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Banks Suffer From Too Much, Too Little Liquidity

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A thing that a bank does is take in short-term money in the form of deposits and lend out long-term money in the form of loans. Two things that you could want out of your banks are:

  • for them to lend out lots of their deposits in long-term loans, and
  • for them to keep lots of money in the bank to give back to depositors who want their money back at any particular time.

A thing two consider is that those two desires are (1) each perfectly sensible and (2) opposite. Another thing to consider is that everything that happens, someone can complain about.

So today we learn:

Deposits at U.S. banks exceed loans by an unprecedented $2 trillion as the threat of a slowing economy tempers borrower demand and lenders preserve tightened standards.

Cash deposited at firms from JPMorgan Chase & Co. to Bank of America Corp.1 expanded 8.7 percent this year to a record $9.17 trillion through Dec. 5, Federal Reserve data show. That outpaced a 3.7 percent gain in loan assets to $7.17 trillion. The gap between what banks take in and lend out has surged since October 2008, the month after Lehman Brothers Holdings Inc. collapsed, when loans exceeded deposits by $205 billion. ... That may prompt banks to hold more Treasuries and government-backed mortgage securities as they deploy excess deposits. Lenders held $1.87 trillion of U.S. government debt and so-called agency securities as of Dec. 5, a 9.7 percent increase from last year.

That sounds bad! Banks are taking all your money and not lending it out, instead parking it in Treasuries and also, probably, prop trading and stuff. But yesterdayish we learned:

US banks are making a last-minute push to ease new global liquidity requirements, arguing that they would need to come up with an additional $800bn in easy-to-sell assets under the proposed standards. ...

The [Basel III liquidity coverage ratio] is aimed at making sure banks have enough funding and easily liquidated assets to survive a short-term market crisis that might include depositor runs and a lending freeze.

But the US banks argue that the definition of liquid assets is too narrow and that the assumptions of what could go wrong are too harsh. They warn that increasing liquidity requirements will reduce their lending capacity and profits.

That sounds bad too! Banks are refusing to keep enough of your deposits in safe Treasuries, instead demanding to lend it out to make risky risky profits.

I dunno. These things aren't perfectly connected: you can bet that banks' objection to the LCR is less "ooh we want to lend more to small businesses" and more "ooh we want to do lots of market making in semi-liquid structured products without holding cash against them," and it's clear that Basel III's increased need for liquid assets is driven not by deposits but by things like repo funding and derivative margining.2 Still, if you squint they're two sides of the same coin: you - "you" the generic member of the public who is skeptical of banks - both want banks to hang on to lots of cash against a rainy day, and are pissed that they're hanging on to so much cash instead of employing it productively.

One can't fault the generic bank skeptic for this view, though, since the banks are complaining about it too. That Bloomberg article is full of bankers complaining about the lack of quality demand for loans, while the FT article is full of bankers complaining about how the new rules will reduce their ability to make the loans that they're currently not making. Both banks and their enemies want banks to be making both more and fewer loans. That's perplexing, but it's also the natural state of the world.

Bank Deposits Surge $2 Trillion More Than Loans: Credit Markets [Bloomberg]
US banks call for easing of Basel III [FT]

1.But also other banks! That makes it sound like "the whole gamut of banks from A to B," but it's actually, like, all the banks.

2.There's more on the LCR here; to oversimplify extraordinarily banks need to keep cash and Treasuries and stuff equal to at least 5% of retail deposits plus various percentages of various other things. The fact that ~20% of deposits are currently in Treasuries/agencies suggests that the various other things dominate this particular equation.


Let's Talk About: Basel III

The Fed last night unleashed eight zillion pages of Basel III implementation on the universe and I'm tempted to be like "open thread, tell us about your hopes and fears for capital regulation." So do that! Or don't because it is super boring, that is also a valid approach. Still I guess we should discuss. Starting slow though. Banks have to have capital, meaning that they have to fund some of their assets with things that are long-lived and loss-absorbing, like common equity, rather than with things that have to be paid back soon and at face value. The reason for this is that the rest of banks' assets are funded with things that we really do want to be paid back soon and at face value, like deposits, and if the value of those assets declines you don't want those deposits to be wiped out. The rules say that you need capital equal to a percentage of your assets. The game is deciding (1) what that percentage is, (2) what is capital (proceeds from selling common stock, and actual earnings, yes, but, like, deferred tax assets?), and (3) how you count assets (you might want more capital to shield you from losses in, say, social media stocks than you would to shield you from losses in Treasury bonds, so regulators use "risk-weighted assets," so that $1 of corporate bonds counts as $1 of assets, $1 of Treasuries counts as $0 of assets, and $1 of Facebook stock counts as $3 of assets*). Anyway, here are the required capital levels: