US Banks Continuing to Hoard Cash at the Federal Reserve

I previously mentioned how the banks were hoarding cash. In order to follow up, I thought that it would be interesting to look in more detail on banks hoarding cash at the Federal Reserve. On balance, I think the economic trend is in favor of gradual reductions in unemployment and a concomitant relaxation of banks lending. This could prove to be a powerful driver for the US and global economy. However, it is not without risk. If the current European Sovereign Debt crisis worsens than conditions could get tougher. I want to demonstrate how contingent all of this is,upon sentiment.

Firstly, if we look at the recent Federal Reserve Senior Loan Officer Survey we can see how the transmission mechanism between the Federal Reserve cutting rates and bank's loosening lending standards, is getting longer and longer with each recession.

source: economagic.com

In fact, there was worrying news for as the banks appearred to be reporting a tick-up in those increasing spreads over loan rates over the cost of bank funds...

Similarly, the demand for loans weakened a bit in Q3...

source: economagic.com

All of which makes rather weak reading and goes someway to explaining the necessity for Ben Bernanke to launch QE2. Simply put, the velocity of circulation remains low because the banks still aren't lending. We can see this with regards how much reserve liquidity the banks are holding at the federal reserve...

source: economagic.com, for more data see here http://www.federalreserve.gov/releases/h3/current/h3.htm

It has come down a bit, but conditions are far from normal. I suspect the banks are still worried about the potential for worsening asset quality. Furthermore, if we look at what the Federal Reserve Senior Loan Officer Surevy said in the July report...


7. Over the past three months, how have your bank's credit standards and terms for approving applications for C&I loans or credit lines—other than those to be used to finance mergers and acquisitions—from nonfinancial companies headquartered in Europe and their affiliates and subsidiaries changed?

	All Respondents		Large Banks		Other Banks
	Banks	Percent	Banks	Percent	Banks	Percent
Tightened considerably	1	4.5	1	5.6	0	0.0
Tightened somewhat	1	4.5	0	0.0	1	25.0
Remained basically unchanged	19	86.4	16	88.9	3	75.0
Eased somewhat	1	4.5	1	5.6	0	0.0
Eased considerably	0	0.0	0	0.0	0	0.0
Total	22	100.0	18	100.0	4	100.0

source: Federal Reserve http://www.federalreserve.gov/boarddocs/snloansurvey/201008/table1.htm

So it seems that the difficulties in Europe in the Spring did have a tangible effect on US banks willingness to lend.

Lending conditions should get better with an improving economy, but they will be held back if European difficulties continue. The US is not immune.