All households increased savings
Bachas et al. use a novel data set, namely transactions from Chase checking accounts, debit cards, and credit cards through May 30, 2020 to study household spending and saving patterns during the first months of the lockdown. They found that by the end of May 2020, average liquid balances were 36% higher than at the same point in 2019; these increases in liquid balances were pervasive throughout the income distribution. In particular, lower-income households contributed disproportionately to the aggregate increase in balances, relative to their initial pre-pandemic shares. Liquid balances at the end of May were slightly more equally distributed over the income distribution than liquid balances in February. In dollar terms though, high-income households contributed most to the aggregate increase in savings.
Initial Impacts of the Pandemic on Consumer Behavior: Evidence from Linked Income, Spending, and Savings Data
Authors: Natalie Bachas, Peter Ganong, Pascal J. Noel, Joseph S. Vavra, Arlene Wong, Diana Farrell, Fiona E. Greig
From: Princeton University, University of Chicago, JP Morgan Institute
How can excess savings be used in Europe
COVID-19 has led to an increase in household savings as well as a shortfall of equity for many companies impacted by the economic downturn. In this paper, Georges Hübner suggests an allocation model to efficiently channel these household savings to companies whose net worth has deteriorated:
The proposed solution, following standard Asset & Liability Management (ALM) principles, is the setup of a private equity fund offering callable, convertible and cumulative preferred shares, funded through the issuance of either (i) a pan-European bond with floating coupon assorted with the public guarantee, or (ii) an asset backed security with a senior fixed coupon and a junior equity tranche, with the collaboration of the financial sector.
For the solution that involves the public sector, the natural way of issuing a popular loan is the associate a guarantee of the public authorities for the preservation of capital.
For the private sector solution: Banks issue asset-backed financial products that would be similar to the popular bond above, but with a fixed coupon and the association of their own guarantee on the structure. In order to make sure that the large equity risk of the fund would not weigh on the banks’ creditworthiness, the funding of the structure would then be split in two parts: a senior tranche held by the household investors, possibly wrapped by a bank’s guarantee, and an equity tranche held by institutional investors attracted by the private equity structure.
Turning collective savings into private equity investments: The Covid-19 crisis as a catalyst for pan-European efficient resource allocation
By: Georges Hübner – Liège University
