The "QE 2 As A European Bank Bailout Vehicle" Story Picks Up Traction

Tyler Durden's picture

The blockbuster story first posted on Zero Hedge claiming that QE 2, and more specifically the $600 billion (to date, and $750 billion through maturity) in reserves generated as a result, was nothing more than another European bank bailout smokescreen is starting to pick up steam with the contrarian intelligentsia. Here is Sean Corrigan's take on a topic which we have a very distinct feeling will be the cause of substantial Q&A between the Chairman and the Monetary Policy Subcommittee shortly. From Corrigan: "Note that while Large domestically-chartered banks have cash assets of some $509 billion v non-cash ones of $6.840 billion (a ratio of around 8%), and small domestics hold $293 billion in cash against $3,595 billion in no-cash (a similar ratio of  approx 9%), foreign banks have the startling sum of $940 billion piled up against non-cash assets of $998 billion for a ratio of an incredible 94%. Put another way, despite the fact that all domestics’ combined non-cash assets amount to getting on for ten times those of foreign banks ($9,633 billion v $998 billion), they actually hold 15% LESS cash ($803 billion v $940). Once again, European banks have a lot for which to thank Mr. Bernanke, even if his fellow citizens have far fewer reasons to be grateful!"

Full note from Sean:

There has been a great deal of misplaced commentary about how the presence of some $1.6 trillion in commercial banking deposits with the Fed has somehow meant that its QE programmes were NOT  increasing they money supply (they have been, by 30% since the panic first broke out) but were merely effecting some kind of wholly neutral ‘asset swap’ (yes, but the point is the Fed has been swapping bonds for MONEY!).

We have often tried to point out that while this excess reserve accumulation may mean that the classic, fractional reserve multiplication of the Fed’s injections has not been taking place to its theoretical maximum, the Fed’s programmes were, nonetheless exerting sufficient inflationary impetus all by themselves  - albeit with the severe impediment that they were funding government-sponsored profligacy and zombiehood, rather than aiding the recuperation of a vibrant private commercial and industrial sector.

A breakdown of the cash ‘hoarding’ by bank origin further reinforces the point, for here we find that much of the extraordinary rise in precautionary cash holding has been undertaken by foreign, not domestic, banks.

After the salutary lesson given banks across the word when they suddenly found they could no longer roll over their short-date eurodollar funding at the height of the LEG-AIG crisis, this is hardly inexplicable. We suspect, too, that if you were to squint at the two side by side you would see the pattern of reserve holdings for this group would make for a passable a facsimile of the chart of the path of European sovereign CDS prices!

Meanwhile, US banks are notable in having added nothing more to their own backstop over the last two years or so, meaning THEY are not really holding up American creditisation to the extent some would have us believe.

To make the contrast even more clear, note that while Large domestically-chartered banks have cash assets of some $509 billion v non-cash ones of $6.840 billion (a ratio of around 8%), and small domestics hold $293 billion in cash against $3,595 billion in no-cash (a similar ratio of  approx 9%), foreign banks have the startling sum of $940 billion piled up against non-cash assets of $998 billion for a ratio of an incredible 94%.

Put another way, despite the fact that all domestics’ combined non-cash assets amount to getting on for ten times those of foreign banks ($9,633 billion v $998 billion), they actually hold 15% LESS cash ($803 billion v $940).

Once again, European banks have a lot for which to thank Mr. Bernanke, even if his fellow citizens have far fewer reasons to be grateful!

NB, A year before the crisis (Sept 07), large domestic banks’ cash:non-cash ratios stood at 3.7% and small domestics’ at 3.1%, for a combined 3.5% which they have since just more than doubled. Foreign bank equivalents, however, rocketed from 7.7% to 94%.

What is also telling is that non-cash asset growth at large domestics in the intervening period has amounted to 38%, small ones’ to 18% - incidentally, not only proof that there has been no overall credit ‘deflation’ generated here, but a clear sign that TBTF corporatism and asset speculation has been the main outlet for Fed largesse – while the corresponding entries on foreign banks balance sheets have only grown a derisory 4.3%