So far, American banks have largely managed to avoid catching the contagion of the Eurozone debt crisis. That’s partly because there’s little direct exposure to the banks in the most distressed countries. But there are other big reasons behind the U.S. banks’ relative health, as the Economist points out. First, in the wake of our own 2009 meltdown, U.S. banks have raised their capital holdings significantly.
Yet the least appreciated virtue of America’s banking system is that it is drowning in dollars, the byproduct of the Federal Reserve’s efforts to kickstart the economy through “quantitative easing”. The Fed has bought government and mortgage bonds to push their prices up and yields down. It pays for them by creating money, which it deposits in the reserve accounts of banks at the Fed. Since late 2008, those reserves have soared from virtually nothing to $1.5 trillion.
America’s biggest banks now boast liquid assets of three to 11 times their short-term borrowings, according to Moody’s. Despite European banks’ well-publicised funding problems, they too have benefited. Lou Crandall of Wrightson ICAP, a research firm, reckons that half of those reserves have ended up with the American subsidiaries of foreign-owned banks. German, Scandinavian, Swiss and French banks all have big holdings. “We’re seeing all sorts of strains on markets but no runs on banks because they are sitting on top of huge mounds of cash,” says Mr Crandall.
In fact, the story notes, loan growth this quarter is projected to be the fastest since the middle of 2008. That said, not all U.S. firms have benefited from the recovery and relative health of the U.S. banking system: small businesses are still facing tight credit in an economy where even financially healthy players are continuing to exercise caution.