Financial System Liquidity

As discussed recently, the growth of financial system liquidity has been decelerating. Yet,
it did advance by 10.5% yr / yr through early Feb. thanks primarily to the Federal Reserve.
Private sector financial liquidity improved by only 4.2% over the same period as minor
funding growth matched the combination of moderate real economic demand and continued
low inflation. Total system liquidity / credit growth in double digit % readings measured yr/yr
should provide assistance to the economy in 2014, although the past two months of economic
activity have been hampered by the adverse winter weather.

The US banking system remained on extended holiday over the past year, with total bank
credit growing only 1.3%. Banking system loan growth was a low 2.0%. Banks liquidated
securities holdings and allowed cash on hand to increase very substantially.

The system's large real estate holdings remain on the flat side, with any new loans quickly
sold out net of loan generation fees of course. The banking system is losing market share
to a variety of other credit issuers. The one o.k. spot on the asset side of the ledger was the
commercial and industrial loans category which increased by 7.6%. The banking system
remains flush with liquidity even excluding the large balance of excess reserves generated
by the Fed's QE program.

As long as the Fed continues Its current taper program, total system liquidity growth will
decelerate unless the banks step up lending and pursue deposits more aggressively. Without
a more responsive banking system, liquidity growth is headed toward drying out, leaving
risk to the economic expansion to rise. With bank capital now growing only 3% on a much
higher quality book of assets, one would think the banks might do well to come in off
holiday. Who knew custodianship could pay so well?