Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead. Given existing commitments to customers and the increased resistance of investors to purchasing some securitized products, banks might need to take a large volume of assets onto their balance sheets over coming weeks, including leveraged loans, asset-backed commercial paper, and some types of mortgages. Banks' concerns about the implications of rapid growth in their balance sheets for their capital ratios and for their liquidity, as well as the recent deterioration in various term funding markets, might well lead banks to tighten the availability of credit to households and firms.
Lee Adler has been beating the drum that October 15 could well be the D-Day for financial institutions to come clean and fess up about worthless ABCPs that they are holding. Karl lasers in on that point and accuses the FED of complicity in abrogation of regulatory banking framework by knowingly looking the other way while banks created SIVs and various Conduits for the explicit purpose of evading regulatory requirements."
What that means is that banks are holding tons of CDOs, ABCP, leveraged loans and MBS in off-balance accounts which are not subject to any banking capital reserve requirements. Aaron Krowes also noted it in his critique "Is The Fed Flushing Out The “Excess Credit” Demons?" :"The coup de grace, however, is found in other Fed machinations. My nitpick and refrain for well over the past year has been “reserve requirements matter (big time)”. As most analysts acknowledge, but forget all too easily, reserve requirements (not interest rates) are the main lever available to the Fed for controlling the amount of credit in the financial system. The reserve ratio and other rules bearing on the quantity of reserves effectively control the “money multiplier” in a fractional reserve banking system such as ours. Lower reserve requirements allow more credit to be created — of all sorts. Reserves are the floodgates of the fiat money/credit system."
So what happens when banks will need to take back these off-balance sheet assets onto their balance sheets? Many don't have sufficient capital ratios as the FED acknowledges even without the special reductions in reserve requirements. Karl Denninger advices to carefully check out your bank's finances or to just take the money out. He said he is putting his into a credit union.
Edited by linrom1, 09 October 2007 - 10:10 PM.
