Sunday, May 6, 2018

Fed Balance Sheet


Mike sent this chart out to his subscribers this week; bringing attention to a recent acceleration in the rate at which the Fed seems to be reducing Reserve Balances:



This would seem to be confirmed by the statements of the Fed's Quarles on Friday here:

The figure illustrates that the Fed's securities holdings are projected to decline about $400 billion this year and another $460 billion next year as Treasury and agency securities continue to roll off gradually from the Fed's portfolio.

So $400B at an annual rate is about $33B/month which is faster than what they have been doing since they started to reduce in October which has been about $12B/month.


14 comments:

SDB said...

Matt and Mike,

Any predictions on what this will mean for the economy over the next year or two?
A big nothing burger or something substantial?

Matt Franko said...

Imo it’s going to help as it reduces the amount of capital that the banks have to allocate against non-risk assets and then (at least implies not guarantees) banks can acquire more risk assets in finance of production oriented activities....

You have to read that Quarles speech in full it reveals how there exists a trade off between capital deployment for risk assets vs non risk assets due to “monetary policy “... it matters...

Footsoldier said...

Interest income channels will improve also.

Which area fiscal stimulas.

Instead of killing them they will allow them to mature.

Footsoldier said...

Don't forget about this tonight

https://twitter.com/ProfSteveKeen

Footsoldier said...

One of the best op-eds out there on the flawed assumptions behind ballooning national debt fears.

No entitlement crisis in America

https://twitter.com/stf18/status/992060585754988544

Ryan Harris said...


No Haircut to reserve balances or treasuries. 100%.

"The LCR rule allows firms to meet this requirement with a range of cash and securities and does not apply a haircut to reserve balances or Treasury securities based on the estimated liquidity value of those instruments in times of stress"

Ryan Harris said...

Some good stuff in this article...

" One could envision that as the Fed reduces its securities holdings, a large share of which consists of Treasury securities, banks would easily replace any reduction in reserve balances with Treasury holdings, thereby keeping their LCRs roughly unchanged. According to this line of thought, because central bank reserve balances and Treasury securities are treated identically by the LCR, banks should be largely indifferent to holding either asset to meet the regulation."

"on the liabilities side of banks' books, we will be keeping our eye on both the volume and the composition of deposits, as there are reasons why banks may take steps, over time, to hold onto certain types of deposits more than others. In particular, retail deposits may be especially desired by banks going forward because they receive the most favorable treatment under the LCR and also tend to be relatively low cost."

Matt Franko said...

Ryan it appears there are at least 2 ratios employed here

You have the eSLR and here the LCR...

Also, there is that bank reform bill still trying to get out of Congress that exempts at least a cohort of big depository banks from having to account for Reserve Balances as part of total assets in computing the SLR... not sure if that would then also effect the Fed's LCR they talk about here...

The whole thing is a moron fest...

You read this speech here and the context is that the Fed thinks the banks are the ones demanding the creation of $Ts of reserves or something... while the banks probably think the Fed is creating the reserves so they have more "money!" to "lend out!"...

I dont know which side is more stupid....

More of the C students somehow weaseling their way into regulating the activities of the A students.... ie expect more chaos at some point...

but short term this looks like an improvement to financial conditions more so if we get the Congress to pass the reform bill imo... somewhat bullish...

Matt Franko said...

Here this is revealing:

"Leading up to the 2007-09 financial crisis, some large firms were overly reliant on certain types of short-term funding and overly confident in their ability to replenish their funding when it came due. Thus, during the crisis, some large banks did not have sufficient liquidity, and liquidity risk management at a broader set of institutions proved inadequate "

they just plainly skip over their own role in fomenting "the crisis!" in the first place.... by increasing Reserve assets at the large banks which put those banks in violation of their own maximum allowed Leverage Ratios... so the large banks had no authority to lend EVEN IF the firms in need of the credit had acceptable collateral such as govt securities... the large banks had no further authority to increase their asset base by one penny...

Look at his figure 3 in the speech it goes STRAIGHT UP by $100Bs in September 2008 and caused the crash when Lehman couldnt get a loan even against its US Treasury securities as the big banks were being stuffed with Reserve Balances..

They are all morons and cant even figure this out... Art majors...

Matt Franko said...

"Look at his figure 3 "

should be Figure 1... straight up in Sept 2008... caused the whole f-ing thing...

Tom Hickey said...

The generally accepted story is that the crisis began with the drying up of the commercial paper market, since firms did not know which firms to trust.

Daniel M. Covitz, Nellie Liang, and Gustavo A. Suarez, The Evolution of a Financial Crisis: Panic in the Asset-Backed Commercial Paper Market, Federal Reserve

Matt Franko said...

Well maybe when the Fed put the risk free rate up to 5.5 then those who previously sought the higher rates of the commercial paper preferred the liquidity of short term govt paper over the commercial paper .... so it was up to the banks to fund Lehman instead...

That paper still doesn’t explain why Lehman couldn’t get funded against US Treasury securities...

Matt Franko said...

C’mon Tom they talk about “the crisis!” like its like a tornado or earthquake or something... please....

Matt Franko said...

Tom, they are running this f-ing thing whether they know what they are doing or not...