31 March 2009

U.S. Banks have no virtually no "reserve" cash

Historically, banks have always kept a certain amount of cash on hand to meet the needs of their customers (for ATM withdrawals and check cashing). This has typically been about 4% of assets. Federal banking regulations have also mandated such reserves as a buffer in the event of crises or panics.

In the 1970s, the Fed began decreasing the mandated reserve levels of cash to be held by banks, to the point that now the only $$ banks have available is that which they expect to need for ATM and cash transactions.

The chart above, derived from Federal Reserve data, shows the federally-required reserves minus the actual cash in the vault, adjusted for inflation. For the past decade, that number has hovered around zero.

Is this reckless - or ominous? Not particularly. As long as things continue to go well, the absence of extra cash reserves shouldn't be a problem...

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