This is unrelated to the tangent everyone else has gone off on but can anyone tell me why the total reserves figure jumps so dramatically around Sept.11 01 and then where that extra money disappears to? http://www.federalreserve.gov/releases/h3/hist/h3hist4.htm
the fed injected liquidity after 911 to lower the fed funds rate way bellow its target in order to keep the banking system liquid. the money probably was loaned out
But it's their non borrowed total that increases too. Is it possible to list a Fed loan in this column?
the only thing I can think of is that the banks were with some temporary excess liquidity due fed injections and could not find opportunities to use these funds so they kept as reserves. they could also by trying to show they were in good shape and well capitalized to try not to scare the counterparties
I have found the final world the matter..its a red herring.. http://piggington.com/bank_reserve_requirements_and_the_taf There's a post, apparently from someone over at Calculated Risk, that's posted in the middle of the thread that's approximately correct. (Most importantly, the poster correctly points out the difference between "liquidity reserves" and "capital," two very different things.) I'm not going to go through all of the balance sheet math here because it would take too long and wouldn't accomplish very much. Suffice it to say that banks have five major sources of funding for loans: (1) Common Equity, (2) Trust Preferred and Sub Debt, (3) FHLB Borrowings, (4) Other "Fed-related" borrowings (such as the TAF, currently), and (5) Deposits. If the rates offered through the FHLB system or the TAF are as good or better than the terms that would have to be offered to depositors, then many banks will go with the past of least resistance - FHLB borrowings or the TAF. Remember, deposits not only cost money from the rate side of things but you also have to pay employees, etc. to process them; that is, deposits are "operationally expensive." Sometimes it's just cheaper and easier to use the "government's money" (for lack of a better term), especially when Fed is practically throwing the money at them. Merely the fact that the banks are availing themselves of the opportunity to use these funds doesn't mean a whole lot. Nor is it really meaningful to look at liquidity reserves in relation to these funds. If the government gives warning that these funds will no longer be available as of "x" date, the banks will just raise deposit rates, take in sufficient deposits and repay the borrowed funds. Yeah, they'll see a margin squeeze, but it's not the end of the world. Look, the regulators understand liquidity really well. This is a non-issue in the aggregate. The REAL issue is with capital and solvency. And regulators aren't particularly good at that because it's hard to analyze a loan portfolio that you didn't underwrite yourself or a complex MBS portfolio that you didn't purchase yourself. Liquidity will only become an issue AFTER more capital/solvency issues crop up, as in the recent case of Countrywide. People should keep their eyes on the losses in the loan and securities' portfolios. These FHLB/TAF borrowings, while not entirely unimportant, are a red herring. ********************************************* BUT THIS IS STILL A GOVT FUNDED SUPPORT FOR BANKS, as the margin they make on TAF funds is more than the would make on public deposits. So welfare for the banks..poor them !!