“When interpreting data on Reserves, it’s important to keep in mind the quantity of reserves in Banking System is determined almost entirely by the Central Bank’s actions.
An individual Bank can Reduce their Reserves by “Lending Them Out or Using them 2 Purchase other Assets.”
“But these actions Do Not Change the Level of Reserves in the Banking System.”
“The general idea should be clear: while an Individual Bank can reduce its level of reserves by “lending to firms or households, the same is not true of the Banking System as a Whole.”
“No matter how many times the Funds are lent out by the Banks or used to make Purchases -Total Reserves in the Banking System do not change.”
“In particular, one can’t infer from the high level of aggregate reserves that banks are hoarding funds rather than lending them out.”
I’m telling y’all right now the traditional fractional banking system has been completely gutted in a QE Floor System… Deposit Multiplier is as good as Dead.
Reserves are Cash & Can be Lent Out… Now subject to LCR/RLAP & Sheet Capital constraints per Basel 3.
$XLF #Reflation
Begs the question for Lacy Hunt, who is very knowledgeable & should be deeply respected… but one can still disagree or be unsure of his characterization of “m” or little m in this piece given Basel III has neutered the money multiplier by paying IOER.
His point about long term public debt is a good one in that it subtracts from growth over long periods of time, but now we have a QE system by design so L/D ratio falls dramatically, but also loans have been pushed out to Shadow banks, CLOs & Life Insurance companies as well.
Regulated $XLF system much safer as a result 4 depositors. Now we have $2Trillion in XS savings from Covid, Pent Up Demand & a willing + Able Banking system ready to make loans = Higher LT Yields, not lower. I think good chance last Summer was a bottom at 50bps on 10 Yr. Let’s c.
We spent 12 Yrs fixing $XLF System w Basel III + Dodd Frank shaving off 50bps (u pick exact number) of annual GDP growth… now we have the best capitalized system in 30+ years..time to take the Shackles off & execute regular Covid normalization + recoup years of stifled growth.
$XLF CET1 ratios r way too high.. Fed can reduce reliance on 0% RWAs 4 $TLT & 20% 4Agencies… by Recalibrating SCBs, SLRs, GSIB Scores which is good for Loans..& see this economy rip…even beyond Covid Normalization for next 2 years… & bring people back into the Labor Force.
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The Fed intentionally raised IOER & RRP to start the process.. people clearly sold Bills 4 RRP.. lots of em why Curve flattened some..but GC < IOER & no stress anywhere… no $DXY shortages anywhere…I don’t think Sterilizing is a big deal in this context… but actually necessary.
Banks are encouraging this…not a surprise.. they have been firing Non Op Deposits since last November that don’t hold any LCR or RLAP credit. $JPM has a 160% OpCo LCR it’s way too high…There or others’ issue isn’t a future lack of liquidity… it’s a lack of Balance Sheet..
… imho there’s a big difference between both concepts.. there’s $7 Trillion of XS of Deposits over Loans which for the most part is HQLA. Loan/Deposit ratios is at 60% & 45-50% for GSIBs. They can’t contain any of this liquidity… more draining is great.
$DXY Ripping Does NOT = Bank Funding Shortage (Global De-Levering #WreckingBall) imho
Here’s one clue… FRA OIS is still pinned at 3bps & NII still stinks…
Partly why Credit markets couldn’t care any less about the 5s30s Curve coz nobody funds at the 5 year point.
Let’s move across the pond to some European Banks… they have almost Zero issues with access to $DXY. 3M Cross FX Basis Spreads are -3bps.. But the Intelligentsia they keep telling me EM & EMEA has a lot of dollar debt.. u know all those BIS Reports and all…
While true that there are large Cross FX Claims…higher $DXY has a marginal impact on debt service.. but higher $DXY just means there’s some marginal increase in debt service.. that could pail in comparison to a Reopen & stronger earnings power that’s lagged by 6 months on Covid.
That’s not to say there’s not going to be some Tail in Credit Losses/NCOs rising from now such epically low levels will be close to nothing in 2021… partly coz of Stimmy.. but people forget $2Trillion in XS Savings isn’t all Stimmy.. Regardless the Insane amount of Loss Reserves
that r already built into Capital coz of actions taken to their P&L & BS getting smashed in 1H20 coz of CECL Pulling Forward Loan Loss Reserves for “Lifetime Losses” vs previous “Incurred next 12 months Loss” regime is what killed Banks & Market on Build in 1H20 but also swift V.
I think that the “Tables are Set for a Booming Economy.”
The Bank Reg Tourniquet is gonna getting loosened… So Supply is gonna find Demand for Loans imho… Key is when Loans do come back? I don’t think we are that far away as most think. Let see tho.
Imho… if they are really gonna loosen Baki Regs.. seems like he’s super serious to the point he was reading off a script when the question came up… then they can hike IOER at least 4 times to 1% w/o Breaking a Sweat in 2022, given backdrop. $XLF #Reflation