Investing
Quick shot: Build it and they will come: The Fed’s latest support measures
The formal job of the Fed is to keep inflation in check and maximize employment, but our central bank also serves a crucial role as the bedrock of the banking system.
The formal job of the Fed is to keep inflation in check and maximize employment, but our central bank also serves a crucial role as the bedrock of the banking system. As such, since the Global Financial crisis, the Fed has expanded its toolkit to offer various ways to restore or maintain financial stability when that stability is threatened.
Last weekend, the FDIC, Fed, and Treasury jointly announced efforts to make depositors at the recently failed Silicon Valley Bank and Signature Bank whole, and boost confidence in the broader financial system. Beyond guaranteeing all deposits at SVB and Signature, the Fed introduced a new emergency facility to make it easier for all banks to get the liquidity (i.e., access to cash) that they may need in times of stress. That program is called the Bank Term Funding Program, or BTFP.
Already, the data shows that banks are making use of the measures. Banks tapped the Fed’s discount window (which is the Fed’s main direct lending facility that enables it to lend banks money) for $153 billion, and the new BTFP also had about $12bn loans taken out by only its third day of existence. Roughly ~$100bn of the new borrowing came from First Republic, suggesting that banks beyond just SVB and Signature are relying on the Fed for liquidity right now.
We believe policymakers are trying to ring-fence weak links in the banking system in order to arrest a downward spiral for the entirety of it. Accomplishing that mission may take time, further or more powerful forms of central bank intervention, company-specific capital raises at much lower valuations, or some combination of these measures. Either way, the actions taken so far suggest that policymakers are willing to do what it takes to contain the turmoil before it mounts into a crisis.
Banks are tapping liquidity sources from the Fed
All market data from Bloomberg Finance L.P., 3/20/23
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