I caught CBS airing Arrianna Huffington’s screed against the larger banks on Sunday.  The ostensible point was to push her “Move Your Money” campaign since;

JP Morgan, Citi, Bank of America, Wells Fargo — these banks, that have received taxpayer money, that have been bailed out by the taxpayer, have not done their job at helping small businesses, at lending, so that the economy can start again, and start producing jobs.

The obvious solution is to move personal savings accounts into smaller local banks as a way to stick it to the man.  Never mind that hundreds of these smaller banks have entered FDIC receivership.

I guess on a pure populist level it makes some sense.  Force market behavior changes through individual decision.  On a larger level, the scale is just not there, so let me propose something else.

The heart of the problem is that the major banks have decreased lending to small businesses by $100 billion or so over the last year.  Looking before the crisis, banks rarely held high amounts of excess reserves (more reserve funds than Fed regulations require).  Meaning they used would be excess reserves for other purposes, like lending.  Now, the Fed requires a total of $61,417,000,000 in reserves of all banks.  Meanwhile they hold $1,253,692,000,000 in total reserves, which is way above historical norms.

Prior to 2008 such a move would have made zero financial sense as funds held in reserve are not interest bearing.  However, as part of the Financial Services Regulatory Relief Act of 2006 (Section 203), the Fed was authorized for the first time to pay interest to banks on required reserve funds.  This authority was extended and expanded in Section 128 of the 2008 Economic Stabilization Act to cover all reserve funds.  Also, during the same period, the Fed chose to exercise this authority by paying banks .25% in interest for all reserve funds.  Later that rate became the current .5%.

It really is not a mystery then why banks are choosing to hold onto $1 trillion in cash, we are paying them to do so.  A .5% return on investment with absolutely no risk is seen as a better choice than lending the money and risking default.  I cannot blame them.

My simple suggestion would be to if not repeal these provisions, then amend them so interest is only paid on required reserves not excess reserves. Remove the incentive to sit on reserves and start encouraging real investment.

I would wager such a move would be far more effective than some populist bank local movement.