Friday, 26 September 2014

The Reserve Ratio for U.S. Banks (as of 26 Sep 2014)

I recently published an article titled U.S. Banks Are Now Operating With 100% Reserves - Is Full-Reserve Banking The Next Step? which pointed out that U.S. banks (i.e. depository institutions) are now effectively operating with 100% reserves. In the article, the reserve ratio was calculated as bank reserves in percent of the M1 money supply. 

Going forward, I'll publish the latest ratio from time to time to see how it is progressing. Here's the first update based on data published today by the Fed for the weekly period ending Wednesday 24 September. The current reading is 99.0%, with the reserve ratio averaging 98.6% during the last four weeks.

The small chart inserted shows the ratio for the period 1 January 1984 to 10 September 2008. As this chart in the chart demonstrates, the reserve ratio averaged less than 1% (yes, 1%) for most of the decade preceding the banking crisis culminating with the spectacular bust in September 2008. In fact, for the period 16 September 1998 to 10 September 2008, the reserve ratio averaged a razor thin 0.76%. Starting mid September 2008 (the week Lehman went belly-up), the ratio started its surge towards 100% as the Fed granted "emergency" credit to the banks (see chart here) followed by the implementations of QE1, QE2 and QE3. In addition, the Fed started paying banks interest on reserves (0.25% p.a.) giving banks another incentive to build up their reserves.