Bloomberg does a quick and dirty estimation of how much profit a bank like Citigroup (C) is giving up each year by keeping so much cash as “excess reserves,” rather than lending it out.
Bloomberg: The $244.4 billion Citigroup holds in cash and deposits is $131.4 billion more than it had as of June 30, 2008. That’s five times as much as the $47.1 billion cash hoard Warren Buffett’s Berkshire Hathaway Inc. had at its peak in the third quarter of 2007. Financial firms typically keep more liquid assets than other companies to comply with regulatory requirements.
“In my 44 years in the business, I have never seen a company with remotely as much cash as this,” said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida.
If Citigroup’s cash and deposits, which earn 0.63 per cent, had been put into loans, which fetch 7.2 per cent, the bank would be getting at least $8.65 billion more in annual interest revenue. The risk is that some of those loans go bad, and the bank ends up losing more than the incremental revenue.
We think comparisons to Berkshire are a tad misleading, but regardless, the conclusion analysts are coming to is that banks must be fearful of a second round of the crisis (more writedowns, etc.) and know that that 7.2% rate of return is a pipe dream.