As several major banks disclosed their financial reports recently, there seems to be much interest in the financial community as to the implications of the large cash piles at US commercial banks. The issue appears to stem from the Fed interventions, which added liquidity to the market but also led to a large accumulation of deposits at commercial banks. In the cases of JP Morgan and BofA, the cash piles are in the hundreds of billions of dollars.

One view is that if demand for loans remains weak and deposits continue to grow, cash piles will increase. If the cash piles increase enough then Dodd-Frank/Basel regulations come into effect, imposing stricter capital requirements. From a business standpoint, this would be a negative for the affected US banks.

I can follow this line of logic, but I feel as though I'm missing something.


Surely, if a commercial bank has a larger cash pile, its capital adequacy is improved? If the cash comes from the Fed, that would not change things; the Fed would just be improving the banks' capital strength for them?

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    $\begingroup$ "Cash pile" needs to be defined in terms of assets of the bank sector in the bank liquidity cushion or in terms of liabilities of the bank sector held as assets in the non-bank sector liquidity cushion. In general "flight to safety" means both banks and non-banks in aggregate want to hold more risk free assets in their respective liquidity cushions and fewer risk assets in their portfolios. Covid shock to real economy triggers "run" away from bank liabilities at risk so banks either sell high quality liquid assets (HQLA) to keep cash flowing or Fed/Treasury provide liquidity to the system. $\endgroup$ – SystemTheory Jan 22 at 2:36

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