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The US banking system is hugging the Fed tighter and billions of backstop borrowings are falling hard

Banks only slightly reduced their borrowing from two Federal Reserve backstop facilities in recent weeks, a sign that institutions are taking advantage of central bank liquidity in the wake of the turmoil.

According to Thursday’s data from the Fed, total outstanding balances of US institutions stood at $163.9 billion in the week to March 22, compared with $164.8 billion the previous week.

The data showed $110.2 billion in borrowing from the Fed’s traditional backstop lending program, known as the discount window, compared with a record $152.9 billion in outstanding credit last week. The loan can be extended up to 90 days and the window accepts a wide range of collateral.

Outstanding borrowings from bank term funding programs stood at $53.7 billion, compared to $11.9 billion in the previous week. The BTFP opened on March 12 after the Fed declared a state of emergency following the collapses of California’s Silicon Valley Bank and Signature Bank of New York.

Credit under the program can be extended by one year and the collateral guidelines are strict.

Fed loans to bridge banks set up by the Federal Deposit Insurance Corp to resolve SVB and Signature Bank rose to $179.8 billion from the previous week’s $142.8 billion.

“There’s nothing here that suggests things aren’t spreading,” said Blake Gwin, head of US interest rates strategy at RBC Capital Markets.

Funding markets were showing signs of stress, although with emergency measures the pressure has eased.

This includes drastic changes in rates for short-dated securities and some other moderate dislocations in the instruments where banks and others typically go for their short-term funds. Repurchase agreement rates were raised for several days, cross-currency basis swaps have been whipsawed and the difference between direct floating-rate agreements and index-tied ones – often as a measure of difficulty for banks to obtain funds. Used in – also swell.

Still, there are concerns about whether deposits will continue to flee the banks for other places in the financial system. Money market funds have been hoarding cash lately, in large part after depositors pulled their money out of US banks.

The amount of money parked in money-market funds climbed to a new record in the week to March 22 as banking worries continued to weigh on global markets.

Initially much of that flow was driven by more attractive rates, but concerns about the stability of some smaller lenders helped fuel the trend this month.

Major central banks also tapped swap lines with their US counterpart for only $590.5 million last week, even as authorities moved to make the facilities available daily in light of global banking concerns.

For the first time since November, banks tapped the Fed’s foreign repurchase agreement facility for $60 billion. This is equivalent to the counterparty limit for the participants.

Fed Chair Jerome Powell and his colleagues on Wednesday raised the benchmark lending rate by a quarter point to a target range of 4.75% to 5%. Asked whether this would exacerbate problems in the banking system, Powell said he was actually trying to reduce the cost of borrowing for the economy by keeping backstop liquidity abundantly available to banks.

“When we think about the situation with the banks, we focus on our financial stability tools, particularly our lending facilities,” he said.


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