Ali’s blog

Mostly quant stuff with occasional digressions

Reserves at US banks at record lows

Posted by alifinmath on February 21, 2008

Chris Prouty has brought to my attention the fact that depository institutions have had to borrow heavily from the Fed to maintain their required reserves. This is where the figures can be found, and I’ll let Chris explain the matter in his own words:

Look at the second column, non-borrowed reserves.  In 2007 non-borrowed stood around 40B.  Now it’s -18B.  This says to me that depository institutions have literally zero reserves and have been tapping the discount window (Fed’s way of lending money to banks to cover reserves reqs) to meet regulatory requirements.  This would explain where the ~$60B+ money in recent short-term Fed auctions has been going.

To be frank, I seldom look at financial statistics. These figures, however, suggest a banking system in deepening crisis.More commentary and analysis can be found in a post at this blog. I’ll past a couple of paras from the post:

In the grand scheme of things, $30 Billion or $40 billion is not a lot of money. However, when lack of reserves would otherwise prevent lending, it certainly is a lot of money. Imagine a major bank telling customers: “We have no cash reserves so we can’t give you a loan.” With that in mind, banks are scrambling to raise cash.Borrowing reserves is expensive, paying 5% on CDs and Savings Deposits is expensive, and in the end, attempting to extract more blood out of consumers by raising ATM fees to $3.00 is going to prove expensive. There are simply no good ways to raise capital. And the problem is going to get far worse before it gets better.A deepening recession, a falling stock market, plunging commercial real estate, and social acceptance of walking away are all going to exacerbate the problems Bernanke and lending institutions face.

I also recommend some more posts at the blog cited above:

here, here, and here.

I always attempt — rightly or wrongly — to relate the kind of phenomena described above to broader tectonic shifts. One tectonic shift I’ve mentioned before will be the reduced stature of the US on the global stage. And history gives us precedents — Spain, Holland, and Britain, each of which went from industrial and/or trade capitalism to finance capitalism, leading to, inter alia, an evisceration of the middle class and rising disparities between rich and poor, and a reduction in manufacturing capability. We’ve seen it all before.

The other phenomenon we’ve seen before is that powers which attempt to circumvent a reduction in their status and prosperity often take the militaristic route. And indeed, the USA has 1) used the military-industrial complex as a Keynesian mechanism, and 2) used its military power to prop up and maintain its commercial and financial interests worldwide (aka “promoting democracy and freedom”) since the time of Harry Truman. However — important caveat — it appears that US military Keynesianism isn’t so effective these days in having an impact on the broader US economy. But I digress.

The United States will become a kind of Brazil within my lifetime — both economically and ethnically. By 2050, if the population projections are correct, there won’t even be enough land to feed everyone. To those who think I’m being unduly pessimistic, let me remind them that Argentina was considered among the most developed countries a century ago, with standards of living and general development surpassing those of North European countries; and look at its sagging fortunes from roughly 1930 to today.


3 Responses to “Reserves at US banks at record lows”

  1. Chris Prouty said

    I should clarify my original comments to you. The Fed is not loaning money to banks through the traditional means, the famous discount window. Recently the Fed has set up something called the “Term Auction Facility” to facilitate loans to deposit institutions. Why might the Fed create what is basically a second discount window? Because one property of the TAF is that is accepts *a variety of collateral.* That, to me, is a thinly-veiled indication that the Fed is allowing banks to put up worthless CDOs as collateral for short-term loans needed to meet reserve requirements.

    I try not to be an alarmist, but this worries me. The ultimate statement here is that not only can banks not borrow from each other, but they cannot even borrow from the Fed under traditional terms! The company line from the Fed is that the non-borrowed reserves data is an accounting blip because banks are borrowing from the TAF, not the discount window. The implication in this statement is that if banks *were* borrowing from the discount window, it would be cause for alarm. However, if we accept the postulate that the TAF and the discount window are basically the same, the only logical conclusion is that this data should worry us.

  2. alifinmath said

    With regard to Chris’s comment, more can be read here.

    (In fact, a google search of “term auction facility CDO” will turn up other similar explanations.)

    I may be mistaken, but part of the motive seems to be to create some sort of market and valuation for dodgy CDOs. Also the loans made available by the TAF seem to be available at slightly lower rates of interest than the usual discount window.

  3. I was waiting for the weekly release of the numbers where the non-borrowed reserves are reported. It seems they updated the link and their site shows that a new report was issued yesterday but in reality the numbers of this week’s report are the same as last week. Who knows how much more non-borrowed reserves have increased over the past week? They are still only showing the Feb 13 preliminary number.

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