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Here’s a Quick Check as to How the Fed’s Balance Sheet Helps Spur Lending

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28 comments on Here’s a Quick Check as to How the Fed’s Balance Sheet Helps Spur Lending

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Fed’s Balance Sheet, Bank Deposits, Bank Loans Detail 

Bank Loans and Leases

Bank loans and leases (yellow line) had an initial surge in April and May of 2020 but that was entirely due to paycheck guarantee programs. 

I could easily have gotten a loan, paid myself salary and had it discharged for free, but I didn’t. Much of this money was fraudulent.

Since May of 2005, bank loans and leases have been in a steady decline despite a rip-roaring surge in the Fed’s balance sheet (red line).

Commercial and Industrial Loans 

Commercial and industrial loans tell a similar story. The peak was also May of 2005. 

Mortgage Loans

The above picture does not tell the full story because banks have largely gotten out of the mortgage business. 

The Fed did goose housing and the stock market via interest rate suppression. What the Fed will do for an encore is a mystery (except for more of the same).

Negative Demand For Deposits

Once again, banks do not lend from deposits. Nor does the Fed’s balance sheet represent money on deck waiting to be spent.

However, that does not imply QE is harmless. 

For discussion, please see There is a Negative Demand for Deposits to the Tune of 1.1 Trillion Dollars

Tapering 

The Fed is discussing tapering, reducing its balance sheet. However, at the rate discussed, it would take 42 years for the Fed to unwind its sheet.

We may be well into another recession in a couple of years, with the Fed reversing course.

Regardless, don’t hold your breath waiting for meaningful balance sheet reduction.

For discussion, please see A Word About Tapering and Who the Fed is In Bed With

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28 Comments
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Eddie_T
Eddie_T
4 years ago
Now I totally get why banks got out of mortgage lending. They have to risk weight assets they hold as equity to meet their capital requirements…..and mortgage loan assets have been risk weighted at 50% since 2008……so they make a terrible asset to hold to meet capital requirements, no matter what those capital requirements might be set at.
No wonder they sell mortgages off asap.
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Eddie_T
Eddie_T
4 years ago
For anybody (like me) who finds terms like “reserves” and “capital requirements” a bit confusing, here is a nice synopsis. I found it helpful.
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RonJ
RonJ
4 years ago
“There is a negative demand for deposits to the tune of 1.1 trillion dollars.”
Sounds like that comes under the headline of, for each action there is an equal and opposite reaction.
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Mish
Mish
4 years ago
BIS Comments on role of bank reserves in lending
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Mish
Mish
4 years ago
Added this Tweet to my post
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prumbly
prumbly
4 years ago
If the fed’s balance sheet never meaningfully reduces (and how can it?) then isn’t this effectively the same as money printing?  Aren’t we in the realm of banana republics and looming hyperinflation already?
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Mish
Mish
4 years ago
Reply to  prumbly
NOT money printing 
It lower rates and thus increases speculation but QE is not spendable cash.
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StukiMoi
StukiMoi
4 years ago
Reply to  Mish
The economic effect is the same, though.
QE effectively backstops and puts a de facto (and rising) floor under “assets.” Which increases the “valuation,” both current and expected, of what can, hence will, be lent against. One way or the other, net result is more dollars in circulation.
The real effects are also all the same: Redistribution of purchasing power to those closest to the central bank, from those who produce value. That’s the only real result, once you strip away all the mindless jargon.
The differences amount to no more than obfuscation and attempted “things are different this time” foils. Which it, of course, never really is.
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Cocoa
Cocoa
4 years ago
So, if rates increase(not likely but let’s pretend) and the banks don’t lend then they have to pay higher interest for deposits they have no interest in holding…how long before banks stop accepting consumer accounts? If the banks don’t want to lend or hold money in accounts…what exactly is their existential model?
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StukiMoi
StukiMoi
4 years ago
Reply to  Cocoa
“If the banks don’t want to lend or hold money in accounts…what exactly is their existential model?”
Precious little. As it should be. And is in any free market, economy and society.
Asymmetry of knowledge about specific businesses and processes, leave very little room for banks in a free economy without state intervention (aka theft from non banksters for the benefit of banksters). Not zero, but not that much, either. They’ll store coin, for a fee, I suppose. Some will try their luck at lending some of it, but will almost inevitably end up dangling from trees when the aforementioned asymmetry of knowledge results in them making bad loans. With the result that few savers will ever entrust much to them.
Specialized businesses like money transfers will still be around. But those are fee-for-service. Not really banking dependent.
Large scale money center banking etc., all exists solely as a result of pervasive government theft. In the form of implied backstops preventing the leeches from being, literally, parted out and hung when they overstep their bounds and are found out. Backstops which have to be paid for by someone. Those someones always being non banksters forced to subsidize the idiocy.
Noone in New York will ever have sufficient specific knowledge about a mom-and-pop in Nebraska, to ever not be taken to the cleaners if he tries to “determine creditworthiness” of such ventures. And anyone with savings knows that. Hence noone will ever entrust their savings to be wasted by such clueless cretins.
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amigator
amigator
4 years ago
Excellent info….. The final analysis the Fed can’t and will not change course….They are really really stuck now. Besides their shareholders are kicking a$$ why would they change course.
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Casual_Observer2020
Casual_Observer2020
4 years ago
The balance sheet itself is a joke as an idea because it double counts everything. The Fed balance sheet is worse because it is a glorified spreadsheet with electronic money created out of bits and bytes from a computer. Sounds a lot like bitcoin.
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Mish
Mish
4 years ago
Reply to  Casual_Observer2020
Double counting of M2 is indeed correct
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Bam_Man
Bam_Man
4 years ago
Expanding the Fed’s balance sheet spurs “lending” to Uncle Scam.
“Lending” is in quotation marks, since not one cent will ever be re-paid – just rolled over indefinitely until the system collapses – which could be soon.
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Captain Ahab
Captain Ahab
4 years ago
Does the comment above, ‘banks do not lend from deposits’ bother you like it bothers me? Seeing as the interest rate on deposits is essentially zero, why wouldn’t a bank use deposits to make loans? Also, despite the $1.1trillion of unwanted deposits, savers have been ‘forced’ into risky assets.
What does it mean for the risk-return relationship when the economy does enter a recession? I suspect dislocations in the most affected markets, stocks, bonds, real estate will be of a magnitude many times worse than 2008.
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Eddie_T
Eddie_T
4 years ago
Reply to  Captain Ahab
Banks never have (in modern times anyway) loaned money from deposits. The loans are themselves always  “new money” created from nothing. 
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Eddie_T
So your theory is that they sit on client deposits.
How do you explain the existence of ING Americas, promoting saving accounts? The ING model was/is to use deposits as a way to finance loans, as opposed to issuing bonds. Most banks have a mixed model.
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Eddie_T
Eddie_T
4 years ago
Reply to  Maximus_Minimus
My understanding (and I’m no banker) is that the reserve requirements for lending  were dropped completely in 2020…..leading to the current situation that Mish has called “fictional reserve banking” since there is no longer a specific reserve ratio  for lending.
In the past, it has often been said that banks need to have 10% of their deposits held in cash in their vaults or with the Fed …but I don’t think they do right now.
Happy to be schooled on this if I’m wrong.
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Eddie_T
US Banks do have reserve requirements as defined by BIS’s Basel rules. This base capital is held in the FED, which pays interest on it: Interest on Required Reserves (IOR). The excess balances are also held in the FED, which also pays interest: Interest on Excess Reserves (IOER).
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Eddie_T
There was a valid question, what’s the RRP facility at 0.15% for, when banks can get the same interest by keeping their cash with the FED.
The answer is that this is an extension of the interest on reserves to non-banks, e.g. money market funds, which were in danger of breaking the buck.
The next step will be to give them access to FED’s overnight lending.
When the system is broken, brake all rules!
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Eddie_T
Eddie_T
4 years ago
Reply to  Maximus_Minimus
Thank you for the elucidation…..which is appreciated very much.
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Mish
Mish
4 years ago
Reply to  Eddie_T
There are no reserve requirements on deposits. Official policy.
Never mattered in practice anyway and I said so in 2009.
However, deposits are a liability not an asset of banks.
And banks have capital requirements on deposits – They have to raise cash for the deposit liability. So banks steer deposits to money market funds who in turn have no idea what to do with deposits earning nothing. 
Paying money on reverse repos covers Money Market funds otherwise MMFs would charge interest on deposits.
Totally convoluted. 
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Eddie_T
Eddie_T
4 years ago
Reply to  Mish
Okay, I get it. Thanks.
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Bam_Man
Bam_Man
4 years ago
Reply to  Captain Ahab
Lending CREATES 90+% of the deposits to begin with.
It’s called Fractional Reserve Banking for a reason.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  Captain Ahab
It is akin to turning the faucet on at home and thinking you are the creator of running water. 
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Eddie_T
Eddie_T
4 years ago
So…I’m a little confused. Help me out.
It looks to me like  JPM, Wells Fargo, BoA and USBank are among the top ten mortgage lenders. I understand that the loans are rehypothecated and sold as MBS securities, but doesn’t that still count? It’s part of their revenue, right? 
Does that not show up as loans somewhere in your analysis? 
It also looks to me like all the major banks make half or more of their revenue from consumer lending, which I suppose is mostly credit cards and auto loans…….isn’t the mortgage business part of that piece?
I was a little surprised to see how much of the major banks revenue comes from asset management and “wholesale banking” the days. A lot, maybe 25%.
I guess my question is…….how much does it matter to banks, anyway, that lending appears flat on these charts? There seems to be a lot going on on the revenue side that isn’t being tracked. Am I wrong on that?
Is banking overall changing in terms of how they generate revenue…and if so…how much does that matter?
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anoop
anoop
4 years ago
forget any analysis.  just buy stonk or have fun being poor.
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LCP
LCP
4 years ago
No joy here
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