[Subtitle: Basel III, capital adequacy, bank balance sheets and leverage]
They don't need no stinking customers - a total baldfaced lie.
Let's look at the facts:
- Under the Basel III compact, FED and SEC regulations, banks must maintain capital adequacy, which means they must contain their ravenous appetite for leverage to just 10:1 approximately. They can lend 90c of every dollar they hold in assets.
Wikipedia - Capital Adequacy
Wikipedia - Calculating Capital Adequacy Ratios
- The assets they hold are classified in "Tiers" based on risk. The ONLY assets that have zero risk are CASH and Treasuries.
Wikipedia - Risk Weighted Capital Adequacy Calculation
- Banks aim to maximize profit and therefore try to maximize leverage. If they can lend a dollar without adding to their risk, they do. So they did. They lent as much as possible, until their capital adequacy is the absolute minimum necessary to pass the FED tests.
Wikipedia - Federal Reserve - Bank Reserve Requirements
- The banks are sitting on a mountain of cash, but that's because they're also sitting on a mountain of toxic debt that erodes their balance sheet. The stuff they thought was gold is shit.
- As their mortgage-based and securitized assets declined in value when the RE bubble burst, they had to rely heavily on secure assets, ie. deposits.
- In the 2008 crisis, the banks, especially the big ones, ended up "upside down" with more liabilities than assets in reserve and therefore could find themselves failing capital adequacy tests (the "stress" tests you heard about). So they stopped lending and started advertising for depositors and savers and started adding fees. This was to shore up their balance sheet.
Wikipedia - FED stress tests
In the examples in Wikipedia you can see the various banks and how much money they were SHORT:
Citi: 5.5 billion
Wells Fargo: 13.3 billion
BofA: 33 billion
So 3 of the 4 "big bad banks" did not have enough capital in deposits in 2008.
Oh, and as usual, these numbers were entirely fudged. The real picture was much much worse
To make things more tangible, have a look at one bank's specific numbers as reported for FY2010
Citigroup 2010 SEC filing
The balance sheet of Citigroup from 2010, shows the numbers:
- 1.9 trillion in assets,
- of which 800 billion are cash deposits.
- Their Tier 1 assets are just 13 billion, a ratio of 10% of total capital assets
- They are leveraged at a rate of 6.6 (that's 6.6 to 1)
- North America consumer banking was their largest cash operation with deposits of 145 billion.
when you take out $1 from cash deposits in Citi's NA operations, that comes out of their Tier 1 capital, and by leverage reduces their capital adequacy by an equivalent of $0.66. That's the amount that they can no longer lend from your $1.
They are in deep shit and they know it. They need 99%'ers deposits so they can lend money to the 1% and make money on interest and fees. Without your deposits, they cannot lend and cannot make money. Since they are already bleeding money because of mortgages, every penny counts.
So much for "we don't need no stinking customers"