Liquidity‐poor Households in the Midst of the COVID‐19 Pandemic

• Published date: 01 June 2022
• Author: David Loschiavo,Mariano Graziano
• Date: 01 June 2022
• DOI: http://doi.org/10.1111/roiw.12581

© 2022 International Association for Research in Income and Wealth

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LIQUIDITY- POOR HOUSEHOLDS IN THE MIDST OF THE COVID- 19

PANDEMIC

by DaviD Loschiavo*

Directorate General for Economics, Statistics and Research,Bank of Italy

AND

Mariano Graziano

Venice Branch,Bank of Italy

The COVID- 19 pandemic led to a huge surge in deposits, although little is known about how this was

distributed. This paper overcomes the lack of timely micro- data on households’ liquidity by looking

at supervisory data, introducing a new method to estimate the trend in liquidity distribution and the

percentage of liquidity- poor households. We find that in 2020 there was a decrease both in the degree of

deposit inequality among Italian households and in the share of liquidity- poor households, alongside

government support measures that allowed some households at the bottom of the liquidity ladder to

save out of their declining income. The increase in households’ liquidity improved their ability to repay

debts, and this could help spending patterns to rebound once confidence about the economic outlook

is restored. Despite this, households with insufficient liquidity buffers still constitute a large share of

population, making their debt repayment capacity dependent on the strength of the economic recovery.

JEL Codes: D14, E21, E66, H31

Keywords: households’ liquidity, deposit distribution, financial poverty, COVID- 19 pandemic

1. introDuction

The outbreak of the COVID- 19 pandemic led to an immediate and large

decline in consumer spending and an increase in households’ aggregate saving rates

in many countries (Bachas et al., 2020; Christelis et al., 2020; Dossche and Zlatanos,

2020). In Italy, in 2020 the propensity to save increased by 7.6 percentage points

(peaking at 15.8 percent) compared with the previous year, while income dropped

2.8 percent over the same period. On average, households have therefore compressed

their consumption proportionally more than the reduction in disposable income.1

1Households’ propensity to save is determined by a set of objective and subjective factors, which

vary greatly among individuals with different socioeconomic characteristics (see Keynes, 1936, p. 108;

Browning and Lusardi, 1996, p. 1798).

Note: The views expressed herein are those of the authors and should not be attributed to the Bank

of Italy. We would like to thank Giorgio Albareto, Andrea Brandolini, Emilia Bonaccorsi di Patti,

Alessio De Vincenzo, Michele Cascarano, Francesco Columba, Romina Gambacorta, Silvia Magri,

Andrea Neri, Sabrina Pastorelli, Elena Romito, Andrea Venturini and two anonymous referees for their

comments and suggestions. All errors are our own.

*Correspondence to: David Loschiavo, Directorate General for Economics, Statistics and

Research, Bank of Italy, via Nazionale 91, Rome, 00184, Italy (david.loschiavo@bancaditalia.it).

Review of Income and Wealth

Series 68, Number 2, June 2022

DOI: 10.1111/roiw.12581

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Review of Income and Wealth, Series 68, Number 2, June 2022

542

© 2022 International Association for Research in Income and Wealth

During the phase in which the contagion containment measures were more severe,

consumption dropped reflecting the impossibility of purchasing several goods and

services due to the shutdown of non- essential activities (referred to as “forced” or

“involuntary” savings). After the gradual lifting of social distancing regulations

(since the middle of May 2020), the propensity to save has been boosted by the will-

ingness of households to build up a buffer against unforeseen contingencies (known

as “precautionary” savings) amid growing concerns about the evolution of the pan-

demic and the timing of economic recovery. In a context of increased risk aversion,

the growth in the propensity to save resulted in soaring household liquidity; in

December 2020, bank and postal deposits were up by 7 percent on an annual basis,

the highest growth rate since the end of the sovereign debt crisis.

Liquid assets allow households to deal promptly with adverse events such as

sharp reductions in income, while maintaining reasonable levels of consumption

and, for those who are indebted, continuing to service their financial commitments.

However, aggregate data do not provide an accurate picture of households’ resil-

ience to income shocks as liquidity is unevenly distributed across them. Indeed,

according to the latest available data from the Bank of Italy’s Survey on Household

Income and Wealth (SHIW), in reference to 2016, 45 percent of the population did

not have enough liquidity (bank and postal deposits) to avoid the risk of falling

into poverty,2 in the absence of income for at least 3 months.3 This condition of

vulnerability was also widespread among indebted households suggesting that the

risk of illiquidity can easily translate into difficulty in repaying debts.4

Given the lack of more recent data on the distribution of the financial liquidity

of Italian households, we use supervisory reports (SR) on bank and postal deposits

divided into size buckets to draw information not only on the change in aggregate

household liquidity but also on its distribution among households in different wealth

categories, shedding some light on the distributional effects of soaring savings.

Our results show that the existing trend toward an increase in the degree

of concentration of deposits has reversed in the aftermath of the COVID- 19

outbreak. Yet, a lower concentration of liquidity does not necessarily imply an

improvement of households’ financial resilience, which instead depends on the

absolute amount of liquid resources available at the bottom of distribution. To

make the concept of financial resilience operational, we therefore introduce the

notion of “liquidity- poor” households, which are defined as those households

without sufficient bank and postal deposit holdings to avoid, in the absence of

income, falling below the risk- of- poverty threshold. We provide an estimated range

of liquidity- poor households under various assumptions, building on the recently

2The European Commission sets the at- risk- of- poverty threshold at 60 percent of national median

equivalent disposable income. For a comprehensive discussion on the asset- based measures of poverty,

see Brandolini et al., 2010. See also Brunetti et al., 2016 for a characterization of households’ financial

fragility/resilience.

3See also Bank of Italy (2018), p. 12. According to Gambacorta et al. (2021), this percentage drops

to 40 percent when other financial assets are included in the estimation. In comparison with the main

economies of the euro area, the share of financially poor households was in line with that of France and

Spain, but about 7 percentage points higher than that recorded in Germany.

4Indeed, 47 percent of indebted households were in conditions of liquidity poverty and about 44

percent of overall household debt was attributable to them. These shares remain large (42 and 37 per-

cent, respectively), even when considering all financial assets and not only the most liquid ones.