There is good news and bad news from the banking sector. The good news is that all is quiet. The bad news is that all is quiet.
In terms of the goods news, “quiet is good” because there have been no new “discoveries” of bad loans or bad assets that will shock the financial system. We continue to hope for silence here even with the continued growth in the unemployed, in bankruptcies, in delinquencies, and in loans coming due that need to be re-priced or re-financed.
In terms of the bad news, there is still no life in bank lending. If we are going to see a pick-up in the economy and a return to growth the banking sector is going to have to start lending again, especially in the commercial sector. Commercial and industrial loans were down by 3.3%, year-over-year in June, and in the last five weeks, all in July, these loans have fallen by another $24 billion.
Real estate loans peaked in May 2009 and have declined ever since, dropping approximately $60 billion through the end of July. Even the amount of home equity loans has declined steadily since reaching a peak in May. Consumer loans continue to drop, with credit card debt falling for the fifth consecutive month.
Total bank assets are still up on a year-over-year basis by 7.5%, but the main balance sheet increases are in cash assets, primarily deposit balances at Federal Reserve Banks, and in Treasury and agency securities.
Banks are still not doing any lending to speak of and are staying very, very liquid.
On the liability side of commercial bank’s balance sheets, demand deposits are still rising at a very rapid pace, about 38% on a year-over-year basis. Other checkable deposits at commercial banks are rising at a relatively rapid pace, 19.3%, but a surprising bit of information is that other checkable deposits at thrift institutions have only increased by a modest amount, by 2.9%, year-over-year.
Checking into the thrift institution situation a little further we find that savings deposits at thrift institutions have actually declined year-over-year at a 7.9% rate and small-denomination time deposits at thrift institutions have fallen at a 14.3% rate over the same time period. These balances at commercial banks have increased at a 16.3% rate and a 15.3% rate respectively.
Two shifts seem to be taking place in depository institutions. First, there seems to be a major movement of funds from thrift institutions to commercial banks. Second, individuals are holding more and more of their funds at commercial banks in demand or other checking accounts relative to time and savings accounts. One additional note to this: retail money funds have dropped by about 11.6% on a year-over-year basis indicating another shift taking place from non-banks to commercial banks.
Another trend continues to hold and that is in terms of currency holdings outside of the banking system. Year-over-year, the currency component of the money stock continues to rise in excess of 10%. Like the banks, the public wants to remain as liquid as possible in order to be able to meet the contingencies people experience in uncertain times.
This movement of assets is reflected in the aggregate money stock figures. The Fed publishes money stock growth figures using 13-week averages. On a year-over-year basis using the thirteen weeks ending July 27, 2009, the narrow measure of the money stock, M1, has increased at a 17.0% annual rate whereas the broad measure of the money stock, M2, has increased at an 8.7% annual rate. It is obvious that the growth rate of both measures is dominated by the huge annual rate of increase in demand deposits as people have re-allocated their funds from time and savings accounts to checkable deposits in commercial banks.
This shift is even more obvious if one looks at the relative rates of growth over the past three months. M1 growth is 15.4% while M2 growth is 3.1%, indicating that much of the re-allocation of funds has come in the past three months.
In terms of the Fed’s assets, there continues to be a runoff of dealers using the Commercial Paper funding facility indicating some easing of liquidity in the commercial paper market. This decline was expected to occur as the commercial paper market improved and this is a hopeful sign. Central bank liquidity swaps also continued to decline indicating an additional strengthening of foreign exchange markets around the world, another hopeful sign.
Both of these declines in the Fed’s balance sheet resulted in reserves leaving the banking system. All it means, however, is that excess reserves in the banking system declined. These excess reserves still remain well above $725 billion, while required reserves total around some $65 billion.
As reported before, the banking system seems to be coming out of the big financial bust in typical fashion. This is why the claim that things are quiet in the banking system is a good thing. We can only hope that this peace and quiet will continue.
There will continue to be bank failures. We reached 72 for the year this last week, but there were no surprises in the increase, they had already been identified. One concern arising from the figures presented above is the health of the thrift industry. With funds leaving the thrift industry as reported, what pressure is this putting on thrift institutions in terms of their assets and solvency?
The big question remains: “When are the commercial banks going to start lending to businesses again?” To answer this, we need to keep a close eye on the information coming out of the banking sector. My guess is that banks will not be too quick to start lending to businesses again. There are questions about how brisk the “back-to-school” season will be and there may not be much increase in lending during this time. The next really big test after that will be the holiday season that begins in October and early November. It will be interesting to see how lending activity behaves at this time.
The Fed continues to keep funds going into the capital markets in terms of acquiring Treasury securities and mortgage-backed securities while letting some of the other facilities that were created to support liquidity in different specific areas of the financial markets run off as it was hoped that they would do. As long as the banking sector remains relatively peaceful, this seems to be the way the Fed wants to act. Then as liquidity picks up in the stressed areas of the capital market, the Fed plan is to sell these other securities back to the private sector and reduce the size of its balance sheet.
The good news in the banking sector is that things are relatively quiet. May they stay that way. In my view we will have to wait a while before we see the banks beginning to refuel businesses and the real estate sectors.
Showing posts with label Federal Reserve policy. Show all posts
Showing posts with label Federal Reserve policy. Show all posts
Sunday, August 9, 2009
Sunday, July 19, 2009
What Do The Money Stock Figures Tell Us?
The two basic measures of the money stock continue to grow at rapid rates. The broader measure of the money stock has continued to grow at a relatively steady pace. In the fourth quarter of 2008, the M2 measure of the money stock grew at an 8.2% year-over-year rate of increase. (I use non-seasonally adjusted data in all cases relying on year-over-year calculations to take account of seasonal movements in each series. Thus, I don’t rely on the artificial statistical adjustments that produce the seasonally adjusted series.) In the first quarter of 2009 the M2 year-over-year rate of growth was 9.5% but the rate of increase dropped back down to 8.7% in the second quarter.
These growth measures are high historically, but only modestly higher than the rates of growth that were being achieved before the Federal Reserve began pumping up its balance sheet in September and October of 2008. The important thing is the changes that have taken place within this broad measure of the money stock. The movement has been from time and savings accounts to transaction accounts as people have moved their funds from accounts that are interest-earning to those that are basically used to make payments.
The first look at a smaller component of the M2 money stock is to examine the performance of the M1 money stock. For the first half of 2008, the M1 money stock hardly grew at all on a year-over-year basis. But, in the third quarter this measure began to increase as the financial meltdown occurred. For the third quarter the M1 money stock grew at a 3.1% year-over-year pace, but this jumped up to 11.4% in the fourth quarter, followed by a 13.4% growth rate in the first quarter of 2009 and a 16.3% rate of increase in the second quarter.
The monthly year-over-year growth rates for April, May, and June of 2009 were 15.1%, 15.3% and 18.4%, respectively. Something is happening within the M1 measure of the money stock that is not happening to the non-M1 component of the M2 money stock which remained relatively flat during these three months.
What is growing?
Well, demand deposits at commercial banks grew by 44.3% year-over-year, in June 2009, up from 33.1% and 34.5% in April and May, respectively. This is also up from slightly under 30.0% for the first quarter of the year. People and businesses are moving their money into transactions accounts in order to have funds available to meet their day-to-day spending needs.
We see a similar jump in “Other Checkable Deposits” at commercial banks and thrift institutions as these accounts were growing by more that 12.0% in June 2009, up from 6.5% and 7.2% in April and May, respectively. In the first quarter of the year these accounts were only increasing at around a 2.5% to 3.0% rate of growth.
Another component of the M1 money stock is also increasing quite rapidly. Coin and currency held outside of commercial banks has been steadily rising by more than 11.0% year-over-year every month in 2009. A year ago the pace of growth in coin and currency was about one-half of what it is now. Again, one can only draw the conclusion that people are buying more and more things with cash now than they were a year ago. This is another indication of the fact that so many people are unemployed or are going bankrupt.
Where are the funds going into transaction accounts coming from?
The sources of these shifts seem to have been from primarily two areas, Small-denomination time deposits and retail money funds. There has been a drop of about $90 billion in deposits in retail money funds over the past twelve months. The decline in these accounts, year-over-year, is now about 8.5%. The rate of increase in small-denomination time deposits has dropped by 50% in the last six months and there has been an outflow of about $110 billion from these accounts since December 2008.
The conclusions one can draw from these data, I believe, are very clear. People and businesses have become much more conscious of their need to have cash and deposits available for meeting their daily living needs. People and families are moving funds from their small, low interest-earning accounts where they have not been earning much at all. These same people and families seem to be leaving funds in bigger accounts that earn higher rates of interest. It will be interesting to see what happens to these accounts in upcoming months if unemployment continues to rise and bankruptcies remain at high levels. In addition, businesses have found that other short term sources of funds are not available and so have had to become more liquid in order to satisfy their cash demands.
One could argue that the actions of the Federal Reserve have had little stimulative impact through the banking system since the rate of growth of the M2 measure of the money stock has only increased slightly so that the rapidly increasing rate of increase in the M1 measure of the money stock has resulted from individuals and businesses redeploying their short term assets.
This conclusion is reinforced by the information repeated in my July 16, 2009 post on “The State of the Banking System.” (See http://seekingalpha.com/article/149272-the-state-of-the-banking-system.) Commercial banks are not lending except in to consumers and just to consumers that have pre-arranged lines of credit like equity lines on homes and credit cards. This just supports the argument that people are doing what they can to make day-to-day ends meet. And, commercial and industrial loans have actually declined on a year-over-year basis. The argument can be made that no one is going to do anything that would lead one to conclude that economic units are going to increase their spending in a way that will stimulate the economy.
We need to continually watch what is going on in the banking sector. We are going to watch for further changes in behavior that might indicate the changing decisions of families and businesses. Of course, things could get worse and we need to watch for that. But, if things are going to get better, one place to look for changes in behavior is to watch where people are allocating their short term funds and whether or not banks are beginning to lend again. However, it doesn’t seem as if this change for the better will appear soon.
These growth measures are high historically, but only modestly higher than the rates of growth that were being achieved before the Federal Reserve began pumping up its balance sheet in September and October of 2008. The important thing is the changes that have taken place within this broad measure of the money stock. The movement has been from time and savings accounts to transaction accounts as people have moved their funds from accounts that are interest-earning to those that are basically used to make payments.
The first look at a smaller component of the M2 money stock is to examine the performance of the M1 money stock. For the first half of 2008, the M1 money stock hardly grew at all on a year-over-year basis. But, in the third quarter this measure began to increase as the financial meltdown occurred. For the third quarter the M1 money stock grew at a 3.1% year-over-year pace, but this jumped up to 11.4% in the fourth quarter, followed by a 13.4% growth rate in the first quarter of 2009 and a 16.3% rate of increase in the second quarter.
The monthly year-over-year growth rates for April, May, and June of 2009 were 15.1%, 15.3% and 18.4%, respectively. Something is happening within the M1 measure of the money stock that is not happening to the non-M1 component of the M2 money stock which remained relatively flat during these three months.
What is growing?
Well, demand deposits at commercial banks grew by 44.3% year-over-year, in June 2009, up from 33.1% and 34.5% in April and May, respectively. This is also up from slightly under 30.0% for the first quarter of the year. People and businesses are moving their money into transactions accounts in order to have funds available to meet their day-to-day spending needs.
We see a similar jump in “Other Checkable Deposits” at commercial banks and thrift institutions as these accounts were growing by more that 12.0% in June 2009, up from 6.5% and 7.2% in April and May, respectively. In the first quarter of the year these accounts were only increasing at around a 2.5% to 3.0% rate of growth.
Another component of the M1 money stock is also increasing quite rapidly. Coin and currency held outside of commercial banks has been steadily rising by more than 11.0% year-over-year every month in 2009. A year ago the pace of growth in coin and currency was about one-half of what it is now. Again, one can only draw the conclusion that people are buying more and more things with cash now than they were a year ago. This is another indication of the fact that so many people are unemployed or are going bankrupt.
Where are the funds going into transaction accounts coming from?
The sources of these shifts seem to have been from primarily two areas, Small-denomination time deposits and retail money funds. There has been a drop of about $90 billion in deposits in retail money funds over the past twelve months. The decline in these accounts, year-over-year, is now about 8.5%. The rate of increase in small-denomination time deposits has dropped by 50% in the last six months and there has been an outflow of about $110 billion from these accounts since December 2008.
The conclusions one can draw from these data, I believe, are very clear. People and businesses have become much more conscious of their need to have cash and deposits available for meeting their daily living needs. People and families are moving funds from their small, low interest-earning accounts where they have not been earning much at all. These same people and families seem to be leaving funds in bigger accounts that earn higher rates of interest. It will be interesting to see what happens to these accounts in upcoming months if unemployment continues to rise and bankruptcies remain at high levels. In addition, businesses have found that other short term sources of funds are not available and so have had to become more liquid in order to satisfy their cash demands.
One could argue that the actions of the Federal Reserve have had little stimulative impact through the banking system since the rate of growth of the M2 measure of the money stock has only increased slightly so that the rapidly increasing rate of increase in the M1 measure of the money stock has resulted from individuals and businesses redeploying their short term assets.
This conclusion is reinforced by the information repeated in my July 16, 2009 post on “The State of the Banking System.” (See http://seekingalpha.com/article/149272-the-state-of-the-banking-system.) Commercial banks are not lending except in to consumers and just to consumers that have pre-arranged lines of credit like equity lines on homes and credit cards. This just supports the argument that people are doing what they can to make day-to-day ends meet. And, commercial and industrial loans have actually declined on a year-over-year basis. The argument can be made that no one is going to do anything that would lead one to conclude that economic units are going to increase their spending in a way that will stimulate the economy.
We need to continually watch what is going on in the banking sector. We are going to watch for further changes in behavior that might indicate the changing decisions of families and businesses. Of course, things could get worse and we need to watch for that. But, if things are going to get better, one place to look for changes in behavior is to watch where people are allocating their short term funds and whether or not banks are beginning to lend again. However, it doesn’t seem as if this change for the better will appear soon.
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