This $158 billion drawdown in JPMorgan's reserve account is evidently what necessitated the Fed's $165 billion in new repo offerings. But why the large drawdown?
Henry attributed it to regulatory changes that increased the bank's required reserves, but according to the Martens, something more was involved. "The shocking news," they write, is that ...[a]ccording to its SEC filings, JPMorgan Chase is partly using [f]ederally insured deposits made by moms and pops across the country in its more than 5,000 branches to prop up its share price with buybacks." Small businesses are being deprived of affordable loans because the liquidity necessary to back the loans is being used to prop up bank stock prices. Bank shares constitute a substantial portion of the pay of bank executives.
According to Thomas Hoenig, then-vice chair of the Federal Deposit Insurance Corporation, in a July 2017 letter to the Senate Banking Committee:
"[If] the 10 largest U.S. Bank Holding Companies [BHCs] were to retain a greater share of their earnings earmarked for dividends and share buybacks in 2017 they would be able to increase loans by more than $1 trillion, which is greater than 5 percent of annual U.S. GDP.
"Four of the 10 BHCs will distribute more than 100 percent of their current year's earnings, which alone could support approximately $537 billion in new loans to Main Street.
"If share buybacks of $83 billion, representing 72 percent of total payouts for these 10 BHCs in 2017, were instead retained, they could, under current capital rules, increase small business loans by three quarters of a trillion dollars or mortgage loans by almost one and a half trillion dollars."
Hoenig was referring to the banks' own capital, rather than to their deposits, but the damage to local credit markets is even worse if deposits also are being diverted to fund share buybacks. Banks are not serving the real economy. They are using public credit backed by public funds to feed their own private bottom lines.
The whole repo rigmarole underscores the sleight of hand on which our money and banking systems are built, and why it is time to change them. Banks do not really have the money they lend. To back their loans, they rely on their ability to borrow from the reserves of other banks, generated from their customers' deposits. If those banks withhold their deposits in the insatiable pursuit of higher profits, the borrowing banks must turn to the public purse for liquidity. The banks could not function without public support. They should be turned into public utilities, mandated to serve the The banks could not function without public support. They should be turned into public utilities, mandate interests of the people and the productive economy on which the public depends.
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