Sunday, July 5, 2009

So where is the TARP money and all the other cash?

We've been getting numerous e-mails questioning what has happened to the TARP funds the banks still hold. Plus what about all the new debt banks have issued including the FDIC guaranteed debt. What happened to recent earnings? Why aren't banks lending? Where's the cash?

Let's see if we can shed some light on the issue using some data from the Fed. TARP funds (though helped add equity to banks) are actually a drop in the bucket in comparison to the overall deposits at banks, which continue to grow. Deposits are now at some $7.5 trillion:

What about the lending then? How have bank assets grown to date? Here is a chart that shows all the loans historically outstanding on banks' balance sheet:

The lending has leveled off at about $7 trillion. This includes corporate as well as residential and consumer loans. But relative to deposit growth one would expect to see more lending. Here is the total loan-to-deposit ratio:

So where are the banks placing all their cash? And NO it's not in the treasury certificates the two guys caught in Italy were carrying as many have suggested.

One place to look is at bank holdings of government or agency bonds - liquid paper held for emergency purposes that would not require significant amounts of capital. The amounts of liquid paper held. actually took a nose dive last year as banks were selling all liquid securities to raise cash. But now this is where some of the bank cash is going:

The most striking change however is the cash banks hold at the Fed. Banks are required to always hold some amount at the Fed as reserves (reserve requirements). But now banks use the Fed as a parking place for their cash, holding far more than the reserve requirements. It's about $800 billion in total vs. under $60 billion required, as the chart below shows:

Now that the Fed pays interest on cash deposits (a recent change), this in fact is the ultimate safe place to dump cash. It's a riskless deposit without any capital requirement that pays some interest. The Fed now pays 0.25% (annualized - which is better than T-bills) to banks, and the banks pay their depositors probably half that (unless a bank wants to grow deposit base and set an attractive rate).

So why hoard all that cash? Here are 3 reasons:

1. The demand for loans is actually not that great - at least for loans the banks want to underwrite. Companies that are profitable don't have immediate growth plans and don't want increase leverage. Why would they in this environment? Those who can issue bonds and pay down their loans have been doing so. Consumers who qualify for a mortgage are not in a hurry to buy either. Without the securitization market, banks have a limited appetite for other consumer loans unless they get TALF help (which they have been utilizing somewhat).

2. Banks are still paranoid about deteriorating assets and any unexpected growth in balance sheet. For example here is a chart that shows home equity loans on banks' balance sheets. Desperate consumers are drawing on home equity lines as they too try to hoard cash or just trying to survive (sometimes trying to get ahead of their bank cutting the line.) This is a scary trend for banks and they need to reserve for it to avoid finding themselves overleveraged again.

3. Banks are trying to deleverage. They are trying to raise new equity and a nice helping of cash on the balance sheet makes it easier for them do that. Here is a chart of overall bank net equity. It had an ugly dip last year and banks just don't want to be near there again. It's a race against time: recapitalization vs. asset deterioration.

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