The Big Idea
Banks tap $648 billion of federal liquidity in a week
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The Fed provided $292 billion in cash to banks in the week ending March 15, according to the H.4.1 report released March 16, including an extraordinary loan to the FDIC. And along with $356 billion of gross borrowing the same week from the FHLBank system, the $648 billion in total funding signals intense bank demand for liquidity. That heightened preference for liquidity will almost certainly limit bank appetite for lending and investing in the short run.
The Fed discloses an extraordinary loan to the FDIC
Nearly $138 billion of Fed lending came through the discount window, nearly $12 billion through the new Bank Term Funding Program (BTFP) and nearly $143 billion through loans to banks set up by the FDIC to manage the resolution of SVB and Signature Bank (Exhibit 1). Low use of the BTFP may reflect the lack so far of a detailed public outline for getting access, although some banks have suggested concerns about drawing regulatory attention.
Note: * Includes loans that were extended to depository institutions established by the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Banks’ loans to these depository institutions are secured by collateral and the FDIC provides repayment guarantees.
Source: Federal Reserve H.4.1
As Bill Nelson at the Bank Policy Institute points out in a March 17 note, the loans to the FDIC’s bridge banks look the most surprising. “As far as I know,” Nelson writes,” the Fed has provided no other information on these loans. The lending itself is extraordinary and possibly unprecedented. The Fed is essentially lending to another government entity.”
Nelson speculates that the Fed is lending under Section 13(13) of the Federal Reserve Act, which allows lending to an almost unlimited set of borrowers with few restrictions.
Nelson also notes that on Monday, March 13, the FDIC drew $40 billion from the deposit insurance fund and then repaid the fund the next day. There was $128.2 billion in the FDIC fund at the end of 2022 “My guess is the Fed decided to lend to the bridge banks to keep the FDIC flush,” Nelson continues. “Any appearance that the FDIC is running out funds would not help with depositor confidence.”
Record issuance from the FHLBanks
The FHLBanks have seen record demand to borrow. The FHLBanks issued $167 billion in debt on March 13, $122 billion on March 14 and $67 billion on March 15. A substantial portion of the debt came in overnight form, which borrowers repay the next day. Gross issuance likely overstates net demand.
Most money likely invested in cash at the Fed
Total bank reserves held at the Fed for the week ending March 15 went up by $435 billion, suggesting banks put most of the funds raised from the Fed and the FHLBanks in overnight reserves at the Fed. Banks have reported anecdotally for years that regulators prefer Fed reserves over any other asset for meeting liquidity tests.
Impact of liquidity preference
The collapse of SVB and Signature Bank and the sharp uptick in bank demand for liquidity stands to have immediate impact on bank funding and asset preferences. In the short run, banks seem likely to store more liquidity at the Fed and hesitate to deploy into loans or securities. How long that liquidity preference lasts will depend on lessons drawn by bank management, boards, regulators and rating agencies in the weeks and months ahead.
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