Cash Hoarding by Two Banks

 This action may help to boost financial system confidence but offers little comfort to the banks’ shareholders as they see shrinking returns when banks put the money into liquid investments yielding one-twelfth of the loans’ interest rates. Yet according to Eric Hovde, CEO of a hedge fund owning $1 billion real estate and financial-industry investments, “This move is a smart one for a longer term even if it takes down the rate of returns generated by these companies. As the economy stabilizes and liquidity levels start dropping, the banks will never go back to the way that they have been before the crisis.”

Regulators also believe that the banks become too aggressive in the past – this led to the credit-market seizure last year – they put much money into non-liquid investments such as derivative, securities, and loans while operating with little equity capital. Treasury department said in their statement that lack of funds can also contribute to the failure of the firm similar to insufficient capital.

In light of this, Treasury said that banks should hold pools of unencumbered or liquid assets enough to cover possible funding shortfalls in cases of acute liquidity stress. This may happen when depositors pull out their money or trading partners demand additional collateral unexpectedly.