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How to account for bank deposits

Summary:
Here is a chart of how the bank has to account for a deposit: So the left side entry is an increase in an asset account for the bank; and accordingly, the bank has to include any increase in total assets in its computation of its regulatory Leverage Ratio; ie capital/assets.So in periods where tax revenue increases to the point of surplus, when Treasury elects to maintain  those surplus USDs in depository accounts "to earn some interest for the taxpayers!" instead of in the non-interest bearing General Account, it will create a credit contraction as the system is experiencing an increase of these types of assets and will have to reduce or negate other forms of asset creation in order to maintain the fixed Leverage Ratio.This is why periods of fiscal surplus have typically been short

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Here is a chart of how the bank has to account for a deposit:

How to account for bank deposits

So the left side entry is an increase in an asset account for the bank; and accordingly, the bank has to include any increase in total assets in its computation of its regulatory Leverage Ratio; ie capital/assets.

So in periods where tax revenue increases to the point of surplus, when Treasury elects to maintain  those surplus USDs in depository accounts "to earn some interest for the taxpayers!" instead of in the non-interest bearing General Account, it will create a credit contraction as the system is experiencing an increase of these types of assets and will have to reduce or negate other forms of asset creation in order to maintain the fixed Leverage Ratio.

This is why periods of fiscal surplus have typically been short lived as the in flood of Treasury deposits into the banking system soon drives depositories into violation of the Leverage Ratio and a resultant immediate deleveraging in the other asset categories.

Since the GFC, Treasury has not elected to move their surplus USDs into depository accounts rather they seem content to leave then in the General Account which has eliminated these negative effects of any short term fiscal surpluses that have been occurring.

So we are seeing a continuation of economic growth to somewhat record duration of time as this policy is continued and the metaphor brigade is left wondering "when the punch bowl is going to be removed?!".

Also, the Trump 2018 tax cuts are timely as they (should?) reduce the likelihood of fiscal surplus any time soon; so that may help this year also as the TGA should be maintained at lower levels and the potential for significant government transfer of surplus USDs into deposit accounts is reduced.

Mike Norman
Mike Norman is an economist and veteran trader whose career has spanned over 30 years on Wall Street. He is a former member and trader on the CME, NYMEX, COMEX and NYFE and he managed money for one of the largest hedge funds and ran a prop trading desk for Credit Suisse.

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