Tuesday, January 29, 2008
negative bank reserves
Total reserves for two weeks ending January 16 are $39.988 billion. Inquiring minds are no doubt wondering where $40 billion came from. It's a good question. The answer is the Term Auction Facility. You can see that figure in Table 1 of the H3 release, accessible through the link above.
Were it not for the Term Auction Facility, banks would have had to raise $40 billion in capital by selling assets or some other means. We will look at "other means" in just a moment.
For now, the Fed is not disclosing who is borrowing under the Term Auction Facility, probably out of fear that people just might find out what banks are capital-impaired and by how much.
at least as shocking as the net free (borrowed) reserves chart is the straight non-borrowed reserves chart -- the data mish is highlighting in the table indicates that the next datapoint here will be the first negative one in the series.
no wonder then, as mish noted previously, that money center banks have more or less quit lending to anyone, regardless of situation, in an effort to hoard capital. a new example is that countrywide (probably among many others) has begun suspending previously-extended HELOCs. the fed is literally maintaining the static solvency of the system at this moment. if it were to withdraw its anonymous auction facility, it's likely that asset sales and bank failures would begin more or less immediately. it's not that the banks would have no other recourse -- the old discount window is there, after all -- but the lack of anonymity could very well spark bank runs that would destroy the banks that tapped it, as the data here point to conditions well into insolvency for many banks.
that won't happen, of course. but the hard realization is that the solvency situation is not static -- it is dynamic, and the fed may very well end up bumping into the limits of what it can do as debt default becomes so common as to gain social permission.