Question for Aaron and Bart (maybe Flow5)

[Spartacus]

since reading Flow5's post led me to this -

based on the de minimis reserve requirements, are banks fully extended?

That is to say, could they lend much more money TODAY without
1. more reserves

OR

2. further loosening of reserve requirements

or are their loan books maxed out for the existing combinations of reserve requirements and reserves?

Or is there any way of knowing this?

this is I think a crucial question to ask when figuring out whether the system could survive a perturbation without much external aid.

[bart]

Re: Question for Aaron and Bart (maybe Flow5)

The straight answer is yes, they can. Practice is frequently different than theory.

Here's a long term picture of "excess" reserves (from the Fed's H3 report) showing how much extra reserves that banks have over the statutory requirements.




Also, the changes in reserve requirements since 1998 or so have been small on a relative basis, and here's what happened to bank credit during the last ~10 years.

[Spartacus]

Re: Question for Aaron and Bart (maybe Flow5)

Thanks much.

I expected the exact opposite, that to maximize revenue the banks were always up against their reserve limits.

Back to the drawing board, as it were.

The brutality of science: the destruction of beautiful, fancy ideas by facts.

The straight answer is yes, they can. Practice is frequently different than theory.

[bart]

Re: Question for Aaron and Bart (maybe Flow5)

The brutality of science: the destruction of beautiful, fancy ideas by facts.

The story of my life the last few years too as I've been delving & researching... and you now know how painful that can be. ;)

And also note that there could easily be other data I don't know that could modify my views too.

It's truly astounding how few understand the area even a little, and how complex and full of false data it is.



# "Economics exists to make astrology look respectable."
-- John Kenneth Galbraith

... and from an EJ post recently:

# "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
-- Joan Robinson, Cambridge University

[Spartacus]

Re: Question for Aaron and Bart (maybe Flow5)

There are so many resources (you and Aaron and EJ being among the best) for studying US data it's INSANE (not that you guys go for quantity, but for very high quality).

just TRY to find the same info on Canada, my own country - ugh. If you tortured all the economists at the Bank of Canada I doubt you could get the same quality info as you guys provide.

The story of my life the last few years too as I've been delving & researching... and you now know how painful that can be. ;)

And also note that there could easily be other data I don't know that could modify my views too.

It's truly astounding how few understand the area even a little, and how complex and full of false data it is.



# "Economics exists to make astrology look respectable."
-- John Kenneth Galbraith

... and from an EJ post recently:

# "The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists."
-- Joan Robinson, Cambridge University

[bart]

Re: Question for Aaron and Bart (maybe Flow5)

There are so many resources (you and Aaron and EJ being among the best) for studying US data it's INSANE (not that you guys go for quantity, but for very high quality).

just TRY to find the same info on Canada, my own country - ugh. If you tortured all the economists at the Bank of Canada I doubt you could get the same quality info as you guys provide.

Wow - thanks Spartacus, you have me blushing.

Would that I were as good as EJ in the overall areas that most are curious about and interested in. I pretty much specialize in the Fed and Central Banks and behind the scenes stuff.

There's no question that EJ is our Fearless Leader, and why. His breadth and understanding and contacts, etc. are truly superior... and besides, he tolerates my odd humor quite well. ;)


... although I am still waiting for him to change the name of the site to the iTulip:



:eek: ;)

[flow5]

Re: Question for Aaron and Bart (maybe Flow5)

xxxxxxxxxxxxxxx

[bart]

Re: Question for Aaron and Bart (maybe Flow5)

I'm not sure if excess reserves are increasing or not: (1) Maybe banks are holding more excess reserves, because their holdings are relative to the banks required reserves. (2) Maybe it's harder for the banks to determine their average daily deposit liabilities in the reserve computation period. (3) or, maybe monetary policy is easy.

In my opinion, most likely it's #3 with some small effects from the other two.

I think the answer to the overall question remains the same though. The capability of the banking system to keep on loaning more and more is there.
It's not like the early '30s where neither the capability nor willingness was there, and even the Fed wasn't doing much of a job being the banker's banker then.

NOTE:

It's no happenstance that (Excess Reserves + Required Clearing Balances topped) c. 8/2003, and the Effective Federal Funds Rate bottomed c. 8/2003

Indeed, there is a relationship.

[Spartacus]

Re: Question for Aaron and Bart (maybe Flow5)

Thanks for your posts, too , flow5. Those text files of reserve requirements are good stuff.

1, 2, 3 sound good

How about option 4 - securitization liberates some of the cash that used to be tied down and not easily moved.

Until the age of the MBS, the vast majority of mortgages were bank credit, right? But now mortgages can go "upstream".

This kind of activity could explain the rising choppiness of Bart's chart above.

I'm not sure if excess reserves are increasing or not: (1) Maybe banks are holding more excess reserves, because their holdings are relative to the banks required reserves. (2) Maybe it's harder for the banks to determine their average daily deposit liabilities in the reserve computation period. (3) or, maybe monetary policy is easy.
================================================== ======
Legal Reserves
Reserve Computation Period….(current period days)
14 Days – 2 weeks Begins on Tuesday Ends on second 2^nd monday

daily average vault cash held during the computation period that ended 3 days prior to the beginning of the maintenance period is deducted from the amount of the institution's required reserves

balances due from other banks do not include balances due from Federal Reserve banks; pass through accounts (respondent banks) or from banks located outside the U.S.

cash in the process of collection and due from other banks may be excluded from deposit and Eurocurrency liabilities

clearing balances are not counted as reserve balances

computed on the daily average of deposits subject to reserve requirements

4% carry over deficiencies and excesses are applied to next maintenance period

Reserve Maintenance Cycle (lagged period days)
required Reserves 30 days after the beginning of the computation period
14 Days – 2 weeks Begins on Thursday Ends on second Wednesday
-----------------------------------------------------------------------
Required Reserves Reservable Liabilities = Pass-throughs + Vault Cash + IBDDs

The 14 days ending -- (17 days before the start) of the maintenance cycle.

I.e., Weekly reporting CBs maintain reserves on current Liabilities with a 30 day lag.


Computation………….. lag ………………...maintenance
14 days<--------------17 days------------14 days

Maintenance begins 31 days after beginning of computation period.
================================================== ======

NOTE:

It's no happenstance that (Excess Reserves + Required Clearing Balances topped) c. 8/2003, and the Effective Federal Funds Rate bottomed c. 8/2003

[flow5]

Re: Question for Aaron and Bart (maybe Flow5)

ALL OF THESE COUNTRIES OPERATE WITH ZERO RESERVE REQUIREMENTS & A "POLICY RULE".


Canada, publishes M3

Deflator
High........4.1
Low.........-.4

GDP
High........5.5
Low.......-2.1
Period 90-06

Sweden, publishes M3

Deflator
High.....3.4
Low...... .7

GDP
High......4.6
Low.....-2.0
Period 92-06

Switzerland, publishes M3

Deflator
High.....2.4
Low.....-.3

GDP
High....3.8
Low.....-.8
Period 90-06

Australia, publishes M3

Deflator
High.....4.5
Low.... .4

GDP
High.....5.3
Low.....1.8
Period 90-06

New Zealand, publishes M3

Deflator
High....4.7
Low.... .6

GDP
High.....5.2
Low....-1.7
Period 90-06