Fed Interested in “Cash” at Foreign-Related Financial Institutions

Seems like the Fed is interested in something I have been writing on for at least four months: the cash assets that “foreign-related (financial) institutions have been accumulating during the period referred to as QE2. (link)

Reporting this morning in the Wall Street Journal, David Enrich and Carrick Mollenkamp claim that the“Fed Eyes European Banks” . “Federal and state regulators, signaling their growing worry that Europe’s debt crisis could spill into the U. S. banking system, are intensifying their scrutiny f the U. S. arms of Europe’s biggest banks…”

“Officials at the New York Fed ‘are very concerned’ about European banks facing funding difficulties in the U. S…the worry is that the euro-zone debt crisis could eventually hinder the ability of European banks to fund loans and meet other financial obligations in the U. S. While signs of stress are bubbling up, the problems aren’t yet approaching the severity of past crisis.”

Up to now, borrowing dollars hasn’t been a problem. “Thanks partly to the Federal Reserve’s so-called quantitative easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks, according to weekly Fed reports on bank balance sheets”

This is just what I have been reporting since early this year.

“Regulators are trying to guard against the possibility European banks that encounter trouble could siphon funds out of their U. S. arms.”

“Part of what is unsettling regulators and bankers is the speed at which funding can reverse direction. This spring, foreign banks were able to build up ample cash cushions, thanks largely to quantitative easing…”

In July, 2010, non-U. S. banks had $418.7 billion on reserve and collecting interest at the Fed, according to Fed data. By July 13 of this year, the total more than doubled, to about $900 billion. Some major European banks were among the main drivers of this trend, according to their U. S. regulatory filings.”

Again, you could have read it here first.

“In recent weeks, though, the cash piles at foreign banks’ U. S. arms have diminished…foreign banks’ overall U. S. cash reserves fell to $758 billion as of Aug. 3, the latest data available.”

One note on this, the figures on cash assets at these foreign-related financial institutions can swing fairly dramatically from week-to-week and August, in banking non-seasonally adjusted statistical series, can be very interesting.

Also, the buildup in cash assets at these foreign-related institutions began early enough this year that they could have been used for the “carry trade.” Interest rates were so low in the United States that borrowing here and investing at the higher interest rates that could be found throughout the world was being done by most of the large financial institutions in the world.

On June 28 of this year I wrote, “In essence, it appears as if much of the monetary stimulus generated by the Federal Reserve System went into the Eurodollar market. This is all part of the “Carry Trade” as foreign branches of an American bank could borrow dollars from the “home” bank creating a Eurodollar deposit. This Eurodollar deposit could be lent to foreign banks or investors and this would not change the immediate dollar holdings of the American bank. This lending and borrowing in Eurodollar deposits could then multiply throughout the world. And, the American bank might be the ‘foreign-related” institution mentioned above and included in the statistical reports.

Note that the original dollar deposit created by the Fed is still recorded as a deposit at one Federal Reserve bank no matter how much shifting around the borrowing and lending in the Eurodollar market occurs.

Thus, it appears as if the Federal Reserve pumped one-half a trillion dollars off-shore since the end of 2010!” (link)

So, there may be more than one reason for the build up of cash assets at the foreign-related institutions. This is why we need to keep our eyes open and look at a wide-range of data.

It’s interesting to me that the Fed did not seem worried at all about this cash buildup earlier this year even though the foreign-related institutions seemed to be siphoning off a lot of the funds the Fed was supplying to the banking system that was supposed to go into bank lending to get the economy moving again.

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About John Mason 79 Articles

Professional history: Banking--President and CEO of two publically traded financial institutions; Executive Vice President and CFO of another. Academic--Professor at Penn State University and at the Finance Department, Wharton School, University of Pennsylvania. Government--Special Assistant to Secretary George Romney at Department of Housing and Urban Development; Senior Economist in Federal Reserve System. Entrepreneurial--work in venture capital and other private equity; work with young entrepreneurs in urban environment.

Visit: Mase: Economics and Finance

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