Cash-strapped banks have borrowed $300bn from the Fed this past week

The central bank announced on Thursday that cash-strapped banks received nearly $300 billion in loans from the Federal Reserve last week.

Nearly half the money – $143bn – went into holding companies for the two major banks that failed in the past week, Silicon Valley Bank and Signature Bank, triggering widespread alarm in financial markets. The Fed did not identify the banks that received the other half of the funding or say how many of them did so.

Janet Yellen: US banking system ‘robust’ despite two collapses in a week

advertisement

Holding companies for the two failed banks were established by the Federal Deposit Insurance Corporation (FDIC), which took over both banks. The money they borrowed was used to pay their uninsured depositors, with bonds owned by both banks posted as collateral. The Fed said the FDIC has guaranteed the loan repayments.

The data provide the first glimpse of the scale of the Fed’s aid to the financial sector after two banks collapsed this past weekend.

– Advertisement –

The rest of the money was borrowed by banks trying to raise cash – at least partially, to pay depositors who tried to withdraw their money. Several mega banks such as Bank of America have reported receiving an influx of funds from smaller banks since last weekend’s bank failure.

During the past week, an additional $153 billion in Fed borrowing came through a long-running program called the “discount window”; This was a record level amount for that program. Banks can borrow through the discount window for up to 90 days. Typically in a given week, only $4bn to $5bn is borrowed through this program.

The Fed has lent an additional $11.9bn from a new lending facility announced on Sunday. The new program enables banks to raise cash and pay any depositors who withdraw money.

Michael Feroli, an economist at JPMorgan Chase, said in a research note that the Fed’s aid so far is about half of what it was during the financial crisis 15 years ago.

“But it’s still a huge number,” he said. “The glass half-empty view is that banks need a lot of money. The glass is half full that the system is working as intended.

Last week’s emergency loans from the Fed seek to address a key reason for the collapse of the two banks: Silicon Valley Bank and Signature Bank hold billions of dollars in seemingly safe treasuries and other bonds that pay low interest rates. We do.

Over the past year, as the Fed steadily raised its benchmark interest rate, yields on long-term Treasuries and other bonds rose. In turn, the value of the low-yielding Treasury bonds held by banks decreased.

As a result, banks could not raise enough cash from the sale of their Treasury bonds to pay the many depositors who were trying to withdraw their money from the banks. It was like running a classic bank.

The Fed’s lending program, specifically the new facility unveiled on Sunday, enables financial institutions to post bonds as collateral instead of selling them and borrow against them.

For its new lending facility, the Fed said it had received $15.9bn in collateral, more than the $11.9bn it lent. Banks sometimes provide Fed collateral before borrowing. This shows that additional credit is being given.