What does it mean when American banks have no nonborrowed reserves?

I'm not much of an economist, but I understand a bit about the fractional reserve banking system. Here's my admittedly thin and flawed understanding. Banks are required to maintain a certain level of reserves to underwrite their loan activities. The law says they need to have at least 10% of the total value of their loans available in reserves at all times. Reserves are usually bank assets of various sorts - bonds, cash in the vault etc. If the ratio if reserves drops below 10% they are required by law to bring it back up. I think they usually do this by issuing bonds. If they have no other source of funds, they can go to the Federal Reserve's Discount Window and borrow the required amount. This is why the Fed is called the "lender of last resort".

So with that in mind, take a look at the bottom of column 2 of the first table at this link: http://www.federalreserve.gov/releases/h3/Current/

Jan. 16, total reserves $41577 million, non-borrowed reserves $200 million?

WTF is going on here? Is the Fed really telling us that all the reserves of all the banks in the United States are now just loans from the Fed? That the banks have no assets left to act as reserves? And that this utterly unprecedented situation all happened in the last month? Where did the banks own held reserves go? What does this imply for the future of American banks and by extension the global banking system?

Can anyone who has a better understanding than I tell us what's going on here? Because to me this looks really, really, really bad.

It's not a 'credit crunch' it's a 'liquidity crunch'

yes, we're out of money

banks were using those bundled home loans as assets to loan and borrow against. the bundles are now crap

How does a person or a nation recover from running completely out of money?
:scared:

And in this day and age, you don't even have to print more...

Sure, you get huge inflation, but those debts just melt away (well, so do the assets, but right now debts are greater than assets so we focus on the debt side).

If a person did this, they'd get a visit from the Secret Service... but banks and the nation can do it so long as everyone that bought those bonds and Tbills lets them. And, as Donald Trump figured out, if you owe enough money to ONE lender, they don't own you, YOU own them ("hi china... about all those Tbills... look, we really are going to deflate that dollar and make them worthless... BUT, you own so many of them that you really can't just go selling them off now... OK?")

Of course, the downside is that we become a third world nation... and the Chinese might just say "the hell with it, let's dump this crap anyway".

That started in the beginning of last year....

Surreal.

we have to distinguish between "a person", "the banks", and "the nation".

A person can get an extra job or have a garage sale.

The banks can sell off their "loans", but TRUST between banks is very low.

The nation ... that´s another story.

Or offer up a few thousand blood-filled bodies to run the war machine, which generates capital by producing products for the war.....

Of course, there are limits on those types of exchanges too, as we are quickly finding out.


My Favorite Master Artist: Karen Parker GhostWoman Studios

all this creative finance structuring they have been doing. These write downs of course reduces their 10% reserve pool so they have had to go hat in hand to the Feds to replace those billions.

yes

The CDO's they creatively created over the last two-three years are junk. Rating agencies kept giving them triple A ratings, but they are junk.

Of course everyone in MSM keeps calling it a subprime problem, but subprimes are a minuscule part of the ponzi scheme. Subprimes could be handled easily by the banking system. The CDO's and derivitives created by the investment community is what is churning the banking community right now.

Packaging "junk" and selling it to foreign banks as "treasures" might be a creative idea, but it is not good for business.

they sold it to Pension funds, State and Local investment funds, to money markets, to your 401K funds, etal.

We are all going to be hurting which is why everyone in the field and the Fed are scrambling like crazy right now.

My "blink" told me it was very, very bad. Panic bad. The Spousal Unit, while accepting of my "blinks" felt that, in talking to siblings in DC and friends in the stock market re: the subprime mess, things might be recession bad for a while, but in 3 to 6 months, they would settle out.

I've been keeping up with the saga and sharing new developments. When I got to the Bond Insurers being rated down, then the S.U. finally got the gist my panic and was quite ashen for the better part of an hour.

In essence, there is no worth to any of it. It is literally paper. High quality, cotton-rag toilet paper.


My best suggestion: Spend it now on staples, before the stores figure it out.



My Favorite Master Artist: Karen Parker GhostWoman Studios

I was concerned enough at that time to pull out the prospectus on my money market funds. What I learned was that they were at risk from subprime (and not FDIC insured). I moved into treasuries and tangible assets. I think there is a good possibility that some banks will fail. Investments that look safe could lose money. There are two schools of thinking right now. One says the dollar will strengthen as deflation takes hold, the other says foreign markets will decouple from our economy and offer the best harbor.

about this. He clearly will not address this.

292-737-0002 (dem line)

They are still blaming subprime mortgage holders and saying it can be handled. It is very important to the Wall Streeters to keep the focus on subprime. Subprime is manageable, but derivatives are not. Subprime is only billions, derivatives are trillions.

The mass media will not allow public attention to drift away from blaming the lowly bad subprime borrower. Except when they blame the lowly bad credit card holder.

They stopped in 2006...

Right when the M3 would have been the most useful in raising red flags, they decided to no longer allow the public to see it.

There are many people to blame in this mess. Subprime homeowners being the least responsible devils in the room.

Censored when most needed, a common regime pattern. Perhaps a case for conspiracy could be made? Conspiracy the crime, not the derogatory spin control term.

Perhaps that new officer immunity will be extended to the entire Executive?

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3152267

I was checking on Bankrate.com about 2 weeks ago about getting a small ($3,000) student loan for my daughter for this semester's tuition at community college.

The situation was a mess. I couldn't find any fixed rate loans. Everything was variable rate -- and I don't trust variable rate loans. Ever. It wasn't like this in August. We decided to pay the tuition from our savings just to avoid the tricky interest rate situation.

OK, maybe we would have done well to get the loan, in view of yesterday's rate cut. But who knows what kind of high interest might apply to that loan in the future.

I interpreted this to mean the banks were leery of lending money at the moment -- it could be another sign that they are just plain out of money.
I guess they're going to hike up those overdraft fees again and start gouging our kids even more on their debit cards.

... you're missing anything. The reserves banks have were already low, then the subprime junk took them lower.

It IS really bad. My pessimistic side sees us being in a protracted economic funk of indeterminate severity for many years.

Once was a time when people invested in (put up money to start and operate) banks and that was part of the money they had to loan out and they took in savings of individuals and lent that money out too. So the bank had its own assetts to loan out. Now they borrow everything they lend out from the Fed, make the loans, sell the loans, repay the Fed, and pocket the difference as profit and then go back to the Fed to borrow some more.

http://www.informationclearinghouse.info/article18913.htm


snip/

So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.” (Wall Street Journal)

This is truly mind-boggling.

The banks have been creating trillions of dollars of credit (by originating mortgage-backed securities, collateralized debt obligations and asset-backed commercial paper) without maintaining the proportional capital reserves to back them up. That explains why the banks were so eager to provide mortgages to millions of loan applicants who had no documentation, no income, no collateral and a bad credit history. They believed their was no risk, because they were making enormous profits without tying up any of their capital. It was, quite literally, money for nothing.

If that's so, and those derivatives were leveraged 10:1, then their actual reserve holdings may have been 1% or less, instead of the required 10%. Combine that with the sketchy nature of the underlying "assets" whose value is in the process of evaporating, and I guess the picture makes sense. We've been utterly betrayed - by our politicians, by our bankers, by our bureaucratic regulators, by everyone we trusted to protect our interests.

We've been utterly betrayed - by our politicians, by our bankers, by our bureaucratic regulators, by everyone we trusted to protect our interests.

I'm not an Anarchist, but I should be. The entire system is rigged on such a massive scale that You don't even hear "banking" brought up in the Presidential debates. Oh, they'll mention the subprime meltdown as if it is an isolated incident.

There are just so many kinds of anarchism to choose from, it's hard to make up my mind...

To my horror, many of these names are all too familiar for the scandals that have swirled around them. I am reluctant to look up the names of former members, who may be among the recently "retired" Republics.

U.S. Senate Commerce, Science and Transportation Committee

Democrats

Chairman Daniel K. Inouye (HI)
John D. Rockefeller, IV (WV)
John F. Kerry (MA)
Byron L. Dorgan (ND)
Barbara Boxer (CA)
Bill Nelson (FL)
Maria Cantwell (WA)
Frank R. Lautenberg (NJ)
Mark Pryor (AR)
Thomas Carper (DE)
Claire McCaskill (MO)
Amy Klobuchar (MN)

Republicans

Vice Chairman Ted Stevens (AK)
John McCain (AZ)
Trent Lott (MS)
Kay Bailey Hutchison (TX)
Olympia J. Snowe (ME)
Gordon H. Smith (OR)
John Ensign (NV)
John E. Sununu (NH)
Jim DeMint (SC)
David Vitter (LA)
John Thune (SD)

U.S. Senate Banking, Housing and Urban Affairs Committee

Christopher J. Dodd Richard C. Shelby
Chairman (D-CT) Ranking Member (R-AL)
Tim Johnson (D-SD) Robert F. Bennett (R-UT)
Jack Reed (D-RI) Wayne Allard (R-CO)
Chuck Schumer (D-NY) Michael B. Enzi (R-WY)
Evan Bayh (D-IN) Chuck Hagel (R-NE)
Tom Carper (D-DE) Jim Bunning (R-KY)
Robert Menendez (D-NJ) Mike Crapo (R-ID)
Daniel K. Akaka (D-HI) John E. Sununu (R-NH)
Sherrod Brown (D-OH) Elizabeth Dole (R-NC)
Robert P. Casey (D-PA) Mel Martinez (R-FL)
Jon Tester (D-MT)

House Financial Services Committee

Chairman Barney Frank represents Massachusetts' Fourth Congressional District. The other Democratic members of the Committee are:

Rep. Paul E. Kanjorski, PA
Rep. Maxine Waters, CA
Rep. Carolyn B. Maloney, NY
Rep. Luis V. Gutierrez, IL
Rep. Nydia M. Velázquez, NY
Rep. Melvin L. Watt, NC
Rep. Gary L. Ackerman, NY
Rep. Brad Sherman, CA
Rep. Gregory W. Meeks, NY
Rep. Dennis Moore, KS
Rep. Michael E. Capuano, MA
Rep. Rubén Hinojosa, TX
Rep. William Lacy Clay, MO
Rep. Carolyn McCarthy, NY
Rep. Joe Baca, CA
Rep. Stephen F. Lynch, MA
Rep. Brad Miller, NC
Rep. David Scott, GA
Rep. Al Green, TX
Rep. Emanuel Cleaver, MO
Rep. Melissa L. Bean, IL
Rep. Gwen Moore, WI
Rep. Lincoln Davis, TN
Rep. Albio Sires, NJ
Rep. Paul W. Hodes, NH
Rep. Keith Ellison, MN
Rep. Ron Klein, FL
Rep. Tim Mahoney, FL
Rep. Charles Wilson, OH
Rep. Ed Perlmutter, CO
Rep. Christopher S. Murphy, CT
Rep. Joe Donnelly, IN
Rep. Robert Wexler, (FL)
Rep. Jim Marshall, GA
Rep. Dan Boren, OK
(Vacancy)

Republican Members

Rep. Spencer Bachus, AL
Rep. Richard H. Baker, LA
Rep. Deborah Pryce, OH
Rep. Michael N. Castle, DE
Rep. Peter King, NY
Rep. Edward R. Royce, CA
Rep. Frank D. Lucas, OK
Rep. Ron Paul, TX
Rep. Steven C. LaTourette, OH
Rep. Donald A. Manzullo, IL
Rep. Walter B. Jones , NC
Rep. Judy Biggert, IL
Rep. Christopher Shays, CT
Rep. Gary G. Miller, CA
Rep. Shelley Moore Capito, WV
Rep. Tom Feeney, FL
Rep. Jeb Hensarling, TX
Rep. Scott Garrett, NJ
Rep. Ginny Brown-Waite, FL
Rep. J. Gresham Barrett, SC
Rep. Jim Gerlach, PA
Rep. Stevan Pearce, NM
Rep. Randy Neugebauer, TX
Rep. Tom Price, GA
Rep. Geoff Davis, KY
Rep. Patrick T. McHenry, NC
Rep. John Campbell, CA
Rep. Adam Putnam, FL
Rep. Michele Bachmann, MN
Rep. Peter J. Roskam, IL

Rep. Kenny Marchant, TX

Rep. Thaddeus McCotter, MI
Rep. Kevin McCarthy, CA

Bank of America alone had over $1.5 trillion in assets at year-end 2006. Chase had $1.4 trillion.

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-sec&seccat01enhanced.1_rs=21&seccat01enhanced.1_rc=10

Other large banks - Citibank, Morgan, Goldman, etc - will have similar amounts, though maybe not quite that much. Then, you add in local & regional banks and pretty soon you're over $10 trillion for just US-based banks.

And, there are plenty of huge foreign banks that have a large presence here as well - HSBC, RBS, UBS, ING.

That's the only thing I can think of - different rules for different classes of financial instruments. Perhaps not everything that can be counted as an asset can be part of the reserve.

Notice the "Term Auction Credit, NSA" column that goes up to $40000 million in the last period? That seems to be this:



"The FED will not release any information about who accepts the loans and what terms they get" - so they are accepting 'other collateral' (home loans about to go bad?) for what they lend, and they don't have to publish which bank has borrowed what. It looks like a rolling facility - while the banks try to sort themselves out, the Fed is taking on the risk.

I think that means they think the banks are sorting something out. But I might be wrong.

Interesting timing.

I wonder how many reasons former Republican Senator Trent Lott really had for retiring...