The Curious Case Of Bank Lending – Bank Deposits Exceed Bank Lending As Banks Seek The Federal Reserve For Help (Reverse Repos And Zoltan!)

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by confoundedinterest17

Typically, banks make money by taking deposits at low rates and lending to borrowers at higher rates (car loans, residential mortgages, business loans, etc.), earning a spread. And bank deposits are usually less than the loans that they extended. Until April 2020. Nothing has been the same since Covid.

This is really a unique time, since during the last recessions (2001 and The Great Recession) bank credit exceeded bank deposits.

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Banks can turn to The Federal Reserve at times like these. The Fed’s reverse repo program lets eligible firms, like banks and money-market mutual-funds, park large amounts of cash overnight at the Fed, at a time when short-term funding rates have fallen to next to nothing, and finding a home for cash has become harder.

But we are seeing a temporary decline in overnight reverse repo agreements.

In other words, there is too much cash in the system. And Credit Suisse’s Zoltan Pozsar calculates that we’re looking at $2 TRILLION of flow into Reverse Repos by the end of August.

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We shall see if The Federal Reserve ever leaves markets with the effective Fed Funds rate at 8 basis points and The Fed’s balance sheet at over $8 TRILLION. Now, THAT’S a lot of cash in the system.

Zoltan!

 

 

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