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Tylerdurden
02-05-2008, 04:13 PM
I have been watching a chart of Borrowed Bank Reserves for several weeks. The action is unprecedented.

Borrowed Reserves of Depository Institutions

http://bp1.blogger.com/_nSTO-vZpSgc/R57ax-UG3EI/AAAAAAAAB_0/LoeoDxkgXCs/s400/non-borrowed-reserves.png (http://bp1.blogger.com/_nSTO-vZpSgc/R57ax-UG3EI/AAAAAAAAB_0/LoeoDxkgXCs/s1600-h/non-borrowed-reserves.png)

click on chart for sharper image.

The NFORBES Chart (http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19) above is courtesy of St. Louis Fed.

Here's an interesting excerpt from the book Investing Public Funds (http://books.google.com/books?id=jlIjxT0BwzAC&pg=PA192&lpg=PA192&dq=net+free+or+borrowed+reserves+of+depository+ins titutions&source=web&ots=2sLHJiTRCg&sig=ifADN65VYfvCL-4aczeTEefmEDo#PPA192,M1) by Girard Miller about borrowed reserves.

"Another useful indicator of the Federal Reserve's relative monetary policies can be found weekly in the Federal Reserve data. A key statistic is the net free reserves or net borrowed reserves line item. This statistic measures the degree to which depository institutions have found it necessary to obtain funds in the Fed Funds market and through the Fed discount window in order to obtain required reserves.

During periods of central bank credit-tightening operations, the depository sector might find it necessary to borrow funds to meet reserve requirements. This practice results in net borrowed reserves, which shows as a negative number. Conversely, if ample funds are available through the banking system to meet reserve requirements, banks can become net lenders of reserves through the Fed Funds markets"Given that the Fed is not in a credit tightening mode, we must look for a better explanation. Here it is: Banks in aggregate have now burnt through all of their capital and are forced to borrow reserves from the Fed in order to keep lending.

Continued...

http://globaleconomicanalysis.blogspot.com/2008/01/bank-reserves-go-negative.html

Kaa
02-05-2008, 04:24 PM
That's interesting. If you actually follow the link to the NFORBES chart, it looks quite different.

http://research.stlouisfed.org/fred2/data/NFORBRES_Max_630_378.png

(http://research.stlouisfed.org/fred2/series/NFORBRES?rid=19)

On the other hand, the notes point out that starting 2007-12-01 they changed their definition of reserves which sounds very fishy to me.

Kaa

Tylerdurden
02-05-2008, 04:29 PM
On the other hand, the notes point out that starting 2007-12-01 they changed their definition of reserves which sounds very fishy to me.

Kaa


Like M3 or the unemployment statistics. If you don't like something change it.

Curious as to what or who changed the two charts?

Kaa
02-05-2008, 04:38 PM
Curious as to what or who changed the two charts?

Oh, I'm pretty sure the St.Louis Fed changed the definition :-)

But it's easy to figure out. If you look here -- http://research.stlouisfed.org/fred2/series/BOGNONBR?cid=123 -- you will notice that "Non-Borrowed Reserves of Depositary Institutions" dropped from $42B to $27B in November 2007. That's a $15B drop and is what you see in the first chart (which reflects total borrowings).

The amended chart reflects not total borrowings, but only borrowings at the Fed's discount window and it shows a drop from $1.3B to -$2.0B in November, a change of $3.3B.

It seems clear that the banks wrote off about $15B in November 2007, borrowed about $3.3B at the Fed's discount window, and borrowed the rest ($11.7B, more or less) in the fed funds market.

All in all, I think it was highly unpleasant for the banks, but hardly deadly. Note that the data is from November and we're in February already.

Kaa

P.S. Update -- the banks didn't borrow $12B in the fed funds market -- what happened was the so-called Term Auction Credit (or Term Auction Facility, TAF) -- a way for the Fed to extend the necessary credit to the banks.

Tylerdurden
02-05-2008, 05:56 PM
Thanks for the info.

JBreeze
02-06-2008, 07:17 AM
Here is some more info. through 1/31/08:

http://federalreserve.gov/releases/h3/Current/

Any conclusions from this data?

George Roberts
02-06-2008, 08:23 AM
"It seems clear that the banks wrote off about $15B in November 2007, borrowed about $3.3B at the Fed's discount window, and borrowed the rest ($11.7B, more or less) in the fed funds market."

Seems to show a misunderstanding about bookkeeping.

The write off is a bookkeeping entry. In this case it indicates that future cash flow is going to be less than expected. There is no need to borrow money to balance this entry.

TimH
02-06-2008, 11:27 AM
[quote=George Roberts;1756568
Seems to show a misunderstanding about bookkeeping.

[/quote]


They should have 2 sets of books eh George? One real one and one to show the public.


These people dont understand accounting....:rolleyes:

Kaa
02-06-2008, 11:27 AM
"It seems clear that the banks wrote off about $15B in November 2007, borrowed about $3.3B at the Fed's discount window, and borrowed the rest ($11.7B, more or less) in the fed funds market."

Seems to show a misunderstanding about bookkeeping.

The write off is a bookkeeping entry. In this case it indicates that future cash flow is going to be less than expected. There is no need to borrow money to balance this entry.

I don't think so. It seems to me that in this case it indicates that the value of some assets banks held (debt, specifically) turned out to be less than what the banks used to think. Marking this debt down to a lower price led to banks' reserves going down which necessitated borrowing (from the Fed's TAF, mostly).

I don't see anything here about future cash flow.

Kaa

Milo Christensen
02-06-2008, 12:06 PM
. . . Any conclusions from this data?

8 billion out of 812 billion? Nothing to see here.

Seems like this is one time the Fed actually demonstrated their worth. Stepped in and helped a fundamentally sound banking system with a short term liquidity crisis. The crisis is/was actually in the reserves which the Fed (Federal Reserve Bank, catchy innit?) requires members to maintain.

Seems analogous to a person with a $100,000 in interest earning assets putting $1,000 on a credit card for a month or two.

Kaa
02-06-2008, 12:12 PM
8 billion out of 812 billion? Nothing to see here.

Term Auction Facility at the moment is $50B. (http://www.federalreserve.gov/releases/h3/Current/)


Seems like this is one time the Fed actually demonstrated their worth. Stepped in and helped a fundamentally sound banking system with a short term liquidity crisis. The crisis is/was actually in the reserves which the Fed (Federal Reserve Bank, catchy innit?) requires members to maintain.

Correct.


Seems analogous to a person with a $100,000 in interest earning assets putting $1,000 on a credit card for a month or two.

Not really. First, it's a symptom of serious asset write-down which has other implications for banks besides the immediate reserve problems. Second, borrowing isn't free and the extra interest on all that money comes out to a nice chunk of change.

Kaa

Milo Christensen
02-06-2008, 12:57 PM
Kaa: Be patient with me. The TAF section of the table didn't show on my screen here at work. So, if I understand this, the member banks went from 42 billion in non-borrowed reserves to -8 billion (which corresponds neatly with borrowing from the TAF of 50 billion, which means that the entire reserves of the members of the Federal Reserve are "borrowed" from the ?what? from the Federal Reserve? I'm getting a headache, but it would be interesting to continue my education in this. The TAF is new, right?

JBreeze
02-06-2008, 01:06 PM
It was the trend in the non-borrowed reserves in Dec and Jan that caught my attention.

Looking back at historical data from the same site, I can't find anything like this. There was a large infusion immediately following 9/11, but it was apparently not needed.

Hey, maybe it's 9/11 in the financial industry.

Kaa
02-06-2008, 01:13 PM
Kaa: Be patient with me. The TAF section of the table didn't show on my screen here at work. So, if I understand this, the member banks went from 42 billion in non-borrowed reserves to -8 billion (which corresponds neatly with borrowing from the TAF of 50 billion, which means that the entire reserves of the members of the Federal Reserve are "borrowed" from the ?what? from the Federal Reserve? I'm getting a headache, but it would be interesting to continue my education in this. The TAF is new, right?

The TAF section in the table is called "Term Auction Credit". TAF -- the Term Auction Facility -- extends Term Auction Credit :-)

Yes, the table implies that the net reserves of the banks are borrowed from the Fed. That's not as bad as it sounds because the TAF loans are collateralized and represent short-term liquidity as opposed to assets in general.

The TAF is technically new, but in effect is nothing but the usual provision of liquidity by the Fed to the banks. The standard mechanism for that used to be the so-called "discount window", but in this particular case the Fed decided to create the TAF. More information here -- http://www.federalreserve.gov/monetarypolicy/files/TAFfaqs.pdf

Kaa

Milo Christensen
02-06-2008, 01:22 PM
I need an analogy. How's this one?:

To be a member of this exclusive club, you have to have so much money set aside. But the club has serious problems because a lot of their members can't afford to keep the money set aside as required by the club. Therefore, to keep their members in the club, the club's members loan the members of the club the money the club requires the members to set aside.

Not exactly a Ponzi scheme, we need a new word. How about TAFfy scheme?

George Roberts
02-06-2008, 01:53 PM
"It seems to me that in this case it indicates that the value of some assets banks held (debt, specifically) turned out to be less than what the banks used to think. Marking this debt down to a lower price led to banks' reserves going down which necessitated borrowing (from the Fed's TAF, mostly)."

Borrowing from the TAF does not increase a banks assets. The TAF could be treated as an interest bearing deposit, but then its contribution to the reserve requirement would not be 1 to 1.

The fact that the write down of assets equals the "borrowing" indicates that someone does not understand the system.

---

I suppose what really happened is that banks needed to turn over short term paper and there was no liquidity at reasonable rates and the fed simply made liquidity at reasonable rates.

For those who don't know banks always have short term paper coming due as a matter of normal business.

Kaa
02-06-2008, 02:07 PM
I need an analogy. How's this one?:

To be a member of this exclusive club, you have to have so much money set aside. But the club has serious problems because a lot of their members can't afford to keep the money set aside as required by the club. Therefore, to keep their members in the club, the club's members loan the members of the club the money the club requires the members to set aside.

Not exactly a Ponzi scheme, we need a new word. How about TAFfy scheme?

Well, not only club members (banks) lend money to each other -- that's the normal fed funds market -- but also the club itself (the Fed) lends money to members so that they can satisfy the set-aside money requirement.

Yep, that sounds about right.

It's not a Ponzi scheme because it doesn't depend on cash from new members coming in. Also, that's how the US banking system functioned for the last -- oh, I don't know -- almost a hundred years or so.

It's entirely normal for banks to borrow to satisfy the reserve requirements. What's unusual about the current situation is only the scale of the borrowing.

Kaa

Kaa
02-06-2008, 02:10 PM
Borrowing from the TAF does not increase a banks assets. The TAF could be treated as an interest bearing deposit, but then its contribution to the reserve requirement would not be 1 to 1.

So? I don't understand your point. Are you claiming that the banks are borrowing from TAF not to satisfy the reserve requirements?


The fact that the write down of assets equals the "borrowing" indicates that someone does not understand the system.

Again, nobody claimed that. Write-down of assets does not equal borrowing, it causes borrowing.

Kaa

George Roberts
02-06-2008, 03:38 PM
Kaa ---

1) they are borrowing from TAF to meet their normal daily borrowing needs.

2) do the math implied in the following statement from above:

"It seems clear that the banks wrote off about $15B in November 2007, borrowed about $3.3B at the Fed's discount window, and borrowed the rest ($11.7B, more or less) in the fed funds market."


I have more important work to do right now. A computer model I would like to work seems to give 2 sets of answers depending on how I run it. It would be nice if the two sets were identical.

CAPNBIL
02-06-2008, 08:41 PM
I guess I'm just a simple guy but the only parallel I can figure out to this conversation would be that if I go to the bank for a loan and they ask me about what collateral I can offer, I show the banker my credit card and I tell him my collateral is the limit on my credit card. If I get the loan that doesn't sound like conservative banking to me. I guess if the US Treasury is the lender of last resort that makes it OK.

Gary E
02-06-2008, 09:13 PM
The Fed is the lender with the printing press, what dif does it make, it's only paper.

TimH
02-06-2008, 10:39 PM
I have more important work to do right now. A computer model I would like to work seems to give 2 sets of answers depending on how I run it. It would be nice if the two sets were identical.

what kind of computer model?