As I have noted many times before, it is truly remarkable how the Federal Reserve System has supplied foreign-related banks in the United States with reserves. And, it is truly remarkable how many of those reserves have traveled to the foreign offices of these foreign-related banks.
Let me step back just a bit.
On March 5, 2014, there were $2,656.1 billion in Reserve Balances with Federal Reserve banks. (The figures are from the Fed's H.4.1 statistical release.) These are basically the deposits of commercial banks in the United States held at the Federal Reserve. They are basically excess reserves.
One year earlier on March 6, 2013 these balances totaled $1,745.3 billion. Thus, Reserve Balances with Federal Reserve banks rose by $910.8 billion.
Note that for ten months out of this twelve-month period, the policy of quantitative easing on the part of the Fed was to put $850.0 billion into the banking system through security purchases. As the tapering of these purchases began the Fed reduced these purchases in the other two months of the year to $75.0 billion and $65.0 billion. The total purchases amounted to $990.0 billion.
Securities held outright by the Fed actually increased by $1,058.7 billion during this 52-week period.
The point is that the increase in the Fed's holdings of securities, the Fed's plans for quantitative easing, and the increase in the reserve balances held by commercial banks at Federal Reserve banks rose by similar amounts.
If we now go to the banking system, we see that the cash assets held at commercial banks also rose by magnitudes that were consistent with the rise in reserves balances held at the Federal Reserve. (These numbers are from the Fed's H.8 statistical release.)
Cash assets at all commercial banks in the United States totaled $2,762.8 billion on March 5, 2014 very similar to the amount of reserve balances held at Federal Reserve banks.
On March 6, cash assets at all commercial banks totaled $1,894.9 billion. The rise in cash assets over the 52-week period was $867.9 billion, roughly consistent with the increase in reserve balances at Federal Reserve banks.
The interesting fact is that many of these cash assets were held by foreign-related financial institutions and not commercial banks that were domestically chartered in the United States.
Of the $2,762.8 billion in cash assets held by commercial banks in the United States on March 5, 2014, foreign-related institutions held a total of $1,412.0 billion or about 51 percent of the total. Cash assets held by foreign-related institutions on March 6, 2013 was $938.4 billion.
Thus, of the 52-week increase of $867.9 billion, the amount of $473.6 billion, or about 55 percent, went into foreign-related institutions.
The other interesting figure that comes out of this analysis is a liability account of the foreign-related institutions titled "Net due to foreign branches." These represent monies that the foreign-related institutions have shipped "offshore."
On March 5, 2014, the foreign-related institutions reported $607.1 billion in balances in the "net due to foreign branches" account. This figure represents 43 percent of the cash assets total.
This is up from a total of $243.7 billion that were in this account on March 6, 2013. Thus, as cash assets at these foreign-related institutions rose by $473.6 billion, "net due to foreign branches" rose by $363.4 billion or 77 percent.
There is no question that the Federal Reserve has supplied the world with cash not just commercial banks in the United States. We saw how sensitive foreign countries - especially emerging nations - were to the Fed's injections of cash into the world when the outcry arose to the Fed's move to begin tapering its security purchases.
Although this has quieted down, money is still flowing out of the United States banking system into the world's financial system. And, as I have written, there has been evidence that this outflow has impacted foreign exchange rates.
The Federal Reserve will continue to supply cash to the world as it continues to taper its purchases. It is buying fewer securities, but it is still buying securities. Even with the new, lower amount of securities being purchase and with a continued $10 billion reduction in purchases taking place every month, the Fed is still on record to purchase an additional $180 billion in securities over the next six months or so. This is not an insignificant amount.
The big question concerns what happens to these international flows as the Fed stops purchasing securities on a regular basis and the financial world returns to a more "normal" state. One has to take this definition of a "normal state" with a lot of care since cash balances with Federal Reserve banks will probably be around $2.8 trillion at that time. That is, when the Fed stops tapering, there will be close to $2.8 trillion in excess reserves in the banking system!
This is not what one can really call "normal."
And, this is where the uncertainty really grows. How is the Fed really going to manage its portfolio in this situation? How will this impact the flow of cash into the rest of the world? Will these funds eventually flow back into the United States? How will this reverse flow impact the United States banking system … and the Fed? And so forth and so on. And, there will also be a lot of unknown unknowns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.