BANKING 101—LIQUIDITY.

BANKING 101—LIQUIDITY. Lots of banks in the United States survived the financial crisis comfortably. So did Canadian banks. For the most part, they were banks which followed traditional banking practices. Banks traditionally borrow short (think demand deposits) and lend long so banks need liquid assets they can turn into money as soon as possible to meet demands by customers. So commercial banks had substantial holdings of assets like United States Treasury bills. The return on liquid assets has been lower than that on riskier assets. The difference was thought of by banks as a cost of doing business. The financial crisis showed that the very largest banks were not holding anywhere close to enough liquid assets to get them through the crisis. This article by Bradley Keoun and Phil Kuntz (Bloomberg August 22) reports that the biggest banks, both American and European, had to borrow enormous amounts from the Federal Reserve to get through the crisis—more than the total earnings of all federally insured banks in the U.S. for the decade through 2010. New rules—not to take effect until 2015—will require that “banks keep enough cash and easily liquidated assets on hand to survive a 30-day crisis.” Significantly: “Another proposed requirement for lenders to keep “stable funding” for a one-year horizon was postponed until at least 2018 after banks showed they’d have to raise as much as $6 trillion in new long-term debt to comply.” Professor Kenneth Rogoff (who wrote THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY with Carmen M. Reinhart) says: “Regulators are “not going to go far enough to prevent this from happening again.”