Financial strains show first sign of easing

February 17, 2009

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

The volume of excess reserves commercial banks are holding with the Federal Reserve System has declined by $275 billion (31 percent) over the last five weeks, in what could be the first sign of stabilization within the core of the banking system (https://customers.reuters.com/d/graphics/RESBAL.pdf).

Reserve holdings are still at exceptionally high levels, but a clear downtrend has emerged since the start of the year.

Average holdings in the week ending Feb. 11 ($603 billion) were $58 billion lower than the previous week ($662 billion) — the lowest level since the middle of November last year, and well down from the recent peak ($878 billion) at the turn of the year.

There has not been any offsetting increase in commercial banks’ other assets (Treasury securities, private securities and commercial credits) over the same period. So lower reserve holdings seem to be a sign of reduced fear and increasing confidence, as the immediate sense of crisis passes and banks feel comfortable holding lower liquid balances.

Bank reserves have not, so far, been drawn down to buy additional Treasury debt.

If excess reserve balances continue to fall in the next few weeks, it would herald the start of a cautious recovery in the heart of the financial system.

One comment

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It’s true US banks are holding more than their required reserves, but US banking reserves requirements are extremely low by most standards. Canadian Bank reserve requirements are 3 times higher than US banking requirements, and Canadian Chartered Banks are holding higher reserves than required. One of the reasons US banks fail everytime there is a recession, while No Chartered Bank has failed even in the 1930′s.

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