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All That Is Broken With The US Financial System In One Chart
By Tyler Durden | Created 10/14/2014 – 10:54

We have shown this chart before [9]. We will show it again because, to nobody’s surprise, nothing has changed since then.

The chart in question, which we believe demonstrates all that is wrong with the US financial and banking system, shows JPM’s quarterly deposits, which in Q3 just hit a new all time record of $1.335 trillion, and its loans, which despite the much hyped rebound in Q2, once again declined to $743 billion from $747 billion in Q2 (so much for that lending-driven recovery?) leading to a new record low Loan-to-Deposit ratio of 56%. So while deposits are obviously hitting new record nominal highs quarter after quarter, when was the last time JPM’s loans printed at all time highs? The answer: just as Lehman filed for bankruptcy, when the number was $761 billion.

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And for those who missed our explanation last time [9], here it is again, updated for the times:

As the blue bar shows, total loans issued by the biggest US bank were $743 billion in Q3 2014: about $20 billion less than in the quarter Lehman blew up. Four years later, and the US commercial bank lending apparatus is still in a state of depression. Or so it would appear on the books.

But why doesn’t JPM lend out more: after all that is the main pathway to stimulate the economy as all pundits will tell us. Simple: it doesn’t need to. As the red bars show, total consumer deposits held by the bank just rose once more, this time to a record $1,335 billion, up $15 billion in the quarter, pushing the deposit-over-loan difference to a new record $591 billion. This is happening exclusively due to the Fed, which when banks do not “create” money from loans (as they clearly don’t), has to step in with QE and create money on its own.

It also means that JPM has to allocate this excess capital somehow and until the London Whale blew up, was simply funding its prop trading desk with this deposit cash as “dry powder” to manipulate and corner various derivative markets courtesy of its unregulated London traders. Another result of course is that risk assets are bid up to record highs – excess reserves are a perfectly fungible source of margin collateral – even as the actual flow through of the Fed’s “wealth effect” is halted precisely due to the complete collapse in new loan creation – the primary “transmission mechanism” of economic growth.

In other words, by keeping the pedal to the metal on QE for the past 6 years, the Fed has giving the banks all the benefits of money creation (soaring deposits), without any of the risks (loan creation in a record low Net Interest Margin environment). And if you are JPM you will be perfectly happy with this arrangement and not seek to lend out any money, as the case has been for the past six years. Which means consumers who wish to take out loans to fund ventures and other growth strategies are fresh out of luck, because the banks that ordinarily supply them with this risk capital have simply shut down the process entirely, and instead are gambling in the stock market.

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And that is precisely the jist of all that is broken in the US financial system, and why the Fed is in fact making things worse, not better, and is progressively destroying the wealth of the middle class, stunting any growth opportunities the US may have, and all the residual wealth is pumped into the hands of those benefiting solely from rising asset prices.

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