In “Signs Of The Financial Apocalypse”+ (and yes, the title was mostly tongue-in-cheek) I talked briefly about record borrowing from the Fed’s discount window over the last week.
At almost $153 billion, the total eclipsed the previous record of $110.7 billion set a month after Lehman failed.
“It appears that overall, US banks see little stigma in using Fed funding facilities,” JPMorgan’s Nikolaos Panigirtzoglou remarked, referencing the H.4.1 release, which the financial media was waiting for Thursday with the sort of nervous anticipation you’d expect from an industry built on monetizing hyperbole.
When you need liquidity (or when you want it in case of, you know, bank runs) the stigma that traditionally goes along with borrowing at the discount window is probably a secondary concern.
Considering the nature of the mini-crisis that unfolded over the past seven days, and also the fact that the Fed’s new bank term lending facility only came into being on Sunday, the record jump illustrated in the (admittedly remarkable) figure below, isn’t entirely surprising. As BofA’s Michael Gapen put it, “It’s about in line with what we expected.”
Obviously, it’ll be important to monitor how this develops. “As it took time for banks to set up their systems for the new BTFP facility, they likely borrowed initially from the discount window,” Panigirtzoglou went on to say Friday. “Given more attractive terms for BTFP funding, we expect most of the discount window borrowing [or] at least the portion that corresponds to BTFP eligible collateral, to roll into the BTFP facility over the coming weeks.”
Panigirtzoglou suggested US banks could eventually conceptualize of the BTFP as a program akin to ECB TLTROs. “If this materializes, it would represent an additional impulse to the usage of the BTFP facility,” he said.
If you add up the discount window borrowing with the nearly $12 billion BTFP utilization and the $143 billion advance to the FDIC for the SVB and Signature bridge banks, you get — well, you get a very large number. Something like $300 billion.
When you include an estimated $250 billion in FHLB advances (some of which will also likely migrate to the BTFP going forward), the sum exceeds a half-trillion.
Recall that FHLB issuance has been robust over the course of the panic, to put it mildly. Banks thirsty for cheap funding have rushed to their regional HLBs, which in turn prompted a deluge to help meet demand for liquidity from the so-called “lenders of next-to-last resort.”
Monday’s $89 billion sale of floating-rate notes (which came atop $67.6 billion raised overnight and nearly $23 billion in term discount notes) was so large it needed a syndicate group. On the same day, borrowing in the fed funds market dropped to just $41 billion.
If you don’t count December 31, 2020 (i.e., quarter-end), that was the lowest since March of 2016.
On Tuesday, Wednesday and Thursday, FHLB issuance continued unabated, indicative of funding demand from members. The issuance tsunami to sate that demand corresponds with FHLBs’ retreat from overnight funding markets. RRP balances rose a second day Thursday, but had fallen by $187 billion over the three sessions through Wednesday, in keeping with precautionary behavior (money market funds took in $121 billion last week, after all, so the $137 billion WoW decline in RRP usage appears to throw banks’ reserve demand into stark relief).
All told, the $550 billion ($300 billion from the Fed and $250 billion from FHLBs) “implies that US banks lost even more than the $460 billion we estimated based on the uninsured deposits of the six US banks with the highest ratio of uninsured to total deposits,” JPMorgan’s Panigirtzoglou went on to say.
“There was clearly a bias for the discount window and to remove funds from the RRP in an effort to bolster bank reserves in preparation for a prolonged period of financial sector stress,” BMO’s Ian Lyngen and Ben Jeffery said Friday, adding that “the operative question quickly becomes whether this represents preemptive actions by banks to be prepared ‘just in case’ or evidence that there is underlying funding strains that have yet to be revealed.”
When do insurance companies and their annuities start going teats up? Who bails them out?
This is my thought, also.
If the US government is willing to protect all depositors from any losses then the Fed/government will also want to protect other groups that might be harmed (such as pensioners, boomers, investors) from losing too much money that will be needed to live on during retirement, etc.
From a moral perspective, once one group becomes protected by the government, it seems like it won’t be a stretch for the government to want to protect more and more groups.
The US might look a lot more like Japan within the next few years than was thinkable even a month or two ago.
HI Emptynester.
Off topic, but we both see immigration reform as absolutely critical going forward. Ron DeSantis trumpets that Florida represents the future of America. So this is not very encouraging:
Google Florida Senate Bill CS/SB 1718: Immigration. (you may need to specify 2023 in your search term).
My main source of day-to-day eating money is a large fixed annuity from TIAA. In spite of being a fixed annuity (now comprised of three parts after my wife’s passing), this year’s payment actually went up 6% over the previous year. This represents the fourth rise in 15 years of retirement. My two Voya annuities are also going nicely.
@ Mr. Lucky, how do issuers typically finance the annuities they issue? What is the potential impact of rate changes, inversions, rate volatility, etc (if any)?
Looks a bit like QE to me, if banks can post collateral and then get cash at par!
I was thinking that way myself. QE
yah, better than I can get at the pawn shop, fer shure
And here we go with the next bubble.
In this environment why would our central bank keep doing QT and take liquidity out of the system which is desperate for liquidity? Makes no sense. It would not surprise me to see the FOMC pause QT and perhaps raise rates a 1/4% with a dovish pivot dialogue by Powell in the press conference- leading market to conclude that a rate pause is on the table for future meetings.
I wonder if pausing or not pausing QT would make much difference. The monthly QT runoff is much smaller than the bank-related liquidity being provided.
Life is a simple exercise for complicated people. Banking as an industry is a chronic recidivist. Krugman sad many years ago if you lend long and borrow short, you need to be regulated. When somebody goe belly up in a financial company, we see many red flags along the way in hindsight. Incompetence and sketchy practices are tolerated far too much. Canada, with a very highly concentrated banking system, regulates more strictly. I like that. The financial community is very contemptuous
of regulators. I can fix this. Pay them more, maybe a lot more…Fire them when they don’t perform…Forbid lobbying and the revolving door. Form a panel with people like William K. Black, Sheila Baer, etc. Write some legislation that a 14 year old can understand…