Why Is Most of the Fed's QE2 Cash Going to Foreign-Related Banking Institutions?

 |  Includes: AXFN, EUFN, IXG, KBE, KRE, RKH, XLF
by: John M. Mason

Since the end of December 2010 (the banking week ending December 29, 2010), the Federal Reserve has injected almost $200 billion in new reserve balances into the banking system. (See my post of December 18 here.)

Since the end of December 2010 (the banking week ending December 29, 2010), cash assets at commercial banks have risen by more than $280 billion.

Since the end of December 2010 (the banking week ending December 29, 2010), cash assets at foreign-related banking institutions in the United States have risen by more than $175 billion.

In addition, trading assets at these foreign-related banking institutions have risen by $33 billion and a catch-all asset account has risen by $12 billion. (This catch-all account includes things like loans to foreign banks, loans to nonbank depository institutions and loans to nonbank financial institutions.)

All together the accounts at these foreign banking organizations have risen by about $220 billion in the last six weeks, about $30 billion more than the total assets of these foreign-related banking institutions have increased. One could argue that the foreign-related banking institutions are doing pretty well by the quantitative easing that the Federal Reserve is conducting. These foreign-related organizations seem to be doing a lot of trading!

During this same time period, the total assets of large domestically chartered commercial banks in the United States have declined slightly. The total assets of small domestically chartered commercial banks rose by about $30 billion.

Also, during this time period, cash assets at the largest 25 domestically chartered banks rose by more than $72 billion and the cash assets at all other domestically chartered banks rose by $38 billion.

Thus, the Fed's QE2 is getting the cash out into the banking system. However, almost two-thirds of the cash seems to be going to foreign-related organizations and not to domestically chartered commercial banks.

Is this what was supposed to have happened?

Over the past 14-week period, cash assets in the banking system have risen by almost $300 billion. Again, over two-thirds of the increase (about $205 billion) came in the cash assets of the foreign-related banking institutions. All of the increase in cash holdings at the largest 25 banks came after December 29, 2010, while cash assets holdings in the rest of the banking system fell in the period before December 29 before rising in the last 6-week period.

One would think that this distribution of cash would not bode well for domestic lending. And, in fact, bank lending was abysmal over the past 6-week period and the last 14-week period.

Since the end of the year, loans and leases at the largest 25 domestically chartered banks in the United States dropped dramatically by about $50 billion, much of this coming in consumer lending although loan amounts were down across the board. Loans and leases held roughly constant in the eight weeks that preceded December 29 at these large banks.

In the rest of the banking system, the declines in the loan portfolio came primarily before the end of the year. After falling by about $60 billion in November and December, loans at these institutions rose slightly in the first six weeks of 2011. Notable decreases came in both residential lending and in commercial real estate loans, each declining by a little more than $20 billion over the last 14-week period.

One interesting thing also appeared in the recent statistics. The securities portfolio of the banking system declined over the latest 14-week period by a little less than $40 billion.

However, there were huge differences in the behavior of the largest banks and the smaller banks.

The largest banks REDUCED their holdings of securities by about $96 billion; $67 billion of the total were in U. S. Treasury and Agency securities.

The rest of the domestically chartered commercial banks INCREASED their holdings of securities by almost $60 billion with a $63 billion increase in their holdings of U. S. Treasury securities.

The larger banks got out of securities as interest rates rose through November, December, and January. The smaller banks increased their securities. Is this bad timing on the part of the smaller banks?

So, here we are with the Federal Reserve pumping reserves into the banking system like crazy. But two-thirds of it is going to foreign-related banking institutions? And commercial bank lending continues to contract? What is wrong with this picture?

I am feeling such a disconnect between Ben Bernanke’s view of the world and what seems to be going on in the world. When Mr. Bernanke speaks, I really wonder what planet he is on…it certainly doesn’t seem to be the one that I am on.

Also, I am getting tired of Mr. Bernanke putting the blame for all his troubles on the backs of others. He began this practice in the early 2000s and it continues on today. He doesn’t accept the fact that some of the mistakes of the past are his. As Stephen Covey has said, if all the blame for the problems one faces is “out there”, that’s the problem.