Monday, 27 May 2013

Cash Assets in percent of Deposits for All U.S. Commercial Banks hit Record High

Cash Assets in percent of Deposits for all U.S. Commercial Banks hit 22.26% for the week ending 15 May according to figures released by FRED. This was the highest ratio ever reported based on data going back to January 1973 and compares to an average ratio of 11.12% since the start of the data series and the record low of 4.31% as of the week ending 20 August 2008 (just prior to the "financial crisis").

See also the report from yesterday: Cash Assets of U.S. Commercial Banks Surges above 15% of Total Assets for the first time.

The banks are hence in a substantially better financial position now to meet depositors demand compared to five years ago. Even though the cash to deposit ratio is the highest its ever been, current cash assets does not cover the remaining 77.74% of the deposits (1 minus 22.26%). This highlights how fragile fractional reserve banking really is: if all deposits (a bank liability) were to be withdrawn simultaneously, only 22.26% of the total would be covered by the current cash assets. It is safe to say the Federal Reserve did not do its job in the run-up to the "financial crisis" to "ensure the safety and soundness of the nation's banking and financial system" when the cash to deposit ratio dropped to an historic low of 4.31%.

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