Tuesday, December 18, 2012

US banks hold $2 trillion more in deposits than loans

Bloomberg reports that US banks are holding $2 trillion more in deposits than loans.

This suggests that the financial system is awash in liquidity even if $1.5 trillion in deposits leave the banks with the expiration of the Transaction Account Guarantee program that extended deposit insurance to all non-interest bearing deposit accounts.

I would expect that deposits covered under this program would leave the banks and be used to purchase short term US treasury securities.  I expect this because there is no reason for the depositors to bet on the solvency of these banks when the frozen interbank lending market shows that other banks will not lend to these banks.

The effect of the withdrawal of deposits will be seen in the pricing of US Treasury bills.  It is entirely possible that interest rates will become negative as the depositors take their money out of the banks and use the funds to purchase US Treasury bills.

A negative interest rate would reflect the fact that the owners of the funds are more concerned about the guaranteed return of their funds than the return on their funds.  In effect, they are paying to have the government give them back their money at a later date.

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