The Federal Reserve continues to pump reserves into the commercial banking system and the majority of these reserves are getting into the hands of foreign-related financial institutions and then heading offshore.
On May 25, 2011, cash assets on the books of foreign-related financial institutions was just under $950 billion, up about $200 billion from April 27, 2011. On May 4 cash asset at foreign-related financial institutions were 50 percent of all the cash assets held by commercial banks in the United States.
Now, on May 25, 55 percent of all the cash assets held by commercial banks in the United States were held by foreign-related financial institutions.
Please note, that on December 29, 2010, before QE2 really swung into action, these foreign-related institutions held only about one-third of all the cash assets on the balance sheets of commercial banks in the United States.
The increase from December 29 to the present has been roughly $590 billion.
During this same period cash assets at all commercial banks rose by just under $660 billion, so that almost 90 percent of the cash assets pushed into the banking system by the Federal Reserve has gone into the coffers of foreign-related financial institutions!
From the Fed’s own balance sheet we see that Reserve Balances with Federal Reserve Banks, which closely tracks the excess reserves in the banking system, rose by $572 billion. Almost all of this increase in excess reserves in the banking system has come about through the Fed’s acquisition of over $500 billion worth of U. S. Treasury securities.
And, what have these foreign-related financial institutions done with the funds?
There is an account called “Net (Deposits) Due to Related Foreign Offices.” On December 29, 2010 this account, on the reported statistics was a negative $420 billion. That is, this was not money due to “related foreign offices” it was the money that “related foreign offices” had allocated to the United States office. That is, it was an asset of the bank and not a deposit liability.
On May 25, 2011, this negative number had turned into a positive number, it became a liability of the United States branches to “related foreign offices”, and this number was slightly over $86 billion. This represented a swing of $506 billion!
In essence, cash assets at these foreign-related institutions rose by about $590 billion since December 29 and $506 billion of this increase went to “related foreign offices.”
This looks a lot like the “pump” for the “carry trade”. (http://seekingalpha.com/article/270074-fed-continues-to-pump-reserves-into-foreign-related-institutions-in-the-u-s)
And, where do we pick up some of the results of this “carry trade” action?
Check out the Wall Street Journal last week, “Big Banks Cash In On Commodities,” (http://professional.wsj.com/article/SB10001424052702304563104576359704074143190.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj) “Wall Street is tapping a real gusher in 2011, as heightened volatility and higher prices of oil and other raw materials boost bank profits.”
“A group of 10 large bans saw their commodities revenues increase by 55% in the first quarter. “
And, who says that the Federal Reserve is not underwriting world commodity inflation? And, who says that the Federal Reserve is not underwriting the profitability of the big banks and producing even bigger banks that are too big to fail?
This is my July edition of the QE2 Watch, following up my June edition, see http://seekingalpha.com/article/268809-qe2-watch-banking-system-still-not-fully-engaged. The Fed continues to do what it said it was going to do, purchase about $600 billion in U. S. Treasury securities by June 30, 2011.
From December 29 through June 1, the Fed has purchased $516 billion U. S. Treasury securities. Roughly $105 billion of these have gone to offset the decline in the Fed’s portfolio of Federal Agency Issues and Mortgage-backed securities. Thus, the net increase in the Fed’s portfolio of securities has only been about $415 billion.
But, the United States Treasury has drawn down $195 billion from its deposit account at the Fed related to “Supplemental Financing Account and this has put $195 billion of reserves into the banking system over the last five months.
The combination of the two, $415 billion and $195 billion, comes to $610 billion and accounts for all of the increase in reserve balances at Federal Reserve banks, the proxy for excess reserves, of $570 billion.
The bottom line on this is that the Federal Reserve and the Treasury Department are seeing to it that the financial system is awash with liquidity…even though the largest amount of the funds are going offshore.