Capital Reserves in large banks and our bizarre central banking system

Thomas Hoenig on State of US Banks taken from Mis Shedlock web site.

For the largest U.S. banking firms, the average tangible equity capital ratio – known inversely as the leverage ratio – is 4.97 percent (column 8). In other words, each dollar of assets is funded with 95 cents of borrowed money.

Now the currency banker operates with the reverse requirements.  Its loan to deposit ratio is small and it has dollar liabilities outstanding.  That 'float' is needed for the currency banker to allow stable price variance over the economy.  Its loans are to large member banks and its deposits from large member banks. It pays rates on deposits, free and unencumbered money out in rates paid.   And earns rates on loans, free and unencumbered money in from the banks. So the currency banker will, within one term, match the member banks in capital ratio.  By one term, I mean that each node in the banking network should be one term separated when minimal.

What is the loan to deposit ratio at the Fed?

1.0, by law folks. The Fed is required to have a cash flow balance of zero, and the width of its corridor between deposit rates and lending rates is near zero (expenses are covered).  This is a result of the remits issue, the Fed is not allowed to 'earn' money (which it can recycle into ink and paper). So you will never have save banking as long as the Fed is a department of Congress, and it is Congress, in its stupidity, that needs to be educated. 

Solution?

The large banks need a supplemental money, an internal unit of account which they can control using no arbitrage Black-Scholes mathematics.  And mathematicians need to get on the ball, and Goldman Sachs had better be paying them top dollar.  The large banks need to get together and create the investment point, like Walmart loyalty points.  Then each customer needs to have a smart card or smart account that can save and invest with dollars supplemented by Banker Points.