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After Silicon Valley Bank and Signature Bank failed, the US government stepped in with an extraordinary measure to rescue customers, some of whom held many millions of dollars in uninsured deposits that otherwise would have been wiped out.
But a second, perhaps more significant rescue plan has gotten mostly lost in the public conversation: the Fed’s Bank Term Lending Program. Economists have called it an essential tool to prevent another SVB-like bank from failing.
Here’s what you need to know about the Fed’s emergency stabilization plan.
What is it?
The Fed says it created the BTLP to provide “an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell securities in times of stress.”
There are three essential parts of this new program.
The first are the loans it provides to banks.
Financial institutions will be able to borrow cash from their Federal Reserve Bank for up to one year using bonds, mortgage-backed securities and other types of debt as collateral. That means if a bank needs to quickly shore up cash to meet the pace of customer withdrawals, it will be able to.
The second part of the program is valuing bank’s Treasuries and other securities at “par.”
The Fed’s rate hikes have undermined the value of the Treasury bonds that banks rely on as a critical source of capital (you can read more about that here). US banks are currently sitting on about $620 billion in unrealized losses in bonds, according to the FDIC — if any of them need access to a lot of cash quickly, they’d have to sell them at a loss – perhaps a substantial loss, like SVB did last week.
The BTLP aims to fix this problem by valuing the bonds used as loan collateral at “par.” If a bank brings in a bond they purchased for $1,000 that’s only worth $600 now, they’ll still get $1,000 in cash.
The third part of the program is meant to instill confidence in the US banking system. These loans will be backed by $25 billion from the US Treasury. If a bank can’t pay back its loan, the government will.
What’s the point of the program?
The BTLP is partially the brainchild of Douglas Diamond and Philip Dybvig, who won the Nobel Prize last year (alongside former Fed Chairman Ben Bernanke) for their work on bank runs and how to prevent them. They found that if customers know that their bank deposits are insured, a bank run is very unlikely.
That’s what this program intends to do: When banks sell large amounts of super-safe assets like Treasuries at a loss, it signals that they exhausted all other options to raise capital to pay back customers – and failed. The Fed’s program takes that scenario off the table, giving bank customers’ assurances that their money is safe and backed by the US Treasury.
It seems to be working. Bank stocks rebounded significantly on Tuesday after logging record plunges Monday and the week prior.
Has anyone used it?
We don’t know yet! But we will next Monday. That’s when the Fed releases its weekly balance sheet. There won’t be any names attached to the loans but we’ll see how much has gone out to banks.
For those with more patience, the Fed will make the names of banks and how much they borrowed public one year after the program ends. You may be waiting a while though, the program is expected to last a year, but there’s nothing stopping the Fed from extending it indefinitely.
Will anyone use it?
This is where things get tricky. If a bank takes out a loan from the Fed, they’re loudly projecting their liquidity struggles to investors. They’re basically marked with a Scarlet Letter, RSM chief economist Joe Brusuelas told CNN.
But the Fed knows this, he said. It was a common problem with similar programs instituted during the 2008 financial crisis.
That’s why Brusuelas suspects that there could be some maneuvering done by New York Federal Reserve President John Williams and some of the largest US banks. Those banks will coordinate to take Fed loans around the same time on the same day alongside smaller banks. That way the total in loans will be quite large and amorphous, making it difficult for investors to decipher which banks borrowed what.
Wait a minute, I thought the Fed was making money more expensive, not less.
You’re right, though the Fed wouldn’t call this “quantitative easing” — the asset-buying program it used to juice the economy during the global financial crisis. It prefers “large scale asset purchases.”
For about a year now the Fed has been practicing quantitative tightening (QT) to bring down sticky inflation rates. They’re currently selling about $60 billion in Treasuries each month.
This new program does the opposite of that, it injects money into the banking system. But Brusuelas says that $25 billion in loans is at the very most going to slightly offset the effects of tightening. That’s worth preventing an epic bank run which could destabilize the entire economy, he added.
PPI, bank stocks and retail sales: What investors are watching today
▸ February’s US Producer Price Index, which measures what suppliers are charging businesses, is expected to come in at 5.4% year over year (down from 6% in January) and 0.3% month over month (down from 0.7% in January).
PPI is one of several closely watched inflation gauges. Because the producer-centric index captures price shifts upstream of the consumer, it’s sometimes looked to as a potential leading indicator of how prices may eventually land at the store level.
Fed policymakers will next meet a week from now, when they’re largely expected to increase rates by another quarter point, according to CME Group’s FedWatch tool.
▸ US bank stocks rebounded on Tuesday, recovering some of their losses after the collapse of three banks tested markets on Monday.
Regional bank stocks rallied: First Republic (FRC) Bank ended the day up 27% after a record drop on Monday. PacWest Bancorp (PACW) surged 34% and Western Alliance (WAL) shares gained more than 14%.
Large banks also made gains on Tuesday. JPMorgan Chase (JPM) was up 2.6%, Citigroup (C) grew 6% and Wells Fargo (WFA) was 4.6% higher.
The question is whether bank stocks can hold on to their gains or if Tuesday was just a sector-wide dead cat bounce.
“Banks have been given a reprieve by Treasury yields edging lower, and markets pricing in a lower terminal rate than what was expected just a week ago,” said Quincy Krosby, chief global strategist for LPL Financial. “But in this headline driven market, much depends on the banking sector stocks to see the kind of inflows to suggest that the worst is truly over.”
▸ US Retail Sales for February, which are an important indicator of consumer spending, are also due out Wednesday morning. This spending accounts for the majority of US economic activity and is closely watched by the Fed.
Analysts expect a significant drop in February, with sales decreasing by 0.3% – last month saw a 3% gain. But in this bad-is-good economy that might give Wall Street a reason to celebrate, it could mean the Fed will feel pressure to ease its rate hiking regimen.
Credit Suisse finds ‘material weakness’ in its financial reporting
More bad news for the banking sector. Credit Suisse’s stock crashed more than 20% to a record low after its biggest shareholder appeared to rule out providing any more funding for the embattled Swiss lender.
In an interview with Bloomberg, the chairman of the Saudi National Bank said it would not increase its stake in the Swiss lender.
Credit Suisse said in its annual report that it had found “the group’s internal control over financial reporting was not effective” because it failed to adequately identify potential risks to financial statements.
CNN’s Hanna Ziady reports that the revelations come just days after the bank delayed the publication of the annual report after an eleventh-hour query from the US Securities and Exchange Commission over cash flow statements for 2019 and 2020.
The board concluded that the “material weakness could result in misstatements of account balances or disclosures that would result in a material misstatement to the annual financial statements of Credit Suisse,” the annual report said. Credit Suisse is urgently developing a “remediation plan” to strengthen controls.