Suddenly all of the amateurs are expert on bank reserves' reports. Old news; learn some accounting tricks: http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=a7EAJelhvLh0 How Non-Borrowed Reserves Became a Sexy Subject: Caroline Baum Commentary by Caroline Baum Feb. 8 (Bloomberg) -- Technically insolvent! This has never happened before! Without the Temporary Auction Facility, where would banks be? When I got the fifth hysterical e-mail on the subject of -- sit down -- the decline in banks' non-borrowed reserves, I thought I was back in the Volcker era. That would be Paul Volcker, chairman of the Federal Reserve from 1979 to 1987. Volcker knew interest rates had to rise significantly to slay the inflation dragon; he didn't know by how much. So he changed the Fed's operating procedure from targeting a price (the overnight interbank lending rate) to a quantity (the monetary aggregates -- specifically non-borrowed reserves). ``There is no relationship between non-borrowed reserves and anything the Fed cares about, be it inflation, employment or real GDP,'' said Paul Kasriel, chief economist at the Northern Trust Corp. in Chicago. He said that 20 years ago, when I was just starting out, but I still remember his exact words. They came back to me when I learned of the latest obsession with this irrelevant statistic. A few basics are in order. I promise not to make this too geeky. Banks are required to keep a certain amount of funds in reserve -- as vault cash or on deposit at the Fed -- to meet unexpected deposit outflows. These are called required reserves (catchy, isn't it?). Sometimes depository institutions elect to hold more than is required. These are called excess reserves. Sources and Uses Congratulations. You have just completed the introductory course in the uses of reserves. What about the sources? Reserves can be borrowed (from the Fed's discount window) or non-borrowed (supplied via the Fed's daily open market operations). It matters not one whit to the Fed where the banks acquire the reserves they require. If they borrow directly from the Fed, they don't need to tap the interbank, or fed funds, market. What's caused the hullabaloo recently is the dive in non- borrowed reserves from $44 billion in early December to minus $8.8 billion at the end of January. It isn't a mystery what happened. The Fed announced the creation of a Term Auction Facility on Dec. 12, enabling banks to borrow for 28 days versus a wide range of collateral. The minimum bid the Fed accepts is the expected funds rate one month out, which in the current environment means cheaper funding costs than the fed funds market. So what would you do if you were a bank? Lower Cost Loans made through the TAF are categorized as borrowed reserves. The Fed had $50 billion of loans in place at the end of January, which ``caused the borrowed reserves figure to balloon and the non-borrowed figure to decline by a corresponding amount,'' said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, in a Feb. 6 commentary. (He's on the same e-mail lists I am.) All of a sudden, people who never glanced at the Fed's H.3 statistical release are now experts on ``Aggregate Reserves of Depository Institutions and the Monetary Base.'' Their e-mails have the same sense of foreboding as the missives put out by the Black Helicopter/Tin-Foil Hat crowd. ``What if the Fed's rate cuts aren't motivated by the desire to stave off recession, rather to prevent a major banking crisis?'' one e-mail read. ``The Fed's not telling anyone what it's up to because it doesn't want to cause panic, but the evidence is there in its own data.'' (Gosh, you'd think it would do a better job of hiding it. Maybe send H.3 to join M3!) Monopolist Provider The writer of the e-mail directs his readers to the most recent H.3 report, which shows total reserves ($41.6 billion) less TAF credit ($50 billion) less discount window borrowings ($390 million) equals non-borrowed reserves (minus $8.8 billion). The negative number is really an accounting quirk: If banks borrow more than they need, non-borrowed reserves are a negative number. This gentleman is overlooking the fact that the Fed is ``a monopoly provider of reserves,'' said Jim Glassman, senior U.S. economist at JPMorgan Chase & Co. ``This is a non-starter. There is no such thing as a banking system short of reserves. The Fed has absolute control over the supply.'' There may be times, such as late last year, when banks are reluctant to lend to one another for a period longer than overnight. ``And any one bank can have a problem'' funding itself, Glassman said. But in a world where ``the Fed can print money, there is no shortage,'' he said. ``The banks get the reserves they want.'' Low Priority Worry Those hyperventilating over TAF borrowing may want to consider an alternate scenario. ``Suppose the Fed cut the discount rate so that it stood below the funds rate,'' Kasriel said. (He said this yesterday, not two decades ago.) ``Would these folks be upset if banks went to the discount window for funds? What's the difference? It's a difference without a distinction.'' In a commentary this week, Goldman Sachs Group Inc. senior economist Andrew Tilton dismissed the case of the disappearing non-borrowed reserves as ``evidence of the markets' obsession with the health of the financial system.'' Some of the concern is justified, he said, given banks' massive losses and writedowns on subprime loans. Of all the things to worry about right now, this isn't one of them. (Caroline Baum, author of ``Just What I Said,'' is a Bloomberg News columnist. The opinions expressed are her own.) To contact the writer of this column: Caroline Baum in New York at cabaum@bloomberg.net .
I remember during the Enron period how so many journalist came forward to tell everyone not to be alarmedâ¦.. don't you remember? Don't trust anyone PERIOD! The fact remains non-borrowed reserves are negative.
You have to be kidding. Unless THIS Fed runs out of money the banks aren't going broke. The Fed's going to continue to get the penalty rate down to levels that will prevent any catastrophe. At what cost? We will see. Inflation's going to get even uglier. Is all hell going to break loose? You all have better things to worry about.
She basically says, "Don't worry because the FED can print as much as it wants to make sure that banks remain solvent." And that is supposed to make us feel better and remove any concerns about the banking system? They take all of the profit when their bets go good and dump the liability on us (via inflation/bailouts) when their bets go bad. I should have been a banker.
I posted about this back when the TAF was announced, its basically a way for the banks to de facto move their toxic crap on to the Fed's books. http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html?nclick_check=1 "The TAF ... allows the banks to borrow money against all sort of dodgy collateral,â says Christopher Wood, analyst at CLSA. âThe banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for Americaâs banking system.â
Oh damn. Last time I remember this happening was in 1946 <object width="425" height="355"><param name="movie" value="http://www.youtube.com/v/_Er69b4HMl8&rel=1"></param><param name="wmode" value="transparent"></param><embed src="http://www.youtube.com/v/_Er69b4HMl8&rel=1" type="application/x-shockwave-flash" wmode="transparent" width="425" height="355"></embed></object>
go on wikipedia and look up history of fed reserve, you will see that it is all smoke and mirrors,and if u r trading the mrkt , it's 6 mo.s out from reality, question is , where is 6 mo.s out
The point is that as long as banks can use toxic crap to tap the Fed's TAF each month they will never experience any solvency problems. Credibility problems perhaps, but not solvency problems (unless they run out of toxic crap and that isn't likely ) This is massively inflationary hence the move in the Ags.