U.S. Banking System Is Sitting on Its Hands

It’s time for another quick look at the United States banking system. Whoops! Nothing happening there. Are they still alive?

Federal Reserve Bank Credit has increased by $1.2 trillion over the past twelve months. What has increased in the banking system? Excess reserves in the commercial banking system have increased by about $800 billion. Tracing this “stuff” a little further, in round figures, the currency in circulation outside of the banking system has increased about $100 billion over the past year, about $100 billion has gone to foreign central banks in liquidity swaps, so there is another $200 or so in funds that the Fed has pumped into the system that is somewhere in Treasury accounts. But who is counting?

I am still concerned with what the United States banking system is doing with the money that has been pumped into it. The answer is, very little!

Looking at the H.8 release put out by the Federal Reserve System we see that the assets of all commercial banks in the United States have increased by 9.7% from May 2008 to May 2009, an increase of $1.1 trillion.

And what accounts for this increase in bank assets? Well, the cash assets of the banking system has increased a whopping $731 billion or at a year-over-year rate of 236%. This is comparable to the year-over-year increase in excess reserves observed on the H.3 release of the Federal Reserve.

Given my post of last June 15, 2009, “What Aren’t Banks Telling Us?”, I was interested in looking a little deeper into this information to see how these excess reserves were distributed within the banking system. The division is roughly this. The increase in cash assets at large commercial banks was $371billion, at small banks the increase was $143 billion, and at Foreign-related Institutions in the United States, $217 billion. The increase at the larger institutions, the large banks and the foreign-related institutions, was $588 billion.

The reason I am interested in looking into this distribution is the claim made in the above mentioned post that commercial banks had not been fully open with the public on the problems they were still facing. In that post I mentioned three areas of concern: the bad assets now on the books of the banks; the anticipated increase in the bad assets in the upcoming months; and finally, the needs of the banks to be able to fund themselves in the future in the face of liabilities that were maturing and would not be rolled over. The build up in cash assets, it was argued, was a precaution the banks were taking to handle the uncertainty they faced as either asset values fell or a run off of liabilities forced the banks to dispose of assets.

My interpretation of this distribution of cash assets in the banking system is that the larger depository institutions in the United States has stashed up almost $600 billion in preparation for an extremely bad scene. Why do I put this whole amount in this category? Because in the past the WHOLE banking system only kept about $2 billion in excess reserves and the banks we are talking about in this category are the most efficient and sophisticated banks in the world in terms of managing their cash reserves. So, excess reserves have gone from $2 billion in the WHOLE banking system to about $600 billion in the most sophisticated banks in the world!

Just to put this in perspective: $588 billion represents 7% of the total assets of the two groups that are counted in this category, large domestically chartered commercial banks and foreign-related institutions, both in the United States. The question is, can these banks really stand a 7% reduction in their balance sheets through charge offs or a run off of liabilities?

The situation is not so severe for the smaller banks in the report: cash assets totaled only 3.8 % of the total assets at these banks. Still, we are hearing more and more of the problems that the smaller banks are facing. For example, this week information was released that several smaller banks that had received TARP funds were not going to pay the dividend payments owed to the government. The health of the smaller banks has been something that has been off the radar screen given all the press that has gone to those banks that are “too big to fail.” We are going to hear more from this sector over the next several months.

The next question has to do with bank lending: are banks doing any lending these days? Year-over-year, loans and leases at all commercial banks increased by a tepid $182 billion or at a 2.6% annual rate.2.6% annual rate. And, where were these increases located? Generally in home equity loans and other residential loans (primarily mortgages). These were pretty evenly spread throughout the banking system.

Bottom line, however, is that the banks aren’t lending! Especially in the areas of commercial and industrial loans and commercial mortgages. Does that tell you something?

What can we take away from this?

The scary conclusion is this: Almost all of the Reserve Bank credit that the Federal Reserve has pumped into the banking system has gone to provide liquidity to the banking system for when the banking system implodes.

Commercial banks are not lending. Yet the banks are sitting on $800 billion of excess reserves. It is almost incomprehensible to me that the commercial banking system is doing nothing with these reserves! Unless…

No one is talking, not from the banking system, not from the Federal Reserve. What else are we to think at this time if we are not given any other information. We just have to think the worst!

-John Mason

Disclosure: This article was taken from Mase: Economics and Finance with the permission of the original author. All disclosure questions should be referred to the original author.

Comments

[john s. gordon:]

banks use taxpayer $ to bulk up their balance sheets but lending is out of the question.
purpose of a bank is to make loans not to hoard cash,
> jack

Jul 14 08:29 AM

[User 447256:]

Excess reserves were virtually non-existent before Oct. 2008. They soared by hundreds of billions when the Fed amazingly decided for the first time ever to pay the banks interest on the excess reserves. In effect, the net effect is that the Fed is paying banks to sit on the cash rather than lend it out. Why is the result so surprising? This is Econ 101.

Tony Carfang, Partner
Treasury Strategies, Inc.
[e-mail]

Jul 14 10:08 AM

[flow5:]

Big deal. All the FOMC has to do is lower the renumeration rates on excess reserves.

Then the FED should cap insured member bank time deposits rates. Why? Because the banks as a system pay for something they already own. Gradually lowering the rates on interest bearing bank accounts would increase the supply of loan funds in the long-term market, lower long-term interest rates, which would inevitably result in matching savings with investment.

Right now savings are impounded within the CB system. Why?
A member commercial bank (depository institutions) only becomes a financial intermediary when there is a 100% reserve ratio applied to all its deposit liabilities. The weighed arithmetic average of reserve ratios applicable to deposit liabilities stood at 84%, and for demand deposits the ratio was 91, in 1942.

Any institution whose liabilities can be transferred on demand, without notice, and without income penalty, by data networks, checks, or similar types of negotiable credit instruments, and whose deposits are regarded by the public as money, can create new money, provided that the institution is not encountering a negative cash flow.

From a systems viewpoint, commercial banks as contrasted to financial intermediaries: , never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing transaction deposits (TRs), or time deposits (TDs) or the owner’s equity or any liability item.

When CBs grant loans to, or purchase securities from, the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, state, and other governmental jurisdictions) & (every person), (except the commercial and the Reserve Banks), they acquire title to earning assets by initially, the creation of an equal volume of new money- (TRs) -- somewhere in the banking system. I.e., COMMERCIAL BANK DEPOSITS ARE THE RESULT OF LENDING, NOT THE OTHER WAY AROUND.

Jul 14 06:23 PM

[Snitzer:]

In an extremely simplistic view it sort of makes sense; in that the big banks are sitting on a commode rigged to explode (Glover/Lethal Weapon style) with all the toxic detritus from the housing collapse, and they need something to put that fire out when she blows.

Jul 14 11:44 PM