America’s banks have too much cash | The Economist

America's banks have too much cash

Abundant liquidity is meant to help markets. It might soon cause trouble

WHEN BOND markets seized up in the spring of 2020 the problem was a shortage of cash. A global dash for dollars caused bond yields, which move inversely to prices, to spike. It sent the greenback soaring in currency markets. And it caused trading in Treasuries, usually the world's most liquid market, almost to dry up. Today the opposite problem looms: a surfeit of money. It stems from the Federal Reserve's response to the crisis last year. The central bank calmed markets by buying enormous quantities of bonds with newly created cash, and has since continued its purchases, at a current pace of at least $120bn per month. The newfound abundance of dollars is causing headaches for banks and investors, which could soon get a lot worse.

A central bank buying a bond for cash sounds like a simple swap of asset for asset. In fact it often swells the banking system. When the Fed buys assets in the secondary market, say from a pension fund, it cannot pay the fund with the electronic money it creates, because only banks can hold these so-called “reserves”. Instead, the fund gets a newly created deposit at its bank, and the bank gets the newly created reserve at the Fed. The bank ends up bigger, with a new liability and a new asset. The same thing also happens when a bank buys freshly issued debt at a Treasury auction, then sells it to the Fed. When the government spends the funds it has raised, such as by sending cheques to households or paying its staff, the banking system grows.

Live News Feed

News Feed featuring the top articles in the finance world from global publications such as Financial Times and the Economist.

Click here to view

Powered by © Neon Accelerator

From the Web

Railroads Strike a $25 Billion Merger | The Wall Street Journal

| From the web

Canadian Pacific agreed to acquire Kansas City Southern in a merger valued at about $25 billion that would create the first freight-rail network linking Mexico, the U.S. and Canada.

Read More >

Warren Buffett Would Say Do This With Your $1,400 Stimulus Check | MoneyWise

| From the web

The billionaire isn't getting a payment, but he has a strong opinion on how to use yours.

Read More >

A Fed With No Fear of Inflation Should Scare Investors | The Wall Street Journal

| From the web

Markets are only just waking up to the implications of an important shift in Federal Reserve policy.

Read More >

As Blackstone Barrels Toward Trillion-Dollar Asset Goal, Growth Is In, Value Out | The Wall Street Journal

| From the web

Jonathan Gray, Blackstone Group’s day-to-day leader, is guiding a shift at an investment powerhouse that made its name buying into undervalued companies.

Read More >
Go to Top