Tuesday, January 20, 2009

More On The Crash In The Banking Index - Banks Are In Fact Hoarding Cash

Commercial banks continued to hoard cash in the week
ended Jan. 7, according to new data released late Friday
by the Federal Reserve. Cash assets held by commercial
banks have increased massively since August, from a
steady $300 billion from months on end to a record
$1.090 trillion last week. Last week's increase was
$125 billion, which followed a decrease of $81 billion
the previous week.

Cash balances have increased as a result of the Federal
Reserve's massive liquidity injections, for example the
Fed's purchase of commercial paper. Cash levels have
increased also because of injections of capital by the
U.S. government via the TARP.

Bank assets are now $12.297 trillion, $1.1 trillion more
than in August. Hence, most of the increase in bank
assets has been from the increase in cash holdings.
Loans and leases have also expanded since August, but
by a much smaller $166 billion, to $7.133 trillion. The
$166 billion increase breaks down as follows: $51
billion for commercial & industrial loans; $37 billion
for consumer loans; $125 billion for real estate loans;
$22 billion for other loans and leases; -$69 billion for
loans to purchase securities, reflecting the deleveraging
of financial firms and the smaller trading positions
they now hold.

At some point the Federal Reserve will find the "right"
number -- the amount of excess cash that compels banks
to lend -- but it has not yet found that number, judging
by the cash hoarding that has occurred and the small
amount of lending seen by comparison, although some will
be surprised to hear that there has been any lending at

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