The Fed Wants To Stimulate Bank Lending, Charts Show The Fed Failed

The Fed's massive QE program has failed to stimulate bank lending. Let's discuss the evidence and more importantly why it's happening.

Bank Lending Since the Pandemic 

Loans and Leases at Commercial Banks vs Deposits Detail 2021-03

 

What's Going On?

 

That's a good question and poor answers are easy to find. 

For example, consider the Bloomberg headline that inspired this post: Biggest U.S. Banks Pile Into Cash, Securities as Loans Fall

The teaser: "The four largest U.S. banks sucked in a tremendous $919 billion in additional deposits last year during the height of the pandemic. Here’s what they did with it."

Three Word Synopsis 

Wrong, Wrong, Wrong

Banks did not "pile into cash". Nor did they "suck in" deposits. 

Rather, the Fed crammed money down the throats of commercial banks via QE policy although the banks have little demand for loans.

What's Behind the Surge in M1 Money Supply?

On January 7, 2021, in What's Behind the Surge in M1 Money Supply? I explained the surge in M1  is due to QE.

I later found a confirming New York Fed article with nearly the same name. Here is the key snip from the New York Fed.

M1 growth is highly positively correlated with the growth in reserves generated by Fed asset purchases. The reason for this is simple: Reserves held with the central bank are assets for banks. As the Fed expands reserves, banks must either sell other assets (keeping the overall level of assets unchanged), issue more liabilities or equity (expanding the level of assets), or some combination of the two. 

Banks Don't Lend From Reserves

The above charts are misleading in that banks do not lend from reserves in the first place.

Rather, banks lend when they believe they have creditworthy customers who seek loans. Alternatively, banks will lend if the assets pledged as collateral will cover any expected losses.

The banks can and do make mistakes regarding creditworthiness and collateral as happened with housing loans prior to the Great Recession.  

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