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Where's the Cash?


Did you know savings deposits have a reserve requirement of zero?


With the mad scramble of Citigroup (C), Ambac (ABK) , MBIA (MBI) and other to raise cash, and with banks reluctant to even lend to each other overnight, inquiring minds just might be asking Where the Heck Is all the Cash?

It's a good question too, so let's sneak a peak inside in the latest Fed report on Assets and Liabilities of Commercial Banks to see if we can find some clues.

November 23, 2007 Asset Highlights

  • Total Assets $10.734 trln
  • Loans and Leases $6.698 trln
    • Commercial & Industrial Loans & Leasing $1.400 trln
    • Real Estate Loans & Leasing $3.555 trln
    • Consumer $.791 trln
    • Security $.291 trln
    • Other $.660 trln
  • Actual Cash $308 bln
  • Other Assets $934 bln

November 23, 2007 Liability Highlights

  • Total Liabilities $9.617 trln
  • Deposits $6.683 trln
  • Transaction $606 bln
  • Nontransaction $6.076 trln

Transaction deposits are deposits against which checks may be withdrawn. This includes demand deposits, Negotiable Order of Withdrawal (NOW) saving accounts on which checks may be withdrawn and Money Market Deposits (MMD), which have limited check writing privileges.

Nontransaction deposits are interest-bearing accounts against which checks can't be written. This includes passbook savings accounts, small time deposits, and negotiable CDs.

The balance spread between assets and liabilities seems healthy on the surface but such analysis presumes the value of the loans, property, etc. were marked to market when the asset side was totaled.

That health also presumes there will not be significant future deterioration in receivables. See FASB 157 Partial Deferral Implications for marking assets to market.

Let's leave that discussion for a later time and look at actual cash.

Demand Deposits

Click here to enlarge.

Demand deposits are checking accounts. They are called demand deposits because the money is supposed to be available "on demand." The above chart shows roughly $300+- bln in deposits. The assets and liabilities numbers at the top of this post show there is $300+- bln in cash.

On the surface everything seems perfectly normal, but inquiring minds are now asking "What about sweeps?"

What are Sweeps?

Sweeps are automated programs that "sweep" funds from one type of account into another type of account automatically. In this case we are talking about programs that allow banks to "sweep" funds from checking accounts to other types of accounts such as savings accounts that allow money to be lent out.

Sweeps were initiated by Greenspan in 1994. Take a look at the above chart to see what has happened since then.

For more on sweeps, M1, M2,, savings accounts, and credit transactions, please see my post Money Supply - A Question About Credit.

The Fed has also written about sweeps.

Federal Reserve Board Data on OCD Sweep Account Programs:

Since January 1994, hundreds of banks and other depository financial institutions have implemented automated computer programs that reduce their required reserves by analyzing customers' use of checkable deposits (demand deposits, ATS, NOW, and other checkable deposits) and "sweeping" such deposits into savings deposits (specifically, MMDA, or money market deposit accounts).

Under the Federal Reserve's Regulation D, MMDA accounts are personal saving deposits and, hence, have a zero statutory reserve requirement.

Retail sweep programs have substantially distorted the growth of M1, total reserves and the monetary base, as Chairman Greenspan noted in his July 1995 Humphrey-Hawkins Act testimony to the Congress.

Something For Nothing

If that is not bizarre enough for you, please consider this "win win" miracle of modern finance proposal:

Retail deposit sweep programs increase bank earnings by reducing the amount of noninterest bearing deposits that banks hold at Federal Reserve banks. A bank's transaction deposits beyond approximately the first $50 million are subject to a 10 percent reserve requirement ratio, which is satisfied by holding vault cash or noninterest-bearing deposits at Federal Reserve banks. In contrast, savings deposits are subject to a zero percent ratio.

Retail deposit sweep programs take advantage of this difference by "sweeping" transaction deposits into savings deposits-that is, relabeling transaction deposits as savings deposits for reserve-requirement purposes.

This "win-win" experience with retail deposit sweep programs-higher bank earnings without increased federal funds rate volatility-has led some members of Congress to propose relaxing regulatory constraints on retail deposit sweeping.

Proposed legislation would increase that limit to 24 transfers per month, more than one for each business day.

Such a change would be economically equivalent to reducing the reserve-requirement ratio to zero for banks with sweep programs-effectively, the end of binding statutory reserve requirements in the United States.

Wow! Let's lend out every penny. Why not? Who needs cash? Savings deposits already have a reserve requirement of zero, checking accounts are the next logical extension.

Inquiring minds are now asking "How much money are we talking about?" That's a good question too.

As stated, 100% of savings deposits have been lent out. If you have money in a savings account it simply isn't there. Savings deposit figures are readily available. However, checking deposit figures are grossly distorted by sweeps as discussed.

Sweeps Data

The Fed hides sweeps data in an obscure online publication called swdata. Scrolling to the bottom we see 759.8 billion in sweeps. That means only $300+- billion of $1.059+- trillion cash that should be available on demand is actually available on demand.

Inquiring minds will note that the data is now 2 months old. It is never less than two months old. I have no idea why it takes the Fed 2-3 months to post this data. I suppose we should be grateful they publish it at all.

M' vs. M1

When constructing the monetary aggregate I call M Prime (M') missing months are extrapolated because it is the best we can do.

M' is essentially (but not exactly) what M1 used to be before Greenspan allowed sweeps. It's pretty absurd that we have to do this but what the heck, it gives me something to write about. By the way, it took nearly a year to figure this all out.

Those interested in seeing the rationale behind M' can read Money Supply and Recessions. I should have another M' update out soon. Bear in mind that it typically changes very slowly.

Where's the Cash?

As for savings accounts, none of it is actually in your account. Reserve requirement on savings accounts are zero. 100% has been lent out.

As for checking accounts, most of the money you think is sitting in your checking account simply is not there either. Less than a third of it is there. Based on the "win win" success of sweeps to date, the financial wizards think that none of it should be there.

So where's the cash? You tell me. Perhaps it's sitting in SIVs, mortgages, lent to hedge funds, in asset backed commercial paper ABCP, or for conservative banks sitting in short term treasuries.

All I know is that money isn't where most people think it is: in their checking accounts.

By the way, the real extent of the problem is far worse that appears at first glance because with the miracle of fractional reserve lending, money that was "borrowed into existence" was lent out over and over again.

This was not a problem until now. As long as asset prices are rising banks have plenty of capital to lend. But now that bank balance sheets are impaired there is a mad scramble for cash but there isn't much cash anywhere except of course China, Japan, and the oil states, all sitting on huge US dollar reserves and not knowing what to do with them.

In the end, Citigroup had to be bailed out by Abu Dhabi, an obscure country that no one had heard of until several days ago when Petrodollars Returned Home. Expect to see more cash infusions like that, because there is little cash to be found here.

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