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XMFSinchiruna (28.57)

The picture that speaks 99 Billion words.

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April 22, 2008 – Comments (8)

This graph was modified from a previous graphic from the Federal Reserve, updating it to reflect the data as of April 9, 2008.  This gives a very visual read on the historical significance of the events transpiring.  Show this to anyone who still clings to the mainstream line about a normal short-lived recession... we are living through an event which is very far outside of the realm of a 'normal' market reversal.

For those new to the term, here is a definition of non-borrowed reserves from Answers.com:

Measure of banking system reserves, consisting of Total Reserves (member bank deposits in Federal Reserve Banks, plus vault cash), less funds borrowed (Borrowed Reserves) at the Federal Reserve Discount Window. The amount of nonborrowed reserves is computed weekly by the Federal Reserve.

Now, essentially what we're seeing is the effect of the Term Auction Facility - the program under which the Fed has loaned a total of $360 Billion thus far.  Despite the unprecedented scope of Fed actions to shore up bank balance sheets, though, the frightening truth is that the U.S. banking system at present is utterly insolvent. 

8 Comments – Post Your Own

#1) On April 22, 2008 at 1:51 PM, mandrake66 (95.26) wrote:

Oh my...

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#2) On April 22, 2008 at 2:14 PM, Imperial1964 (97.93) wrote:

I disagree that negative non-borrowed reserves means banks are insolvent, or even that non-borrowed reserves is a particularly meaningful metric.

Banks borrow money to loan it out.  They're required to keep reserves to cover losses and withdrawls.  "Funds borrowed" refers specifically to the amount of money borrowed from the Fed, and the borrowed money is not necessarily held in reserve, as you can see from the graph.  The Fed is, of course, only one of several places the banks can go for money.

In my opinion, total reserves minus funds borrowed from the Fed, "non-borrowed reserves," isn't necessarily meaningful metric.  It means the banks have borrowed more money from the Fed than they hold in reserve.  Is that necessarily bad?  Banks have always borrowed more money than they hold on reserve.  It just shows that right now banks widely prefer to borrow money from the Fed, rather than other sources.  This could be for several reasons:

1) The Fed offers a lower rate
2) The Fed offers more favorable terms on loans.
3) They are unable to borrow from other sources.

Only if the reason is #3 does it imply anything about a bank's solvency.

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#3) On April 22, 2008 at 3:18 PM, mandrake66 (95.26) wrote:

It's still troublesome, even given the explanation (thanks, Imperial). The whole point of the Fed actions to date was to stabilize credit markets and get banks lending to each other and to customers again. But it looks like banks are still only borrowing from the Fed. So I would add a list item:

4) Banks are unwilling to lend to each other

Banks still don't trust each other yet. There's too much counterparty risk. It's not that they can't borrow from other sources, just that they won't so long as the Fed is there.

It seems to me that the Fed interventions have superficially succeeded like the surge in Iraq. It has made things seem calmer for a time, but there has been no progress behind the scenes, and it may in fact have been impeding such progress by offering blank-check alternatives to cooperation.

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#4) On April 22, 2008 at 3:18 PM, XMFSinchiruna (28.57) wrote:

Clearly the Federal Reserve considers it a meaningful metric, or they wouldn't have been releasing it every week for the past 50 years.

Also, it's abundantly clear that your reason #3 is at play here.  It's no coincidence that the Fed is nicknamed the "Lender of Last Resort".  The TAF and TSLF would not have been implemented if the banks had somewhere else to go for liquidity.  The inter-bank loaning process has come to a stand-still, as the nominal gains on such loans are outweighed by each banks' need to shore up cash positions on balance sheets, and given the lack of confidence in each others' financial situations.  For example, let's say USBancorp is feeling like it has things under control, barely, it's not about to go loaning billions to Citibank when there's a chance Citibank might be unable to repay the loan.

Traditionally, banks relied on the savings from individuals to lend out as loans.  If you need to see a graphic on the median rate of savings for American households in recent years, let me know and I will dig it up.  It's not a pretty picture either.

As long as non-borrowed reserves remain in negative territory, the banking system as a collective is insolvent.  The fact that it's currently insolvent by a margin of $100 billion is absolutely mindboggling.  The TAF, TSLF, and any other tool the Fed dreams up cannot be considered effective until reserves are restored at least above zero. 

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#5) On April 22, 2008 at 3:25 PM, XMFSinchiruna (28.57) wrote:

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#6) On April 22, 2008 at 3:49 PM, XMFSinchiruna (28.57) wrote:

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#7) On April 22, 2008 at 5:32 PM, Imperial1964 (97.93) wrote:

I fail to understand how money borrowed from the Federal Reserve is that fundamentally different from money borrowed elsewhere.  It's all debt, regardless of where it comes from, and the borrowings from the Fed are small relative to each bank's total debt outstanding.

I think you may be misunderstanding the difference between reserve capital and total capital.  Non-borrowed capital is still positive, even if you include all outstanding debt.  Note that according to the same Fed report, banks do have reserves larger than required reserves and borrowed funds are much less than total capital.

Even Bank of America and JP Morgan, which are considered two of the financially strongest banks have debt that makes up over 60% of their total capital.  That's got to be around 10 times their "required reserves", doing some quick estimation.  And they're far from insolvent. 

Citigroup, on the other-hand, has a debt-to-capital of about 83%.  They might not be solvent before this mess is over.

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#8) On May 04, 2008 at 10:47 PM, abitare (99.42) wrote:

Yep, yep

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