Thursday, 23 October 2008

Commercial bank liquidity - the long run trends.

Last week, the FSA were talking tough. In future, things are going to tighten up; no more soft touch regulation, banks are going to have to behave themselves.

The FSA would do well to take a look at just how lack regulation has become over the last forty or so years. The Bank of England track three measures of commercial bank liquidity; the broad ratio, the reserve ratio and the narrow ratio. The definition of these ratios isn't particularly important. All three ratios compare the total assets of the banking sector with what cash and near cash assets the banks are holding.

The basic message is clear enough. Over the last forty years, banks have reduced their liquidity to virtually nothing. Of course, the banks would defend this trend by saying that with financial innovation and increasingly sophisticated markets, it is not necessary for banks to hold so much liquidity these days.

Well, the experience of the last 15 months suggests otherwise.

9 comments:

Anonymous said...

I do wonder where you seem to get all your information from Alice. You must put a lot of time in.
I thank you sincerely (if you can do that anonymously).

mike said...

It's time for banks to start cashing more of their 'assets' or forcing people/companies to start paying back more of their loans to get liquidity. Let's hope doing this does not bring down the financial sector like a pack of cards. As a hard saver I would like to hope my money will do better in the next few years.

Anonymous said...

As the UK manufacturing economy collapsed and massive reserves accumulated in Japan, the banks have found ways for us all to live on credit - Asian credit -and defer paying the piper.

B. in C.

Nick von Mises said...

Alice,

You think the world coming off a semi-gold standard 1968-71 might've had something to do with the trend?

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

OOOPS.

Sequoia

dearieme said...

The decline was over by 1980 or '81

Anonymous said...

dearieme, so why wasn't there more trouble in the banks from the 1980s onwards. I think there is more to this story than this chart.

will said...

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