. What’s more, it is misleading to lump together all businesses, when the condition of financial and non-financial corporations has diverged sharply during the pandemic.

Fortunately, Statistics Canada publishes detailed data on household and business saving and lending. These data tell quite a different story than bank deposits alone do. What emerges instead is a picture of a household sector saving much more during the pandemic than corporations. Both net savings and net lending by households showed huge increases during the second quarter and remained at historically high levels in the third quarter. By comparison, savings by the corporate sector were minuscule in 2020, while net lending showed only a small increase compared with households. In fact, financial firms were the only part of the corporate sector able to generate net savings and they accounted for most of the net lending by businesses last year.

Household savings soared from 2 per cent of disposable income before the arrival of the virus to 27.5 per cent in the second quarter and 14.6 per cent in the third. Despite a sharp drop in earned incomes as jobs disappeared and hours worked plummeted, household disposable income rose by 12 per cent in the second quarter and remained high in the third quarter — due entirely to a massive increase in transfers from governments. As a result, household savings jumped from $77 billion (at annual rates) in the first quarter to $ 402 billion in the second and $ 207 billion in the third. Even after deducting outlays for housing, households swung suddenly from many years of net borrowing to a position of net lending of $306 billion in the second quarter and $70 billion in the third quarter.

Conducting this same exercise for corporations reveals a much more muted response of savings and net lending during the pandemic. Net savings by corporations totalled $16.8 billion in the first quarter, fell outright by $ 34.3 billion in the second quarter and recovered by only $31.6 billion in the third, leading to a net increase of $14.1 billion over the first three quarters of 2020. That’s virtually nothing compared to the net increase of $686.4 billion in household savings over these three quarters. Moreover, as mentioned, businesses’ net saving was concentrated in the financial sector. By comparison, net saving by non- financial corporations fell by $ 90.4 billion. Net lending by firms fared slightly better, because firms slashed their investment; as a result, net lending rose by $183.3 billion, just over half the increase posted by households over the same period.

None of this is meant to be a criticism of financial firms in 2020. Their robust financial position is unequivocally positive for our recovery moving forward — and quite the opposite of the 2008-2009 financial crisis when many financial firms around the world (although not in Canada) needed government bailouts to survive. Financial firms are faring well in 2020 because the pandemic has not materially interfered with their operations. Indeed, the enormous increase in debt during the crisis benefits banks since, as banking expert Gary Gorton puts it, “The output of a bank is debt.” And it is prudent that financial firms increase their reserves in anticipation of higher loan losses after many of the loan and tax deferral programs introduced in 2020 expire.

The point here is that the condition of financial firms contrasts markedly with non- financial businesses and data for the total corporate sector masks this important divergence. And no business sector benefited like households from massive government handouts.