Tuesday, August 18, 2009

WHY ARE BANKS HOARDING CASH?

One Worlder Robert Peston has explained how and why the banks are hoarding the cash created created out of nothing by the Bank of Ingerland to supposedly get the economy moving again via QE.

It's not working.

They're hoarding it instead of lending it to personal and business customers.

But there's more to this than we know.

For years they've treated us like shit while they went on a reckless gambling spree.

In September in the USA it is the end of the financial year, when many end-of-year reports will have to be released. If we've been lied to again and those results are disastrous, as many expect, then expect a second dive into depression.

And the banks are gonna need all that QE money, instead of lending our money back to us.

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From http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/08/what_rbss_results_say_about_qe.html

What RBS's results say about QE

Robert Peston | 09:52 UK time, Friday, 7 August 2009

If you want to know why quantitative easing may not be working - in the sense that it hasn't led to a conspicuous increase in lending - this morning's financial results from Royal Bank of Scotland give a pretty good clue.

I'll explain.

In simplified terms, quantitative easing is the process of buying gilts from investors - to date some £122bn of them.

Let's assume, which isn't necessarily the case, that when the Bank of England buys gilts from investors the cash ends up in the British banking system.

Well, if the cash is classified by the banks as a customer deposit, which it might be if the investor that has sold gilts to the Bank of England happens to be a relatively small and unsophisticated institution, then the banks say "yippee".

Because that deposit increases the ratio of supposedly stable customer deposits to loans and advances: it reduces the banks' dangerous dependence on flighty, unreliable wholesale funds.

Which genuinely matters, because - as you'll recall - one of the reasons our banking system came so close to collapse last autumn is that our banks had become too dependent on wholesale sources of funds, which dried up after the collapse of Lehman Brothers when investors took fright and took flight.

Take Royal Bank of Scotland. Today, its chief executive has set a target to reduce its ratio of loans to deposits from 156% to around 100% by 2013.

That will require it to reduce its dependence on wholesale sources of funds by not far off £200bn over the same time period.

So when cash deposits come in, the instinct of Royal Bank of Scotland - and of other banks - is to say "thank you very much" and just sit on the cash, rather than lend it out.

And there's a similar story for Lloyds. In the six months from 31 December to 30 June, its ratio of loans to customer deposits has fallen from 166% to 152%, as it has simultaneously increased deposits by £20bn and reduced loans and advances by £25bn.

To reiterate, that reduction in these banks' respective ratios of loans to customer deposits is a deliberate policy.

Why? Well, when Lloyds and RBS increase their customer deposits and don't lend out the cash, they becomes a much safer place for their other depositors.

So a benign effect of QE may have been to increase the security of our banks for savers - even if that's not what the policy was intended to achieve.

But actually much of the cash raised by institutions from selling gilts almost certainly isn't converted into customer deposits at banks.

More likely is that institutions have lent it to banks and other financial companies in the form of wholesale market loans - the kind which the banks are supposed to be weaning themselves off.

If that is the case, then there is absolutely no chance that banks - already too dependent on wholesale funding - will lend the money out.

What's more, some of this money raised by institutions from gilt sales may have been lent to the banks in the form of short-term debt securities underwritten by the Treasury via the credit guarantee scheme.

In effect, there will have been a double public-sector subsidy for fund-raising by the banks, with little apparent consequential benefit in the form of lending into the real economy.

There is a final paradox in this tale of where all the Bank of England's money has leaked.

The banks may have used the additional cash deposits to purchase gilts, as they've been instructed to do by the regulator, the Financial Services Authority, which wants to see them holding much greater reserves of genuinely liquid, high-quality assets.

Let's look at Royal Bank of Scotland again. It has a new target to increase its "liquidity reserve" from £90bn to around £150bn. And that means it may well buy an additional £60bn or so of gilts.

So one lot of gilt purchases, by the Bank of England, is simply spurring a separate lot of gilt purchases by the commercial banks - for which the government should be profoundly grateful, because it helps finance the humongous public-sector deficit, but prevents any of the cash being lent to businesses and households that may need it.

Does that mean QE has been a waste of time?

Probably not.

Without it, there might have been even less lending into the real economy.

But unless and until the banks' ratios of customer deposits to loans and advances have returned significantly nearer to parity, QE is almost certainly not going to spark much in the way of incremental lending to non-financial companies and personal customers.

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