Wednesday, October 13, 2010

JPM Earnings - Earning Interest on Borrowings?

As most people know, banks pay interest on liabilities (deposits) and earn interest on assets (loans).

A friend alerted me to an interesting line in their 8k which I'm sure some bank balance sheet expert can shed more light on.

So there are two sections on the balance sheet for interest rates.  The first is "Interest-Earning Assets" - which lists the assets that JPM earned interest on, and the rates earned:

Interest-Earning Assets
Deposits with banks:  .85%
Fed Funds Sold and Securities Purchased under Resale agreements: .92%
Securities Borrowed:  .22%
Trading Assets (debt instruments):  4.37%
Securities: 2.67%
Loans: 5.71%
Other assets: 1.57%
Total Interest Earning Assets:  3.75%

Right below that section is "Interest-Bearing Liabilities"

Interest-Bearing Liabilities
Interest bearing deposits: .51%
Fed Funds Purchased and Securities Sold under Repurchase Agreements: NEGATIVE .28%
Commercial Paper:  .20%
Trading Liabilities (Debt Instruments): 2.64%
Other borrowings/Liabilities: .54%
Beneficial Interests (VIEs) : 1.36%
Long Term Debt: 2.34%
Total  Interest Bearing Liabilities: .81%

There's a footnote under the Fed Funds Purchased that says "Reflects a benefit from the favorable market environment from dollar-roll financings."

This is the root of my intrigue here:  JPM actually earned money (ie, they paid negative interest) on that line item under liabilities.  They got paid to borrow money!

From the two tables, you can see that JPM got paid 28bps to "purchase" (borrow) Fed Funds, and "sold" (lent) Fed Funds at 92bps!  That's a nice money printing machine!

Is this related to stock loan (or fixed income loan) somehow - is that what the repurchase agreement refers to?  Or just regular overnight open market operations?  Anyone?  Thoughts?  Did the Fed pay JPM to borrow money, which JPM then lent to other banks and got paid again for?  (I doubt it, but I don't know)  What does that "dollar-roll financings" footnote mean?  If they benefited on their borrowings from favorable dollar-roll financings, then why didn't they get hit on their loans by the same phenomenon?

Anyone?  Beuller?

EDIT:  is this related to the 25bps that the Fed pays on excess reserves on deposit?



vjk said...


With repos, the negative rate may have ocuured due to "special" collateral delivery fail penalty, about 3%, introduced in 2009.

So, for the cash lender, overpaying through the negative rate for a "special" collateral may have just been a lesser evil than incurring a penalty for the fail.

I do not know much about "dollar-roll financing" mxcept that it is similar to repo, but I believe the motivation for the cash lender to pay interest may be the same as with repos.

Kid Dynamite said...

VJK - and you're saying that JPM didn't have that problem on the other corresponding line item above because they didn't incur any penalty rates in their resale agreements?

Sam said...

Just found your blog yesterday--good stuff

From NY Fed:
"Why does the Federal Reserve continue to transact in agency MBS dollar rolls and coupon swaps following the completion of program purchases?

The Federal Reserve uses agency MBS dollar rolls as a supplemental tool to address temporary imbalances in market supply and demand. A dollar roll is a transaction conducted at market prices that generally involves the purchase or sale of agency MBS for delivery in the current month, with the simultaneous agreement to resell or repurchase substantially similar (although not necessarily the same) securities on a specified future date. A coupon swap is a transaction conducted at market prices that involves the sale of one agency MBS with the simultaneous agreement to purchase a different agency MBS. Coupon swaps are transactions that allow the Federal Reserve to sell agency MBS that are not readily available for settlement, and purchase different agency MBS that are more readily available for settlement. Although purchases were completed at the end of March 2010, the Federal Reserve continues to use both dollar roll and coupon swap transactions to facilitate an orderly settlement of the agency MBS program’s remaining forward purchase commitments.

With whom does the Federal Reserve transact agency MBS dollar rolls and coupon swaps?

The New York Fed transacts agency MBS dollar rolls and coupon swaps only with primary dealers who are eligible to transact directly with it."

So JPM gets to earn interest on its cash in the interim before taking delivery and subsequently selling the security?

I'm sure someone smarter than I will know.

vjk said...


"you're saying that JPM didn't have that problem on the other corresponding line item above"

There is not enough information in their filing to determine whether my hypothesis is correct, but at least it is plausible ;)

Perhaps, their overpaying for "special delivery" was smaller than that of its counterparties. They may have been luckier or smarter, who knows...

vjk said...


Forgot to add:

As you know, JPM is one of the two tri party repo clearers, so it may have informational and operational advantages that allow JPM to avoid special delivery failures.

Greycap said...

I assume this 8K is consolidated, for the entire BHC? (Sorry, too lazy to read it myself.) If so, I think vjk is very likely correct, and the line item in question represents securities lending. It's not too surprising that they would earn more off this business than they pay, since they are just one of several broker-dealers but one of only two clearing/custodian banks.

Anonymous said...

KD - this is said completely free of derision: can you tell us what exactly it is you do for a living? I understand you were formerly employed at a nameless financial institution in NYC. But now it seems you live in the backwoods of NH, with limitless amounts of time to garden, walk your dogs, take frequent trips to Vegas, and comment on a wide spectrum of issues facing the country and financial markets.

I am genuinely curious.

Keep up the compelling writing.

Kid Dynamite said...

for those interested, that line item that is currently negative 28 bps , over the previous four quarters was:

2Q10 -7bps
1Q10 -5 bps
4Q09 +8bps (ie, paying interest)
3Q09 +20bps

so it has gotten more favorable in each of the last 4 quarters.

Greycap - yes - it's the consolidated 8k. I'm not surprised that they earn more from this biz than they pay out - I'm surprised that they earn on both sides of it (both the repo's and the resales)!

anon - what do I do? Let's just say I'm "exploring strategic alternatives."

you could say I'm retired, but I'll have to work at some point. temporarily retired.

UrbanAnalyst said...


While I haven't done any dig-work on JPM filings, I'm inclined to agree with vjk's premise of special collateral repo's (one of the few negative rate UST transactions I've encountered).

Sorry I can't add much substance to the commentary but a QoQ snapshot of JPM holdings might yield some clues. Any chance they're heavily targeting some of the Fed POMO buy tranches in Q3? Again, no research, just a thought that would play with the sharpening of their game (as they learn and play the Fed buys harder).

I did notice that Yves commented on this back in April for reference:

scharfy said...

Reminds me of an old game I used to play as a child with my Dad -

He called it "find the subsidy buried in the 8k"

It was fun, but I never really could find it.