Charting The Biggest Structural Problem For US Banks, And What The Market Expects From Jackson Hole, Version N+1

Tyler Durden's picture

Sometimes the general public can get confused in attempting to explain the complexities and the inefficiency of the banking sector when one simple chart brings the message home. A chart like that comes from the latest "Eye on the Market" from JPM's Michael Cembalest, who compares total bank deposits ($8.4 trillion), or bank liabilities, and total bank loan (about $2 trillion less) assets, or sources of cash flows that are supposed to fund bank liabilities and generate retained earnings, while the bank performs credit, maturity and risk transformation: a bank's three key functions. As the chart below shows, perhaps the primary reason why the economy is in its current deplorable state, is that instead of lending dollar for dollar to catch up with deposit growth, banks now rely on roughly $1.7 trillion in excess reserves with the Fed, an amount roughly equal to the difference between total deposits and loans, to plug the credibility gap. This also explains why according to Cembalest one of the expectations by the market from Jackson Hole is that IOER will be cut to 0% to promote bank lending, and thus the conversion of reserves into loans (something which the inflationistas out there will tell you is a big risk to a sudden surge in out of control inflation). So how does the Fed's direct intervention in bank balance sheets look like? Here it is.

What this chart demonstrates is that banks, whose liabilities (deposits) are collateralized with IOER-interest bearing reserves, will sooner or later be forced to transform these holdings into risky loan-based assets. The question is whether there is enough cashflow-worthy collateral to absorb this transformation of about $1.7 trillion in fungible money. It also means that endogenous risk in the banking system will spike if and when the Fed weans banks to pull away from the safety of the IOER window, and into the far riskier, and far better paying real world.

As for the 4 things which Cembalest believes the markets expect from the Fed, here they are:

  • make long-term interest rates lower even though they’re already low (2.2% on 10 year Treasuries), perhaps through some kind of “Twist” operation that also removes shorter-term liquidity
  • add liquidity through asset purchases even though there’s plenty of it in the system
  • “encourage” banks to lend more money by eliminating interest on excess reserves held at the Fed, even though banks are struggling with insufficient loan demand, and surveys show a substantial relaxation of lending standards
  • buy corporate bonds, even though investment grade spreads are 85% of their way back to 2007 levels

As noted earlier, we believe the logic on Twist may be inverted, as further flattening on the 2s10s will perversely further impair the banking sector due to a complete collapse in net interest income, and with BAC already trading a dollar away from a toxic death spiral, this is not something the Fed would like to risk. That said, since we do not have an Economic Ph.D., and according to Dr. Nouriel Roubini, we represent the anti-intellectual, lumpenproletariat of the far too democratic blogosphere, and should just keep our mouth shut, we could well be wrong. Surely, however, even Bernanke realizes by now that there is far too much priced into his speech: should he disappoint the market and not announce even the possibility of one of these four, then the warning from BAC that flawed policy decisionmaking could result in the biggest crisis since 2008, may be about to come true.

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MIDTOWN's picture

If you know of "Relaxed Lending Standards" please disclose what bank you are dealing with.  Relaxed Lending Standards are not a reality.

JohnG's picture

Is not NINJA, option ARM's and interest only loans how we got here in the first place???

Cyan Lite's picture

Standards haven't been relaxed to match the interest rates.  I get credit card offers in the mail now with a 725 FICO, but they are all for 19.9% or higher interest rates.  SBA-backed loans are still in the 9.5% and higher range.  CRE loans are non-existant.  Residential mortgages are hard to get with less than 20% down, but if you have 700+ FICO, steady job over the past 5 years, and 20-25% down then you can get 4.5% on a 30-yr fixed. 

I want to borrow for my business but not at double-digit rates.  Go back to the SBA-backed loan days of 5% and I'll be the first to line up.  Double the interest means nearly 50% higher monthly payments.

JohnG's picture

"Residential mortgages are hard to get with less than 20% down, but if you have 700+ FICO, steady job over the past 5 years, and 20-25% down then you can get 4.5% on a 30-yr fixed. "

Which is why housing is dead, dead, dead.


I get those same offers, preapproved just transfer your balance......bah! Two or three a day.  I don't carry a balance and they should see that.


Just need short term, really a bridge loan for a year.  Hard to get.  Banks do not want to lend.  No shortage of borrowers, just no lending.

TruthInSunshine's picture

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

--John Maynard Keynes;  

The Economic Consequences of the Peace


John Maynard Keynes just yelled out that The Bernank is a moron, from his stately grave.

Bob Paulson's picture

The Bernank doesn't play for our team. He plays for the opposition.

We are the enemy.

Keynes is calling The Bernank a genius.

ZeroAffect's picture

Residential mortgages are hard to get with less than 20% down might need to know the following facts:

USDA RURAL Development residential loans: $100 Earnest Money - 100% financing - Seller is allowed to pay up to 6% of the buyer's closing costs and pre-paids. Happens with alarming regularity, i.e., many, many times every business day and here's the kicker - one can purchase a house on a city lot. It does not need to be rural residential property. These can be obtained for suburban type residential housing on small lots, real small lots.

firefighter302's picture

I agree, midtown.

Previously, 5% down (at my bank) and appraisals were a formality.

The recent land purchase I made, most banks were not even interested. The local bank I used required 25% down, several appraisals and a written balance sheet of our monthy income/debt to meet their "standards" of available income. And it was a struggle to eventually get the bank to post bi-weekly payments, instead of monthly.

Relaxed was not the case in my case, at all.

JohnG's picture

Exactly.  I've had simlar experience.  Bought land adjacent to my property 1 year ago.  Had to almost beg them on my knees when it was a no brainer from my point of view.  I just wanted the trees, and they were wanting a contract for the harvest BEFORE I owned the land and could contract it.  It's a tree farm, simplest business there is imho, just let the trees grow.  It was a real mess to get through that.  Not sure 'll do it again unless I can buy in cash.

Shirley Wilfahrt's picture

Like pushing a string up a cat's ass....



zorba THE GREEK's picture

Actually, if you wet the string and then freeze it, it becomes an easy task.

Shirley Wilfahrt's picture

Freeze the cat??

That's cruel man.

rosiescenario's picture

....and be sure to astroglide it, too....for the cat's sake.

NumNutt's picture

LOL! ...ew.....hope your cat is declawed, or you are going to need stitches after that experience!

oldman's picture

Hey Shirley,

Please back off on the cats jokes-----my best friends are cats and we are very sensitive creatures    thanks   om

Shirley Wilfahrt's picture


You "Fight Club" boys are some straight pussies sometimes....

It's not a "joke". It's a fucking allegory you simple fuck.

QE = string

cat = USA economy

dumbfuck pushing the string = Bernanke

Tell your cats I said WOOF.



Kali's picture

What can he say?  They've already told us the economy is gonna be shit for at least 2 more years by extending ZIRP to 2013.  Nothing that comes out of BB's pie hole is gonna change that.  FUBAR.  Kaboom.

spiral_eyes's picture

qe3 very bullish for gold
no qe3 very bullish for gold
op twist 2 very bullish for gold
world war 3 very bullish for gold
new world order very bullish for gold
ron paul elected president very bullish for gold

gold — the anti dow, bitchez!


navy62802's picture

Free market? What free market? BTW - Do Keynesians actually consider themselves to be Capitalists? Just wondering.

magpie's picture

If the State can be the only capitalist.

Dick Fitz's picture

Worse- Keynesians consider themselves the saviors of capitalism, when the opposite is truth. Orwell has nothing on the US, circa 2011.

WonderDawg's picture

I don't think it matters how much they relax the lending standards, the ones who would borrow are saturated in debt already. In order to lend, you need able borrowers, and they've already been tapped to the max. No way around it, over it, or out of it. Debt saturation has been reached.

zorba THE GREEK's picture

I have talked to some people with good credit who tried to borrow

money to expand their business, and they were all basically told

they had to prove they didn't need the money to even have a chance

at getting it. One guy offered to give his bank enough gold bullion

to hold to cover the loan and was still turned down. Finally the bank

offered to lend him the money at 8.5%. I don't see loan standards

falling, quite the contrary, especially for smaller businesses.

TruthInSunshine's picture



It depends.

The game (literally, as in it's a game) now is FHA mortgages, still available to anyone with a pulse.

What do I mean by a pulse?

Well, if one has a 580 credit score or better, they can buy a home with a mere 3.5% down, and the FHA (aka Government) backs the loan, insuring the lender originating the loan and also subsequent purchasers of the note against any losses.

And if one has a 500 credit score or better, the FHA will STILL guarantee the loan, but the only additional requirment of the borrower is that 5%, rather than 3.5%, be put down.

This information is all published on FHA's website.


So, we all can see how government is STILL the problem, I hope.

Some will say "but TIS, isn't it good that this is available, given the state of the housing market and economy?"

My reply is that no, it's not.

The core disease the U.S. has is unemployment/underemployment/wage erosion.

Having the FHA backstop mortgages, with trivial amounts down, to borrowers who are poor credit risks, only kicks the can that is our day of reckoning down the street, and makes the ultimate resolution of our mess that much more painful.

The kicker is that even with this ridiculous FHA program in place, housing sales are still anemic, and even with record low mortgage rates?

Why is that? A lack of jobs, a lack of confidence, and - yes - most can't even come up with the 3.5% or 5% down (64% of Americans can't come up with $2,000 in a 48 hour period if they had to tend to an emergency car or home repair).

Government is prolonging the problem and exacerbating the pain that will be ultimately felt when it comes crashing down, as usual.

By offering up this ridiculous FHA program, government is literally helping to hide how bad things really are, as they are acting in the role of lender, artificially and massively depressing interest rates.

Finally, most people buying homes last year under the 'first time homebuyer tax credit' were using said tax credit AS THEIR DOWN PAYMENT!!

The inflationistas would be pissed off, but it'd be far better to attack this problem through MARKET FORCES, as in letting home prices crash even more, rather than trying to prop the housing market up (without success anyways) with taxpayer monies and taxpayer funded programs.

Let prices of these houses people are buying with a 3.5% down FHA mortgage fall another 75%, and let an investor pay cash for the house and rent it out to the would have been FHA loan taker/buyer for 50% of what the mortgage payment would have been under the FHA mortgage.

The U.S. Government has gone mad. Plan accordingly.

tarsubil's picture

The US government has gone mad. That almost sounds like it is a recent development.

DrunkenMonkey's picture

"letting home prices crash even more, rather than trying to prop the housing market up" 


Amen to that.

Price discovery mechanisms have now left the building.

Markets need to clear, and asset prices need to fall a ways further before they'll do that.

Debugas's picture

banks have no money to lend because they have lended already too much to non-paying borrowers and need to write-down now

spinone's picture

They have no need to lendbecause the FED pays them for keeping money on depost, instead of loaning it out. But, when they stop and the banks loan it out, look out for inflation.

DefiantSurf's picture

My bank told me I needed $250k in liquidity to borrow $100k, absolutely absurd.



LongBalls's picture

Debt saturation has been reached. The outcome is the death of materialism. People not longer believe being in debt is a sustainable risk. It is now apparent to most that they better be out of debt by 40 and stashing cash for the next 15. After 55 all bets are off. The national debate has shifted from kicking the can down the road to paying the piper. From Government to kitchen table the deleveraging bell is ringing.

Idiot Savant's picture

Debt saturation has been reached. The outcome is the death of materialism. People not longer believe being in debt is a sustainable risk.

Don't underestimate the stupidity of the American consumer, LB. There are plenty of people that will still leverage up as much as they can for iCrap and 3D tvs. Debt saturation has been reached, and that's why we're hearing more and more about debt forgiveness. I'd love to see Americans deleverage, save more and consume less, but our economy will crash if that happens. I think we'll see debt forgiveness in the near future. It's really the only option to keep the world economy out of a major depression.  

StychoKiller's picture

If they forgive the debts of deadbeats, they better look forward to forgiving EVERYONE's debts!

spinone's picture

Yep, and when you debt saturate a fractional reserve currency, its broke.

Fiat2Zero's picture

Dr. Nouriel "I have a PHD and you don't so STFU" Roubini.

BS == Bullshit
MS == More Shit (I stopped here)
PhD == Piled Higher and Deeper.

Long-John-Silver's picture

PhD's spend their entire existence shielded behind college walls, knowing nothing of the real world on the other side.

Kali's picture

And those who can't teach, work for the government

tarsubil's picture

I have a piled higher and deeper and I work for the government. Spend my day on zerohedge. Isn't the world grand?

Variance Doc's picture

Careful with your hasty generalizations, especially with Ivy League ones....

Freewheelin Franklin's picture

Robert Murphy earned a PhD from NYU in 2003. I wonder if Roubini teaching at NYU in 2003?

nmewn's picture

PhD == Piled Higher and Deeper.


DaveyJones's picture

So does a JD mean jammed up deeper?