NOTE 1: ON SAVINGS MOVILIZATION
After
graduated in college as a psychologist in 1968, I started my professional work
in a Savings and Loan Association in Venezuela selling savings passbooks
door by door. The equity of these institutions was mutual and these were
specialized in home mortgage loans at 20 years term.
The curiosity was that we were financing the long term mortgage loans at first;
only with on sight savings and later with term deposit certificates with maturity
of less that 180 days, we never had any problems due to the term fitting
between the liquid deposits and the long term loans. It could be said that this
was the “daily little miracle”. Neither had we a credit crunch as the one that
we all lived since 2008, that after triggered a World recession.
Many
of you could argue me that the World was better at that time and that was the
reason why we did not have the problems that we are living today. But do not
fool yourselves: In Latin America: Brazil and Argentina showed from the 60s a
growing 1.500% inflation rate that compelled Brazil to implement a monetary
correction scheme in 1964 with monthly adjustments, that in the 80s, when
inflation reached 2.000%, the adjustments pass to be made daily. Even in this
terrible situation, the savings portfolio of the Savings and Loan Associations
reached in 1989 to be 23,4% of the Internal Net Product, this made possible for
the Brazilians to be able to continue financing to buy their homes.
In
the 90s the culture of the Securitization of the mortgage portfolios surged and
was the main issue in all the congresses and seminars at that time. The
Securitization was born motivated on the apparent risk that posed the
difference in the term fitting between the short term deposits and the long
term loans, arguing that the sources of funds should also have similar terms as
the loans, valid maybe in theory but it neglected the practical reality of the
huge stabilization that the atomizing gives to the portfolios and the bigger risk
of the simultaneous maturity in the securitized titles. On the other hand, the
new created Pension Funds Administrators demanded long term certificates with
mortgage guaranty in which to invest the worker’s pension contributions, which
also stimulated the Securitization as it was something good for everyone.
Internal Net Product of Brazil
Savings as percentage of the
Internal Net Product of Brazil
Savings as percentage of the
This
figure started to spread to all type of loans and to every type of banking
institution. First the mortgage loans were securitized and it was appropriate,
but after it fell in the temptation of adding other type of riskier loans
(Consumer, car financing, etc.) to better the ratings given by the Qualifying
Agencies, because the mortgage loans valuated notably the package. In this way,
during the last 20 years, the financial institutions got accustomed to this
easy and massive access to funds, selling long term certificates in the Stock
Exchange, bought by big investors and left to a second place the savings and
deposit mobilization. My unicellular mind, never understood how the loan
portfolios that already acted as a guaranty to the deposits, could also be a
guaranty for the long term investment certificates, there was something that
did not sound right to me.
As
a constant wholesale demand of the long term investment certificates grew, these
funds became a liquidity risk due to cover their high cost, which pushed the
financial institutions to design methods for massive lending, in order to
invest fast the funds. This new strategy virtually replaced the prudential selectivity,
the “instinct”, the decentralize approval and the personal knowledge and
contact with the loan applicants, done traditionally by the loan officers, being
substituted by the statistical criteria and risk analysis and qualification
that is prevailing today. The loan approval of the loan applicants was automated
with the Credit Scoring and the qualifications in the Credit Bureaus, the rate
of interests were adjusted according to the statistical risk, making them
higher if there was more risk. In resume, all the process was automated
creating Risk Departments to do the analysis and in many cases act as final
deciders, based on the Credit Bureaus data and the probability statistics, but
without ever meeting the loan applicants. As a huge amount of loans came in and
also due to the filters imposed by the Risk Departments, bottlenecks were
produced which increased the risk due to the pressure of time demanded to
discharge the excess liquidity.
Everything
went well until the credit crunch exploded as a consequence of the accumulation
of toxic assets in the financial institutions that gave loans to unknown
people, that could not pay them back, mixing mortgage loans with other type of
loans and inviting the customers to ask for loan when they “qualified”
according to the calculated theoretical risk filters; reaching a point in which
the toxicity was unbearable and impossible to ignore, and when the big
investors found out that they were buying thrash, they decided not to buy
anymore. The financial institutions run out of liquidity and to this the
maturity of the 20 years certificates added up and as no one was buying the new
emissions, they could not compensate paying the matured ones, plunging down; causing
the bankruptcies of banks, mortgages generators, mortgage insurance funds (Such
as Fannie Mae) and everything else that we already know.
At
first the Microfinance Institutions got their funds from the international
cooperation and investors that saw in the Microlending a very attractive
profitability. But from the 90s on they became aware that the best source of
funds was the retail money in the market; that is: The savings and term
certificates, but these had to regulate themselves with the Banking Authorities
to have access to the funds of the public. Many did it based in new
legislations that ease the process, others became banks and the whole sector
became interested to learn how to mobilize and attract savings, I helped with these
issues in many projects.
Today, all financial institutions are desperately trying to mobilize again savings
deposits with an
indifferent public, which leads
to close the circle and return to the roots, but with the added
difficulty that the institutions have
lost their ability to attract savings
or term certificates of people who, for the
most part, have forgotten how to save
and also distrust the banks
themselves.
The
Savings and Loan Cooperatives could only receive money from their members and
these did so with the voluntary contributions, which were another way to save
and did not need to be supervised by the Banking Authority. When the
possibility of these institutors opened up to receive savings from the general
public these were regulated and supervised by the Banking Authority, creating
the Credit Cooperatives also known as Credit Unions. In USA in the 30s
the savings in the Credit Unions were guarantied by the federal government.
Even
today, it prevail both; the NGOs that still work as the old ways with funds
from investors and Savings and Loan Cooperatives that only receive
contributions from their members. When the banks passed to a second place the savings
and term certificates mobilization and promotion, because it was consider being
too expensive to manage, left this market to smaller and more innovative
financial institutions, many of which took advantage learning how to do
it.
I
think that it is vital to retake the promotion and mobilization of savings and
term deposits, because it gives access to a massive financial retail market
that due to its atomized nature produces stable and low cost funds, as was the
case in the 80s, but this implies a great effort of marketing, financial
education, persistence, confidence and a creativity forgotten by the traditional
financial institutions. With the technological tools available today in
communications and information processing, the cost to manage many small
accounts has been demolished, so now is not valid the excuse of the high costs
of small savings accounts and term certificates. I have build savings
mobilization systems that have shown the favorable impact in the costs
reduction, thanks to the ICT and with the appropriate and scientific marketing
the rest is assured.
To
end, I will leave you with the following concern that I will analyze in another
note: In the 70s, while selling savings passbooks door to door, many us who
worked with these issue learned and became aware that the savings account is
the primary and fundamental tool for financial inclusion, because it helps to
create assets for the families and motivates the voluntary and without
compromises financial discipline, that after will be a clue issue for a healthy
loan.
Suggested reading: “The Myth of the Rational Market” - Justin Fox - Harper Collins 2009 –
It is also in e-book, look it up in Internet. This very interesting book,
written by a columnist, it focuses on the super-mathematical models approach to
economy and finances and its consequences. It is an historical review since
1905 till recent times that ended in 2008 with Alan Greenspan’s phrase “irrational exuberance” and describes
the principal actors an its contribution to the process. It is a very light and
illustrating book, that makes clear the origin and real effectiveness of the
financial paradigm to measure risk, as it is used today. As a paragon we could also
talk about the “irrational exuberance” of the lending of the previous years until
2008.
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