Cash-strapped banks borrowed about $300 billion from the Federal Reserve last week, the central bank announced on Thursday.
Almost half of the money – $143 billion – went to the holding companies of two major banks that went bankrupt last week, Bank of Silicon Valley and Signature Bank, triggering widespread alarm in financial markets. The Fed did not identify which banks received the other half of the funding or say how many did.
The holding companies of the two failed banks were created by the Federal Deposit Insurance Corporation (FDIC), which took over the two banks. The money they borrowed was used to pay their uninsured depositors, with bonds held by the two banks as collateral. The FDIC guaranteed repayment of the loans, the Fed said.
The figures give a first glimpse of the extent of the Fed’s aid to the financial sector after the collapse of the two banks last weekend.
The rest of the money was borrowed by banks seeking to raise funds – likely, at least in part, to repay depositors who tried to withdraw their money. Many mega banks, such as Bank of America, said they had received inflows from smaller banks since last weekend’s bank failures.
An additional $153 billion in borrowing from the Fed over the past week was made under a long-running program called the “discount window”; this was equivalent to a record level for this program. Banks can borrow at the discount window for up to 90 days. Typically, in any given week, only about $4-5 billion is borrowed under this program.
The Fed lent an additional $11.9 billion under a new lending facility it announced on Sunday. The new program allows banks to raise funds and pay depositors who withdraw money.
Michael Feroli, an economist at JPMorgan Chase, said in a research note that Fed aid is, so far, about half of what it was during the financial crisis 15 years ago.
“But it’s still a big number,” he said. “The glass half empty is that the banks need a lot of money. The glass half full is that the system is working as intended.
Last week’s emergency loan from the Fed aims to tackle one of the main causes of the collapse of the two banks: Silicon Valley Bank and Signature Bank owned billions of dollars in Treasuries apparently safe and other bonds that paid low interest rates.
Over the past year, as the Fed steadily raised its benchmark interest rate, yields on longer-term Treasuries and other bonds rose. This, in turn, reduced the value of low-yielding Treasury bills held by banks.
As a result, the banks were unable to raise enough cash from the sale of their treasury bills to pay the many depositors who tried to withdraw their money from the banks. This was equivalent to a classic bank run.
The Fed’s lending programs, particularly the new facility it unveiled on Sunday, allow financial institutions to post bonds as collateral and borrow against them, rather than having to sell them.
For its new loan facility, the Fed said it received $15.9 billion in collateral, more than the $11.9 billion it loaned. Banks sometimes provide the Fed guarantee before borrowing. This suggests that additional loans are on the way.