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Sunday, January 29, 2012
Ramanan — The (Almost) Irrelevance Of Reserve Requirements
Ramanan quotes Basil Moore on reserves and show how reserves are irrelevant — almost. They do impose a cost.
Reserve requirements? The banks don't need no stinkin' reserve requirements because when they lever up 40 to 1 they can make a chitpile of money. Of course, a 3% loss wipes their sorry arses into the gutter if the game weren't rigged for them, but it's rigged so that they are made whole while the losses are shoved to the American Taxpayer where we take it in the corn hole. You learned not a thing over the last 4+ years.
40:1 leverage implies a capital ratio of 2.5%, this is absurd, no bank is allowed that much leverage. "Leverage" has nothing to do with reserves, it has to do with capital.
The point of Ram's article is that Reserve ratios are basically irrelevant (like the title says)
This focus on the "reserves" I believe comes from the false notion that banks "lend out the reserves". Banks dont "lend out the reserves".
From Ram's: "A rise (reduction) in reserve requirements raises (lowers) the cost of obtaining funds to place in loans financed via additional reservable deposits, in the manner of an indirect tax."
(A bit out of paradigm imo, but you can still see how) Banks reserve requirements are driven by deposits, for imo misguided policy/regulatory purposes.
Matt, I hate to break this to you, but the FED is levered better than 40 to 1. Explain these ratios of our 5 largest banks since they are so rosy. Capital to derivatives exposure is unbelievable.
Five Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?
Reserve requirements? The banks don't need no stinkin' reserve requirements because when they lever up 40 to 1 they can make a chitpile of money. Of course, a 3% loss wipes their sorry arses into the gutter if the game weren't rigged for them, but it's rigged so that they are made whole while the losses are shoved to the American Taxpayer where we take it in the corn hole. You learned not a thing over the last 4+ years.
ReplyDeleteAnon,
ReplyDelete40:1 leverage implies a capital ratio of 2.5%, this is absurd, no bank is allowed that much leverage. "Leverage" has nothing to do with reserves, it has to do with capital.
The point of Ram's article is that Reserve ratios are basically irrelevant (like the title says)
This focus on the "reserves" I believe comes from the false notion that banks "lend out the reserves". Banks dont "lend out the reserves".
From Ram's: "A rise (reduction) in reserve requirements raises (lowers) the cost of obtaining funds to place in loans financed via additional reservable deposits, in the manner of an indirect tax."
(A bit out of paradigm imo, but you can still see how) Banks reserve requirements are driven by deposits, for imo misguided policy/regulatory purposes.
Resp,
Matt, I hate to break this to you, but the FED is levered better than 40 to 1. Explain these ratios of our 5 largest banks since they are so rosy. Capital to derivatives exposure is unbelievable.
ReplyDeleteFive Banks Account For 96% Of The $250 Trillion In Outstanding US Derivative Exposure; Is Morgan Stanley Sitting On An FX Derivative Time Bomb?
http://www.zerohedge.com/news/five-banks-account-96-250-trillion-outstanding-derivative-exposure-morgan-stanley-sitting-fx-de
anon,
ReplyDelete40:1 what?
What are you talking about?
40 of what? to 1 of what?
Resp,