Sunday, 26 May 2013

Cash Assets of U.S. Commercial Banks Surge above 15% of Total Assets for the first time

According to figures released yesterday by the Federal Reserve Bank of St. Louis, Cash Assets* of all U.S. Commercial Banks hit 15.43% of Total Assets for the week ending 15 May, up from 14.86% last week. This was the first time, based on data going back to August 1985, that cash assets represented more than 15% of total assets. To put this relatively high cash to asset ratio in perspective, the ratio average 5.77% during the period August 1985 to August 2008.

Meanwhile, Deposits in percent of Bank Credit for the banks was 92.9% for the week (see bottom chart), lower than the 93.9% hit towards the end of March, but 10.9 percentage points above the long term average since 1985 (the highest ever was 96.4% at the very start of 1986).

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

The question now is, will the banks continue to increase cash holdings, or is it now high enough?  If the latter is true, and the Fed continues its asset purchase program, this could mean banks start increasing lending driving up M2 money supply further. It remains to be seen, but at some stage banks must decide whether the 25 basis points made on their massive excess reserves held at the Fed is too low. This question will become increasingly pressing if the cash to total asset ratio continues to grow (as return on equity will gradually decline, ceteris paribus). Of course, the Fed might preempt this dilemma by increasing reserve requirements (converting all or part of the current excess reserves to required reserves) or increasing the interest paid on excess reserves held with the Fed, or some combination. This would perhaps be a more palatable option than the Fed selling assets, as the latter would directly increase interest rates (and making it more difficult to finance new government debt).

* Cash assets includes vault cash, cash items in process of collection, balances due from depository institutions, and balances due from Federal Reserve Banks.

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