Why are banks hoarding so much $$$?

I can't answer your question, but I can factually tell you this, they are levered up to their ears again. They're just better positioned to be levered.

CDS are at higher level than pre crisis, and I'm not sure the issuers were ever required to properly reserve for this as they would if they just called some of these what they are, which is insurance. I'm not talking about the CDS that trade, I'm talking about the ones originated to protect credit.

The one friggin thing that could have freed up credit when it was frozen, and really needed to be regulated, and they missed it. Instead going in a thousand directions that are now being unwound, and will have consequences in my estimation. On small guys like us, not them.

It's probably a good thing they have cash.

The stress tests the Fed has been performing on the big banks gives the banks an incentive to keep much higher deposits on reserve with the Federal Reserve. The stress tests' capital ratios are computed on 'risk adjusted assets' so higher risk assets, such as loans, require more capital to absorb any potential losses.

Deposits with the Fed are risk weighted at zero % so the banks don't have to set aside capital for those assets making it easier for them to meet the Fed's higher capital ratios and also helps them pass the stress tests the Fed puts them through.

A credit default swap is an instrument that can be used to insure a bank's loan portfolio. This is one use, they are also traded like a future's contract.

When it all went down, AIG, the largest issuer could pay on the polices they issued. The CDS are regulated as a financial instrument, not an insurance policy.

This is an oversimplification. The CDS serve a very useful purpose, but in my opinion, need to be regulated and the issuers required to reserve for losses.

Could not pay. Correct. They actually could have paid, but that's another argument not for tonight. I guess in the end, through some intervention they actually did pay. Kind of.

Short Answer: Banks are afraid to lend / there is an incentive to NOT lend.

Long Answer: This is due to four reasons.

1) They can park money at the fed window, get a minute amount of interest on that money - but that minute amount of interest is enough to pay some of their interest obligations to deposit accounts - and it is completely risk free.

2) The stress tests / regulators are strongly encouraging to reserve much more than what is traditionally required. The stress tests are overboard. Some of the conditions are, while possible, so far from likely as to basically render them impossible. It would be like the insurance industry running a test to show what would happen if a Katrina-sized hurricane hit somewhere on the US coast every three days for a month. Yeah, most of the insurance industry would collapse. Yeah, that's not likely to occur.

3) Somewhat related to #1, because banks have such low payout requirements, they don't need to take much risk with deposits. They can make strategic loans to very high credit profiles and make enough money to carry the day.

4) Banks are nervous about real estate. Bubbles are forming in some markets. There are lots of economic questions - while unemployment is low, underemployment is high, student loan balances are sky high, and you have all the federal debt/deficit concerns.

Want evidence of a lending environment that is nervous? Look at FHA loans. The insurance on these things is paid by the borrower, and fully protects the lender. If the loan goes bad, the bank is fully reimbursed. There is almost NO RISK on these loans. FHA requires only a credit score of 580 for their basic product. Yet, good luck finding a bank that will lend at 580. Most want 640. Why? Because the feds told the banks that if the banks screw up the underwriting, then the banks will have to eat the loan. If the banks write loans at 580, there is no margin for error. Because the banks have been threatened by the feds, they are giving themselves large room for error. Thus, 640.

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The conspiracy nut in me wants to think the banks are bracing for a big drop or run.

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No conspiracy, just a carefully managed recovery from the near disaster of 2008-09.

The REAL monetary expansion takes place in the banks. If they loaned all that money out, what do you think would happen to inflation?

My only gripe with the program is that (in general) the average Joe who employs people is not getting the loans. FED is going to have to make some changes because the inequalities are becoming blatant and will eventually create social unrest if left unchecked.

This country cannot have a "Let them eat cake" situation. More and more of the "1%" are starting to understand that and are writing about it.

We are witnessing financial history, and books will be written, but it may be decades before we get the real story.

Our central bank is the greatest in the world and their actions kept the worldwide economy from collapsing. There is always talk about the dollar losing reserve status, but at this point in time, what other central bank could have navigated such troubled waters?

From what I've read, the policy of giving interest on reserve deposits has blunted the Fed's attempts at putting cash on the streets so to speak (small-medium business lending).

The banks can survive with significantly less risk.

I think a contributing factor is the lack of economic growth. Businesses are not expanding. Which means they are not borrowing. Which means banks aren't lending.