Bank Capital vs. Bank Deposits

by Laura Ehrenberg-Chesler on June 2, 2009

in Crossvault Capital,TARP

We have recently written on our blog and in our “Guest Voices” column about the difference between bank capital and bank deposits.  We have explained that banks lend on deposits, they do not lend out their capital.  Therefore, government programs like the Troubled Asset Relief Program (TARP) should not be expected to increase the amount of loans made by banks.

We have also argued that during times of recession, banks historically have been more careful about the loans they are making and that this is appropriate, despite the current call for banks to make more loans. 

Encouragingly, banks are following the historic precedent and keeping plenty of cash.  According to prominent U.S. economist Ed Yardeni, “Banks are hiding in cash rather than making loans since it is too challenging to find worthy borrowers in a bad recession.”   Yardeni’s research also finds that the Fed’s weekly data on commercial bank balance sheets show that they held $1.03tn in cash in mid April, up from $301b on September 10, 2008.  

This is good news for those of us who believe the only way to ensure a healthy economy for the long term is to reduce debt starting today.



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