Credit Crisis Continues as Companies, Banks Hoard Cash

A recent Bloomberg article was titled ”Pandit “near death” hoard signals lower bank profits“, and stated that Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM) were hoarding cash as if another crisis were on the way. Also, a Wall Street Journal article entitled “Jittery Companies Stash Cash“ showed cash on the balance sheets of S&P 500 companies was the highest in 40 years.

The chart below, courtesy of economist David Rosenberg of Gluskin Sheff & Associates, shows that credit is still contracting as banks go through the painful process of repairing their balance sheets. As indicated, bank lending has now declined for 21 weeks in a row and over this entire period a total of $216 billion (15% at an annual rate) of loans and leases has vanished.

Click to enlarge:

Rosenberg said

the contraction in bank credit is broad based across all lines of business - consumer, real estate and companies - and seems to be motivated by both the bank and the borrower. This is a dead-weight drag on aggregate demand and it goes to show that the real story in Q3 was not that it was so wonderful that real GDP expanded at a 3.5% annual rate but that the number was so low in view of the massive dose of government stimulus and that the contraction in credit is ongoing and acting as a tourniquet on private sector spending activity.

Meanwhile, the U.S. Depository Institutions Aggregate Excess Reserves continue their ascent at levels far in excess of the amount banks need to keep on deposit to meet their reserve requirements (see chart below). The level indicates that the balance sheets of banks remain under pressure, especially in view of the fact that the value of some assets is not known. A definite peak in the Excess Reserves graph should coincide with a turning point for banks getting back into the business of making loans.

Click to enlarge:

Source: Fullermoney

Rosenberg concluded:

This is 1992-93 all over again when the commercial banks used the steep yield curve as an opportunity to reliquify their balance sheets, and the flip side of that process was a listless and jobless recovery. The only difference is that the credit contraction process this time around will prove to be even more pernicious and enduring than it was back then, and inevitably drag Treasury note yields back down towards the lows we saw almost a year ago.

Comments

[User 353732:]

Cash hoarding by banks, big Companies and by those households who have the financial flexibility to do are is a sign of fear.
Fear that Big Govt is creating cascading uncompensated risks.
Fear that the touted statistical "V" recovery is a tangible fraud
Fear that the still brutally compressing Middle Class and small business population will lead to further contraction in real economy in 2010 and hence pressure on revenues, operating profits and quality of earnings
Fear that the impending CRE calamity will lead to hundreds of billions in defaults, which will reverberate throughout the productive economy
Fear that the rule of men is systematically displacing the rule of law and that eventually the US Regime will turn even on its favored clients and consume its own supporters and camp followers

Investments in innovation that propel true growth are based on confidence ; innovation consumes cash and turns it into wealth.

Hoarding is based on fear and the generation of cash flow via efficiency that frees up resources , which then languish earning virtually no return and therefore create no reliable or significant wealth. Cash has no multiple and cash in dollars may have a discount because of the impending implosion of the Fiat, now Fake, dollar. Cash hoarding is the enemy of the Productive Economy because fear is the enemy of growth.

Nov 04 06:57 AM

[apppro:]

Banks are hoarding cash! Do you blame them?

If someone were constantly telling me I was going broke and would soon be insolvent and that every loan I have was worthless and that every mortgage I had would not get paid – I too would do everything I could to avoid the pundit bashing and the pending Armageddon.

You can’t have it both ways. You wanted all the leverage needed to back all those loans to be withdrawn basically overnight, then you demanded that the banks basically have DOLLAR for DOLLAR backstops on all the loans and accounts they did have, BUT now you want them to loan out the very money that you DEMANDED them to keep.

WHAT HYPOCRISY!

Nov 04 07:40 AM

[Moon Kil Woong:]

Yes it's better that they hoard cash then loan it to people that are a bad credit risk or their friends and then ask for TARP 2. If they kept adequate credit ratios in the first place we wouldn't have all the top 10 banks in the US needing money at the start of this crisis.

Nov 04 08:12 AM

[john s. gordon:]

banks are happy to borrow $ from the govt at essentially zero % & use the $ to buy treasury debt @ 4%. this could go on indefinitely.
lots of milk in this cow.
a 'risk'free' 4% is so much easier than dealing with borrowers who might not be able to repay.
> jack

Nov 04 09:17 AM

[Belome:]

The problem I have is that its my money they are hoarding! So much for the Main Street vs Wall Street campaign promise.

Nov 04 09:23 AM

[EARLPEARL:]

they borrow for ZERO and buy 10 year treasuries yeilding 3.5 % why not hoard ...why loan with risk when you can loan to govt.

Nov 04 12:16 PM

[KirbyJF1:]

I am amazed at the thinking that the banks aren't lending to qualified borrowers as I believe that is far from factual. How many more residential homes do we need built & financed? How many more Condo do we need built?, How many more industrial Parks do we need built?, How many more office buildings do we need built & financed? How many more Shopping Centers do we need built & financed? We have such an abundance of completed projects that need buyers & renters that the need for loans has dissipated. This country, its people & its banks need a small pause & rebuilding of liquidity before starting the growth process again.

Kirby

Nov 04 01:41 PM

[old scapegoat:]

I just locked in with Citibank a CD on Sept.30-09 that pays me 3.50%APY for 5 years. The rate went down the next Tuesday to 3% APY for five years so I guess I got lucky==or not. If I had bought 10 year Treasuries at about 3.40% at the time, the downside risk could be catastrophic if rates suddenly went up during some Hyper Inflation scenario. Why would banks take that risk of borrowing for 0% and grabbing tons of Treasuries---10 year or 30 year. The risk would make that rediculous. Imagine all of the countries banks trying to get out Treasuries at the same time trying to prevent loses. Would'nt that be a rocket to ride.

Nov 04 07:18 PM