Negative Bank Reserves Rebuttal
February 09, 2008
– Comments (13)
First, I am not going to pretend to understand something that I truly do not understand. And I also lack the interest to put the time in to study it well enough so that I have an level of understanding that I'd feel confident about.
In my reading I saw a couple references to negative bank reserves. The first one passed my "meter," yet when I saw the topic again it got my attention in the sense that even though I don't understand it, I ought to be aware that there is "something" happening there that I should follow and see how it develops.
Carolyn Baum wrote a complete rebuttal outlining that what happened is basically that there was a better deal in the discount window so the money went there. Mish has written a response to her post, a long post. He points out that dozens of banks will fail, as many as 2% according to one article cited (I can't stress this enough, if you have cash assets they should be spread between more than one bank and no bank should have more than $100k of your assets.)
Another article points out that over 1/3rd of banks have commercial real estate that exceed 300% of their capital and almost 30% have have construction and development loans that exceed 100% of capital. This wave of banking losses that are coming have yet to hit financial results and it has to put some banks under. I am reading Mish as I post, interest, he repeats the part that I just wrote about.
Here is Mish's statement about the reserves:
"Here's the deal. Bank reserves are net borrowed. This comes at a time when commercial real estate is about to plunge and bank balance sheets are loaded to the gills with them.
This also comes at a time when social attitudes towards debt are going to impair Bernanke's ability to inflate. For more on social attitudes, please see 60 Minutes Legitimizes Walking Away, Changing Social Attitudes About Debt, and a Crash Course For Bernanke.
Finally, banks will not be going deeper to the "TAF well" as long as the rules state "All advances must be fully collateralized." Once collateral runs out, it's the end of the line."
So, there is no way that I can look over the numbers that the Fed puts out and understand what I am reading without spending hours upon hours upons hours... However, I do understand something like "bank reserves are net borrowed," and everything that is happening in the financial markets right now supports that. Banks have gone from leverage of something like 12.5 to 1 up to 30 to 1, which essentially means they could be insolvent with a mere 3% default of loans. Didn't real estate go down 6.1% in the last year?
The insane and incompete decline in reserves means that even a 1% default on loans means that banks have huge recapitalization requirements. To my way of thinking, if the reserves were only 3%, then they need to replace fully 1/3rd of what they had. Before this insane lending mania of the 21st century that leveraged banks to the hilt if they had a 1% default they would have had to replace about 1/8th. You'd have to had 8% losses on your entire loan portfolio to see insolvency with the historical level of reserves. Right now you only have to see 3% of your portfolio in losses, and I personally can't see how it will only be that piddly 2% at the high end estimate of banks that go under. I think 2% is more likely a minimum...
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