Fed lending to banks slows in sign financial turmoil is easing
Banks decreased borrowing from Fed emergency programs last week
Former Federal Reserve Vice Chair Randal Quarles and Cornerstone Research senior adviser William Silber give their take on how the government should responding to bank failures on 'Kudlow.'
U.S. banks reduced their reliance on two different Federal Reserve emergency lending programs this week, a sign that recent turmoil within the financial industry may be starting to fade.
The latest data published by the Fed shows that banks borrowed a combined $152.6 billion in the week through March 29, compared with $163.9 billion the previous week.
Banks borrowed $64.4 billion from the Fed's Bank Term Funding Program as of Wednesday, compared with $53.7 billion one week ago. The new emergency backstop – which was rolled out on March 12 – provides loans to banks, credit unions and other financial institutions for up to a year on highly favorable terms in exchange for collateral like Treasurys and other government-backed bonds.
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Pedestrians near the Treasury building in Washington, D.C., on Dec. 30, 2022. (Photographer: Ting Shen/Bloomberg via Getty Images / Getty Images)
Another $88.2 billion was borrowed from the discount window – the more-traditional lending facility that is used to provide liquidity to the U.S. banking system. That is down from the $110.2 billion recorded last week and the $152.9 reported billion earlier this month, which smashed a record set during the 2008 financial crisis. The discount window provides loans of up to just 90 days.
The Fed did not identify which banks received funding, nor did it specify how many requested it.
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The emergency lending from the Fed comes after the stunning collapse of Silicon Valley Bank earlier in March. It marked the largest U.S. bank failure since the global financial crisis in 2008.
Employees walk in front of a sign outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023, in Santa Clara, California. (Justin Sullivan/Getty Images / Getty Images)
SVB, which largely catered to tech companies, venture capital firms and high-net-worth individuals, saw a huge boom in deposits during the pandemic, with its assets surging from $56 billion in June 2018 to $212 billion in March 2023.
The bank responded by investing a large chunk of that cash into long-term U.S. Treasury bonds and other mortgage-backed securities. However, that strategy backfired when the Fed began steadily hiking interest rates and the value of those holdings decreased.
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That coincided with a decline in available funding for startups, which started drawing down more of their money to cover their expenses, forcing the lender to sell part of its bond holds at a steep $1.8 billion loss. When depositors realized that SVB was in a precarious financial situation, a bank run ensued.
The lending program will allow banks to borrow against those bonds should customers wish to make withdrawals, rather than sell them at a loss.