“The reason the banking system’s loan-to-deposit ratio has declined significantly, from over 90% pre-crisis to just 69% today, is banks aren’t lending the several trillion dollars printed by the Fed to implement QE…
…It can’t be that borrowers won’t borrow (as some claim), as banks are earning just 0.25% keeping these excess reserves at the Fed. Clearly, these banks could lend these funds out at much higher rates (even adjusting for risk), but still desirably low rates to borrowers. I am sure many borrowers would borrow, if the banks’ lending standards would just allow them to do so. Combine this fact, with a total collapse in the private MBS market (which was around $2 trillion at its peak) and a weak ABS market (another multi-trillion market at its peak) and credit is just not flowing to consumers and small and mid-size institutions, as it had for decades prior to the crisis. Pre-crisis, nearly all consumer and mortgage finance was provided by the Big Banks and securitization markets; both private and government-backed. Smaller banks really weren’t involved in consumer and mortgage finance, in any material way, for the country as a whole. Today, nearly all banks have become more conservative, the GSEs and FHA have become more conservative (and doubled or tripled their fees), and the private securitization market has yet to rebound. As a result, I think you could say that the Fed’s unprecedented monetary policies, including its massive QE program, isn’t having the desired effect. QE has temporarily increased the monetary values of stocks, bonds, real estate and other assets; making the wealthy feel wealthier (encouraging spending, speculation, and investment) and repairing bank and debtor balance sheets. And it has lowered borrowing rates for government mortgage borrowers (only, not private ones) and larger institutions, but this increase in income was “taken” dollar for dollar from investors (in existing securities) and savers (in bank deposits).”, Mike Perry, former Chairman and CEO, IndyMac Bank
Big Banks Won’t Drown in Liquidity Rule
By John Carney
After a long incubation period, a new liquidity standard for large U.S. banks has finally hatched.
The novelty of the so-called liquidity-coverage-ratio rule approved by bank regulators Wednesday means that there inevitably will be unintended costs as banks adjust their holdings to meet the new rule. The worst fears, however, appear to be overstated.
Running to nearly 400 pages, the new rule will require banks to have enough safe and readily saleable assets to withstand a 30-day period of stress. The idea is to create a reservoir that a bank could tap to meet withdrawals and replace sources of funding that may be unavailable in a crisis.
In combination with limits on leverage that regulators also approved Wednesday, that should decrease the likelihood of bank runs as well as improve the survival rate of banks facing such stress. In the worst cases, it should give regulators more time to prepare for the failure of a large bank.
The trade-off for this increased stability is potentially a slight reduction in the supply of loans and an increase in their cost, particularly for run-prone products like undrawn loan commitments. That could mean loan-to-deposit ratios, currently at historic lows, don’t eventually rise to a more normal level. And since the assets used to meet the required ratio tend to be low yielding, the rule could drag on bank earnings.
Awareness that banks hold a sufficient buffer of high-quality liquid assets should, however, have a positive effect on bank funding costs. That would ease the pressure on earnings and lower the cost of credit. So the longer-term effect on lending is unlikely to be as strong as some of the rule’s critics have warned.
The net effect will be positive for the economy if it helps prevent another costly financial crisis.