Banks build up cash to ensure credit for borrowers during war

January 19, 1991|By American Banker

NEW YORK (American Banker) -- U.S. bankers have built up their cash positions substantially in recent weeks, in part to ensure that borrowers would have access to credit during a war in the Persian Gulf.

One measure of the cash buildup: Excess reserves held by banks in the Federal Reserve System have skyrocketed from $800 million to $3.5 billion in past few weeks. On top of that, banks are probably holding even more in their own coffers.

First Interstate Bancorp alone has decided to hold an extra $1 billion in cash to ensure that its corporate clients remain liquid during the current crisis. An official at one major money-center bank in New York said his institution, too, was sitting on extra cash.

"We're in a pretty liquid position," he said.

Some of the reserve buildup has been triggered by new reserve requirements recently put into effect by the Fed. And spokesmen at Chase Manhatttan Corp. and Citicorp said their cash postions were "normal."

But First Interstate, the nation's 10th-largest bank, specifically earmarked its $1 billion of extra cash to deal with any complications arising from the Mideast tensions, said Jerry Jordan, chief economist at the bank.

"We've built up a cash hoard," Mr. Jordan said. "Liquidity was built up in our case because we anticipated that customers might need liquidity and hit their bank lines."

One of the most feared complications for bankers would be a cashshortage among their borrowers. For instance, a prolonged war could lead to an economic downturn, causing borrowers' orders and revenues to drop unexpectedly.

Although interest rates have slipped since the war's onset, there is the possibility that a turn for the worse in the war effort would send interest rates up, making it more costly for banks to raise money. Thus, many bankers prefer to watch the war from atop their cash cushions.

Mr. Jordan said that even if the war is short, First Interstate customers are being advised that "it would be costly to bet and bet wrong" by not having sufficient funds. One way to do that is to put credit lines in place.

Mr. Jordan noted that as of late Thursday morning, there was no great shift by clients to draw funds down: "At the moment it appears that we may have been more liquid than we need."

The cost, Mr. Jordan admitted, was the lost interest from the money that could have been invested in interest-bearing assets. "It's the price you pay," he said.

But for now, he said, "cash will be king," adding that corporations and their banks "can't be too liquid" in times of crises.

In any cash shortage, bankers expect that most of the demand would come from preexisting credit lines that had not been drawn down. Roughly $750 billion in unused credit commitments are outstanding in the banking system.

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