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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: pogohere who wrote (96378)	4/12/2009 9:05:50 AM
From: Haim R. Branisteanu	Read Replies (3) \| Respond to of 116555

where did you post a link to "The Roving Cavaliers of Credit" I think his analysis is basically flawed related to the money multiplier of a depositor. The bank need 10% of equity it can not use the depositor money and just lend out 90% of it. If a bank has $100 in equity and a depositor deposits $100,000 the bank can only lend out $1,000 and not $90,000 the remaining $99,000 the bank can buy treasuries but no more than the value of the remaining deposit. The depositor can leverage its deposit by 20 by buying treasuries (5% margin needed), but the bank can not. In real life those lines are getting blurred and mark to market only made things worse when the market went up (yield down) the bank equity went up and the bank was able to lend out more, based on the appreciation of the tresuries it held (increased bank equity) - now we are in reverse Investing in AAA rated MBS’s or CDO’s and buying CDS’s AAA rated also increased the bank equity very substantially which enabled the bank to lend out more etc. and that is the root of the credit debacle – mark to market in a credit bull market and ignoring the present value of the debenture the bank invested into, which debenture value remained the same by maturity!! correct me if I am wrong

To: pogohere who wrote (96378)	4/12/2009 10:48:11 PM
From: mishedlo	Respond to of 116555

Keen states that banks needn't maintain reserves against commercial lending. I disagree Mish

To: pogohere who wrote (96378)	4/13/2009 12:15:14 AM
From: bluezuu	Read Replies (1) \| Respond to of 116555

Below is from the fed document Keen footnoted. ----------------------- 13. The reserve requirement system in the United States 13.1 Reservable liabilities: RRRs are based on types and sizes of deposits at depository institutions. Currently only deposits in net transaction accounts are subject to positive required RRRs (see footnote 1 to table 12 in the appendix for definition of net transactions). RRRs vary with the average amount of a depository institution's daily net transaction deposits in a MP. Non-personal time and savings deposits, and net Eurocurrency liabilities are currently subject to zero RRR. 13.2 Required reserve ratios (RRRs): Progressive RRRs are applied to the averages of net transaction deposits (NT) in the MP. 0% for NT up to reserve exemption level ($8.5 million for 2007); 3% for NT above reserve exempt level up to low reserve tranche level ($45.8 million for 2007); 10% for NT above low reserve tranche level.37 13.3 Reserve computation period (CP): Each CP spans 14 days for weekly deposit reporters, beginning every other Tuesday and ending on the second Monday. The CP for quarterly deposit reporters consists of 7 days, beginning on the third Tuesday of March, June, September, and December and ending on the following Monday. 13.4 Reserve maintenance period (MP): For weekly reporters, each MP comprises 14 days with a lag of 30 days from the associated CP, beginning on the fifth Thursday after the start of the associated CP and ending on the second Wednesday. For quarterly reporters, the MP comprises 7 days. The required reserves for each CP have to be maintained for 12-14 consecutive MPs, called "a reserve maintenance cycle", until the first MP associated with the CP in the next quarter begins. Thus, the first MP begins also with a lag of 30 days from the associated CP, beginning on the fifth Thursday after the start of the associated CP and ending on the following Wednesday. 13.5 Types of reserve requirements: LRR is employed, with a lag of 30 days from the start of a reserve computation period to the start of the associated maintenance period. 13.6 Calculation of required reserves: Required reserves are equal to the sum of the products of each of the three RRRs times the corresponding tier of the average of a depository institution's daily net transaction deposit balances in a CP. For example, a depository institution with an average of daily net transaction deposits of $100 million in a CP has required reserves equal to $6.539 million as calculated below: Required reserves = ($8.5 million x 0.0) + [($45.8 million - $8.5 million) x 0.03] + [($100.0 million - $45.8 million) x 0.10]. 13.7 Eligible assets for satisfying RR: A depository institution can apply its VC to meet up to 100 percent of its required reserves. A depository institution's remaining required reserves after applying its VC, called its reserve balance requirement, must be satisfied by its reserve balance at the central bank. 13.8 Carry-over of reserve balances: A depository institution with a reserve balance requirement is allowed to carry over some excess reserve or deficiency of required reserve balances in one MP to be used or made up only in the following MP. The allowable carry-over of reserve balances is limited to the greater of $50,000 or 4 percent of the total requirement (reserve requirement plus required clearing balance, if any), less clearing balance allowance, if applicable. federalreserve.gov