WASHINGTON: Cash-strap banks borrowed $300 billion from Federal Reserve over the past week, according to the central bank.
Approx half of the $143B went to holding companies for the 2 major banks that collapsed in the last week. These were Signature Bank and Silicon Valley Bank . This triggered widespread concern in the financial markets. The Fed didn’t identify which banks received the remaining half of the funding, nor did it say how many.
Federal Deposit Insurance Corporation created the holding companies for both failed banks. It has since taken over both banks. They borrowed money to pay their uninsured depositors. As collateral, they used bonds from both banks. According to the Fed, the FDIC guaranteed repayment of the loans.
These figures give a glimpse of how large the Fed has been supporting the financial sector since the collapse of two banks this weekend.
Banks borrowed the rest to raise cash, likely to repay depositors who attempted to withdraw their funds. Since the bank collapses, many mega banks like Bank of America have reported receiving funds inflows from smaller banks.
Over the past week, the Fed borrowed an additional $153 billion through a long-standing program called “discount windows”. This was a record for the program. The discount window allows banks to borrow up to ninety days. This program allows banks to borrow between $4 billion and $5 billion per week.
A new loan facility that the Fed announced on Sunday has allowed the Fed to lend an additional $11.9 million. This program allows banks to raise cash as well as pay depositors who withdraw money.
Michael Feroli, an economist with JPMorgan Chase, stated in a research note that the Fed’s assistance has been about half of what it was during the financial crises fifteen years ago.
He said, “But it’s still a large number.” The glass half-empty view says that banks require a lot more money. The system works as it is intended.
Federal Lending to Banks: The Fed’s recent emergency lending to the banks aimed at addressing a major cause of their collapse: Signature Bank and Silicon Valley Bank had billions of dollars worth of bonds and Treasury that paid low interest rates.
As the Fed raised its benchmark interest rate steadily over the past year, the yields on longer-term Treasurys rose. This led to a decrease in the value of lower-yielding Treasurys held by banks.
The banks cann’t increase enough fund from the sale of Treasurys to pay creditors trying to withdraw their funds from banks. It was a bank run.
The Fed’s lending programs allow financial institutions to borrow against bonds and instead of having to sell them. This includes the new Sunday announcement.
The Fed claimed that it has received $15.9 Billion in collateral for its new lending facility. This is more than the $11.9 Billion it has lent. Sometimes, banks provide collateral to the Fed before they borrow. This suggests that additional lending may be in the works.
In the last week, the Federal Reserve has lent banks more money than at the height of the 2008 financial crisis.
Under the Bank Term Funding Program (BTFP), the Federal Reserve has lent banks more than $11.9 million. This program was launched Sunday night to stop a banking crisis that was sparked by the collapse Silicon Valley Bank. The program is just one of the many federal loans to banks that have been made over the last week.
The Federal Reserve has eased restrictions on its discount windows. Banks borrowed more than $152billion, compared to just $4.5billion from the previous week. This is a contrast to the peak of $110billion in weekly discount window lending during financial crisis. A notable increase in bridge loans was also noted by the Federal Reserve report, which reached more than $142 Billion for the week ended March 15.
“This huge use of emergency borrowing confirms the necessity to guarantee par for all SBV deposits was in order to avoid a systemic crises,” tweeted Daniela Gabor, an economist at the University of the West of England.
The total assets added to the Federal Reserve’s balancesheet by the increased lending was more than $297 trillion.
Federal regulators launched an emergency BTFP after SVB collapsed after SVB was taken over by the Federal Deposit Insurance Corp. .
Federal Lending to Banks: This program allows qualified institutions to make sure they have enough money to pay depositor obligations. U.S. Treasury Secretary Janet Yellen stated Thursday to lawmakers that the program had helped maintain a sound banking system.
The Federal Reserve made it easier to borrow at the discount window. However, the newly launched BTFP offered better terms. It included counting collateral assets at ” par value”, which means they are valued at their purchase prices, and not at the current market price. Federal Lending to Banks, Banks can get short-term loans through the discount window to keep their cash reserves. The BTFP, on the other hand offers banks longer-term loans for one year.