Geithner, who had been railing about the need for “decisive action,” all of a sudden started talking
about the possibility of opening up the Fed window to virtually any financial institution with any
kind of assets. It would be a bold act that would likely be applauded by investors.
“I don’t understand, what do you mean?” Kashkari piped up. “If the Fed really wanted to
interpret its authorities creatively, it could do all this without legislation?”
Paulson shot Kashkari an angry look, as it was precisely what he had been hoping that Geithner
might convince Bernanke to do—and thus save Paulson a trip to Congress.
“We can’t do that,” Bernanke admonished Geithner. The call had to end quickly because Paulson and Bernanke were scheduled to brief President Bush…

For a moment, Paulson paused and then added, “In theory, Ben could always do it.”
Paulson, unexpectedly playing politics himself, appeared to be trying to see how far he could push
Bernanke, who, as far as Paulson was concerned, had virtually unlimited powers as long as he was
willing to use them.
“Ben, you can do this?” President Bush asked, sensing an opportunity.
Bernanke, however, did not appreciate being put on the spot and tried to sidestep the question.
“That is really fiscal policy, not monetary policy,” he said in his professorial tone.
(Sorkin, p.277)

The Yahoo! note from above still looks inaccurate as in this case BofA is not “borrowing from the Fed”. For BofA here, it looks like substantial (40%) deposits and the additional goodly amount of corporate bonds is mostly funding their operation. Resp,

The central bank reserve position is a subset of cash and cash equivalents

Fed funds and repos are commingled. Note that there are relatively large gross amounts on both sides of the balance sheet. It’s not just one way.

Very ballpark, each of loans and deposits are upwards of about 1/2 the balance sheet size.

The reporting and legal framework is that of holding company with subsidiaries. I don’t know the exact breakdown in subsidiary terms, but “Bank of America” is the main subsidiary.

Debt is a big part of the liability structure. Debt is issued at the holding company level.

A good deal of balance sheet assets in addition to loans consists of stuff with varying degrees of liquidity, associated with both the core commercial bank and the investment bank (now Merrill Lynch). This includes cash and cash equivalents, fed funds and repos, trading account assets, and debt securities. Most of the this accounts for the large difference between total balance sheet size versus loans.

Shareholder’s equity is quite large as you can see. That’s the book value number that a number of blogosphere ranters think is actually worth zero, which would be the definition of insolvency. We’ll see.

Assets

Cash and cash equivalents $152,412
Time deposits placed and other short-term investments 22,992
Federal funds sold and securities borrowed or purchased under agreements to resell 187,761
Trading account assets 204,838
Derivative assets 94,855

Debt securities 256,745

Total loans and leases, net of allowance 878,434

Premises and equipment, net 15,373
Mortgage servicing rights 17,850
Goodwill 86,009
Intangible assets 12,715
Loans held-for-sale 40,124
Other assets 280,935

Total assets $2,251,043

Liabilities

Total deposits 974,899
Federal funds purchased and securities loaned or sold under agreements to repurchase 249,578
Trading account liabilities 71,672
Derivative liabilities 52,624
Commercial paper and other short-term borrowings 62,280
Accrued expenses and other liabilities 126,019
Long-term debt 456,288

Total liabilities 1,993,360

Shareholders’ equity 257,683

Total liabilities and shareholders’ equity $2,251,043

(The numbers you were looking at on deposits were a segmented subset of the total. Toward the end of your link you’ll see consolidated numbers)

All these people should just try to understand your statement: “Banks can only lend or borrow reserves by dealing with other banks directly in the fed funds market, or by dealing with the central bank directly in the case of discount window borrowing or the current special auction facility.” Then they would see that all this talk about reserves being available to lend is inapplicable. They just cant grasp this.

Your equation: Reserves + other assets = liabilities + equity capital

If you look at B of A’s 1Q results here, excerpt: “Total shareholders’ equity was $239.5 billion at March 31. Period end assets were $2.3 trillion. The Tier 1 Capital ratio was 10.09 percent,…”. They go on to disclose that they have $391B in deposits. (Aside: only $131B in home loans: one starts to get the impression that to be successful in banking in the US, it’s best to avoid deposits and lending!)

Now here we have a large bank that apparently only has 391B of deposits, but is somehow able to own 2.3T of assets. Plugging in your equation, this bank has (liabilities 391B + equity 239B)= 630B, so with 2.3T in assets, they must have another almost 1.7T of liabilities somewhere? This is where things start to turn fuzzy for me in all of this. Do you know how BofA funds this additonal 1.7T of assets? I dont think they have that much corporate debt issued. Or as a bank are they simply just allowed to buy them “out of thin air” (ie credit a bank account) with the contraint of equity ratios?

I think many people believe this is where the banks borrow the money from the Fed. I think if I understood this dynamic for sure, I’d be better able to explain these things to people that i come across. Resp,

Best,
Scott

Banks do not “lend reserves” or “borrow reserves” when dealing either as principals in transactions with or clearing agents in transactions for non-banks. (Non-banks means retail and corporate customers or non-bank financial institutions.) This is an important point in understanding the reserve system as per MMT.

Banks can only lend or borrow reserves by dealing with other banks directly in the fed funds market, or by dealing with the central bank directly in the case of discount window borrowing or the current special auction facility.

The fed funds market is on a completely different “plane” than the market for funds involving non-banks. Banks can attract reserves directly from other banks in the fed funds market, or indirectly from non-banks through the other markets. The latter mode is by far where the bulk of the ultimate reserve effect occurs. All payments in those other markets will clear ultimately but indirectly as reserves through the interbank clearing and settlement system, where net exchanges of reserves resulting from such payments are calculated and processed between banks.