Minneapolis Fed’s Kashkari Says Banks Didn’t Plan Well for Liquidity Needs (Did The Fed??) Bank Excess Reserves Positively Correlated With Home Price Growth

Neel Kashkari was one of the Godfathers of TARP when he was at Treasury under Henry Paulson,  Here is the longer version of the hearing in which I testified (you can see the back of my head at the beginning of the video).

(Bloomberg) — Minneapolis Fed President Neel Kashkari says banks don’t like to use a so-called discount window for emergency funding because “they think it makes them look weak,” according to an interview with Axios.

Says banks are supposed to plan for their own liquidity needs

Says banks did not do that adequately, “And now they’re complaining because they failed to plan”

Neel, one reason that banks may not want to use the discount window is that is 50 basis points higher than the upper bound of The Fed Funds Target Rate.

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What Mr. Kashkari may be saying is bank excess reserves are positively with home price growth. As US home price growth is shrinking, so are bank excess reserves.

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The good news for banks is that mortgage originations are a smaller part of their business models. Take JP Morgan Chase, for example. They went from over $60 billion in mortgage originations at the peak of the housing bubble in 2005 to $24.5 billion in Q1 2019.

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JP Morgan Chase shifted away from residential mortgages to business loans, credit cards, etc. That is, shorter maturity loans.

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Commercial bank credit continues to grow, but no where near the levels of the 2005-2007  credit boom years.

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So, Kashkari bashes banks, but The Fed certainly has their own history of policy errors.

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