Re: Takes "Open Mouth, Insert Foot" to an entirely new level

Mike wrote:
On Fri, 03 Oct 2008 05:50:52 -0500, John Galt wrote:

Mike wrote:
On Thu, 02 Oct 2008 21:33:09 -0500, John Galt wrote:

Mike wrote:
On Thu, 02 Oct 2008 18:35:02 -0500, John Galt wrote:

In America, outside
Wall Street, the banks have lent 96 cents for each $1 of deposits.
i thought the commercial bank reserve requirement was 10% so i looked
it up:

http://www.federalreserve.gov/monetarypolicy/reservereq.htm

that says it's 0% for the first $10M, 3% for $10-44M and 10% above
$44M. so to get the 96 cents figure quoted in the article that means
the average bank must only have $57M in deposits:

(10*.00 + 34*.03 + 13*.10)/57 = 4% reserve requirement

is that right?
I'll take your word on the math, but I can tell you that a bank with
only 57M in deposits is a miniscule bank. I suspect there's more to it
than that.

JG

that makes a huge difference in the amount banks can have loaned out.
with a reserve requirement of 10%, $100 billion of reserves allows $1
trillion in loans whereas 4% allows $2.5 trillion in loans (on the same
amount of reserves). with the investment banks at 30x1 leverage and
commercial banks at 25x1 (loan to reserve ratio) it's no wonder the
financial industry got so screwed up. imo, a regulatory induced
migration back to the vicinity of 10x1 is in order.
Ergo how mark-to-market got caught up in all this. In an appreciating
market, banks love mark-to-market because they can continually reprice
the mortgage asset to the last sale, increasing the amount of money they
can loan. It's one thing to have a cash reserve of $100000; even better
to have an security that you bought for $100,000 which is reprcing up at
20% per year.

JG



yes, the banks would certainly love to loan out every last dollar of deposits to increase profits, however, some level of reserves need to be available for when depositors want access to their money. just how close to zero the reserves can get before the whole system breaks down seems to be the experiment they have been conducting and, imo, they have reached the limit. time to back off a bit and raise the reserve requirement before all hell breaks loose if it hasn't started already.

Yes. And that's why the regulation called for in this situation is not very far-reaching, really. All you need to do is beef up reserve requirements for existing financial instruments and add some for those that don't have them presently. If you add reserve requirements, the air comes out of these balloons.

JG








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