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inflation, just thinking
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Oakview
Posted 4/12/2021 10:06 (#8947302 - in reply to #8945452)
Subject: RE: inflation, just thinking


NEND
IADAVE -

Just how much a bank can lend out is more complex than just a straight loan-to-deposit ratio.

Here are some basic parameters:

First, there is the capital ratio. Generally, most banks can run between 8-12%. There are other measurements of capital, but this would be enough to know "how strong" the bank is. So, if a bank has $10 million of capital, they can run up to $80-120 million of loans and deposits. Next time a banker tells you that your OE% is too low, ask him/her what their OE% is!!!!!

Then, there is liquidity, which you originally referenced. Most banks run between 75-100% of loans to deposits. Yes, they can, but are not encouraged to run over 100%. So, if a bank has $100 million in deposits, they generally cannot lend above that unless they are highly capitalized. There are different measurements of liquidity. Obviously, short-term liquidity is very important (think of the movie with Jimmy Stewart - "Its a Wonderful Life"). Short term liquidity keeps enough on hand to prevent a "run" on the banks. The liquidity of a bank is comprised generally of cash (usually less than 4% of total deposits) and investment-grade bonds/securities (typically government securities and must be highly liquid). Some banks are or have used language in their loan documents that specify that the loan can be called "on demand" in order to address liquidity issues. Wells Fargo did this back during the great recession HELOCS, not necessarily because of liquidity issues, but more so because the housing market was crashing, and their collateral position on all these beautiful new homes did not look so great. Make sure you read your loan documents!

Banks don't always just have local deposits. Some are brokered CD's and funding from the various Regional Federal Reserve Banks. This is referred to as "hot money", meaning it is in large chunks, and can be variable; although, the banking system has kept this going for over 25 years now. Regulators frown on "hot money", and highly encourage banks to obtain local, or core deposits.

Most banks are highly liquid right now because of all the money the government has pumped into the system. They are also very profitable because of the big-time earnings on processing PPP loans.

Some banks are expanding their loan portfolio, putting money to work. However, I don't think it is widespread and causing inflation. Why? Because small and large business owners drive loan production. Yes, houses are being funded, but most of that market goes to the loan securitization market, and does not sit on bank balance sheets. Business owners are not too willing to step into borrowing money given the uncertainty with the pandemic, taxes, and environmental uncertainties.

Bottom line, in my opinion, is that inflation is here, but it is here because of the interruption in supply chain management, people not needing to work, and market manipulation for profit due to globalization of basic resources.
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