monetary factors in banking crisis
Emil Pulsifer
I'm trying to understand the role of bank reserves in the banking
system crisis.
According to Federal Reserve data (see first hyperlink at bottom)
November 2007 was the last normal month for non-borrowed bank
reserves, with 42249 (millions of dollars). December it was down to
27243, then in January 2008 it was down to (-)3510 (yes, negative); by
July it had reached (-)122331.
During this time, both required reserves and the monetary base
remained in their normal (pre-12/07) range.
Total bank reserves also remained in their normal range during this
time, evidently as a result of borrowing. Normally, "non-borrowed
reserves" means not borrowed from the Fed, but I don't understand the
concept of negative non-borrowed reserves, which seems to derive from
an accounting convention I'm not familiar with. (Please explain.)
My understanding is that the U.S. Government's "easement" policy (in
which large amounts of funds were added to bank reserves and thus the
monetary base) didn't begin until later (mostly taking place between
September 2008 and December 2008).
I want to understand where systemic banking reserves went during this
period: the fact that banks had to borrow hugely to keep their total
reserves in line with required reserves suggests a large and
continuing reserves drain over this period. There are a variety of
public, Fed, bank, and foreign actions that decrease reserves (see
second hyperlink below).
What happened to the bank reserves that had to be replaced by borrowed
reserves? Were banks using these to cover their liabilities during a
period when asset values were tanking? Who or what received these
funds? In order for systemic bank reserves to decrease, it seems that
reserves would have had to leave the banking system and enter either
U.S. non-bank financial institutions or foreign institutions.
http://www.federalreserve.gov/releases//h3/hist/h3hist1.htm
http://en.wikisource.org/wiki/Modern_Money_Mechanics/Bank_Reserves%E2%80%94How_They_Change