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posted by martyb on Tuesday June 15 2021, @07:30PM   Printer-friendly
from the I'll-take-it! dept.

Banks to Companies: No More Deposits, Please:

U.S. companies are holding on to billions of dollars in cash. Their banks aren’t sure what to do with it.

When the coronavirus pandemic hit last year, corporate executives rushed to raise money. Banks have been holding that cash ever since, and because companies are reluctant to borrow from them, they can’t turn it into income-generating loans. That has weighed on banks’ profit margins, and some have started pushing corporate customers to spend the cash on their businesses or move it elsewhere.

Bankers say they thought the improving economy would reduce companies’ desire for holding cash, but deposit inflows have continued in recent weeks. Chief financial officers and treasurers, many still wary of the pandemic’s impact, say they aren’t ready for big changes, even if they earn little or nothing on their deposits.

[...] Top of mind for many big banks is a rule requiring them to hold capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.

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  • (Score: 4, Informative) by Anonymous Coward on Tuesday June 15 2021, @08:34PM

    by Anonymous Coward on Tuesday June 15 2021, @08:34PM (#1145655)

    As best I understand it, the problem is that your cash in a bank is the bank's liability.  I promise this will get somewhere, but think back to the mortgage crisis.  The bank's income stream was your liability, your mortgage.  The mortgage crisis happened in part because we had only a few giant institutions who were shoving the risk of the mortgages out the back door while buying up that same risk in the front door.  In order to protect themselves from bad loans, banks got a whole bunch of new restrictions that limited their ability to make out new loans or convert their liability, your cash, into an asset.  Furthermore, they seem unwilling to do so for reasons unknown (except to really rich people).  One last brief aside, the way banks deal with your cash being a liability is via owning 2-3 year treasuries that pay 0.x% currently and then they pay you some smaller % of interest in your savings you deposited with them.  Now with that, we can tackle your question.

    The reason that moving banks doesn't work is that the banking system is really made up of about 5 big banks.  Mega corporations have to use these big banks because the small banks would be swamped by their size.  Like how mortgage risk was spread around the 5 big banks in crazy methods, the liabilities of banks get spread around too.  They already know how to trade with each other, moving liabilities around via asset swaps (treasuries), even if they are not actually swapping the deposits.  There is in effect, too much currency relative to assets (for those who have large balance sheets) in the system right now, and so the natural interest rate for the US gov't 2-3 year bonds should be negative, due to excess demand.  That would mean everyone would have negative interest rates and would pull cash out the system.  The problem there is you'll just put it under the bed, whereas the fed wants you to go spending it.  Losing the purpose of a bank, to hold that cash is obviously bad for banks.  So the fed is giving the banks an out via reverse repo so they get a 0% interest rate, rather than negative, to keep the banks alive.  That is the plumbing as I understand it.

    On a more speculative side, but perhaps interesting let me add a few side comments. If you buy into MMT, the other ways to delete the excess cash is to tax it away, but that is beyond the fed's ability to implement and is where predicting what will happen next becomes hazy. The other unexpected element to this is that banks create ("print") money via credit creation. That is to say, they add money to your account where money didn't exist before (See Richard Werner's studies on this). In theory the banks basically are a management mechanism for running the economy. This works great when there are lots of little banks, all local, who know who is trust worthy to give money to and who isn't (ala It's a Wonderful Life). That is to say, when they assess on character and community needs. As big business and big banks have expanded to kill many of the local banks off, that is dying off. Much of the alt currencies and anti-1%ers are diagnosing this problem where the system doesn't scale up well because the big banks only really deal with big clients. They created a bunch of credit in Feb/March 2020 (printed money) when every business accessed their revolving credit. Now the businesses realize they can fire more workers and have less real estate (work remotely, etc.) they need less cash than before. Yet the businesses also know that this pandemic playbook is pretty hard to predict, there just isn't a map for this. So they want the cash for safety and they want the bank to deal with it. But the bank's constraints make it difficult, because that + stimmy money are pushing on the constraining rules the banks have to follow. Outside of the stimmy money, much of the cash the banks are dealing with is credit creation they made. They just aren't built to hold that money, they are built to see it go somewhere (ala velocity of money). Thus the system is contorting to deal with it.

    NOTE: I'm not a banker, accountant or any kind of expert, just a dud who has been studying this for a while and thinks that the models they have might be useful.

    - JCD

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