Fed emergency lending to banks boosted overall Fed holdings in latest week
By Michael S Derby
NEW YORK (Reuters) – The Federal Reserve’s emergency lending to banks, which hit record levels last week, has remained high over the past week amid continued large-scale lending to the financial system, which now includes official external debt.
The Fed reported that discount lending, its main source of emergency lending to deposit-taking institutions, fell to $110.2 billion on Wednesday from $152.9 billion reported last week. Last week’s level had skyrocketed from $4.6 billion on March 8, shredding a record $112 billion set in the fall of 2008, during the most dangerous phase of the global financial crisis was.
On Wednesday, however, banks increased borrowing under the central bank’s newly launched Bank Term Funding Program to $53.7 billion. On its first outing last week, the facility had drawn less than expected $11.9 billion in loans. The facility allows eligible financial firms to borrow against a range of bonds without incurring the usual penalties for this type of lending.
The Fed also reported that lending to foreign central banks through its repo facility rose to $60 billion on Wednesday from zero on March 15. Several major central banks recently announced they would draw on Fed dollar liquidity if needed.
Borrowing from the Fed caused the size of its total balance sheet to increase to $8.8 trillion from $8.7 trillion the previous week.
Last week’s hike has set back the Fed’s work since last summer to reduce the size of its holdings of cash and bonds, which reached just under $9 trillion over the summer, a development the Fed says has no impact on the economy has monetary policy.
The Fed’s data also showed that the $142.8 billion in loans it made to the Federal Deposit Insurance Corporation to help cope with California’s failing banks continued to rise, totaling $179.8 billion.
BANKS LOOKING FOR FED CASH
Emergency bank lending has surged following the collapse of two California banks, which in turn has raised concerns about broader tensions in the financial system, linked in part to the aggressive pace of the Fed’s tightening of credit, which has been trying to bring down high inflation levels.
The Fed pushed ahead with rate hikes on Wednesday, raising the cost of short-term borrowing by a quarter of a percentage point. The Fed also signaled it was almost done raising interest rates, acknowledging that tighter financial conditions brought on by banking sector woes and market reactions are likely to weigh on the economy.
After the Fed meeting, Federal Reserve Chair Jerome Powell said the current banking woes are not a repeat of what happened in 2008. “Our banking system is sound and resilient with strong capital and liquidity” and “the savings of all depositors in the banking system are sure,” he said at a central bank news conference.
Powell justified the central bank’s quick response by saying that “history has shown that, if left unaddressed, isolated banking problems can undermine confidence in healthy banks and threaten the viability of the banking system as a whole.”
Money market funds saw strong inflows as Powell expressed confidence in the financial system. But analysts at investment bank Barclays added a note of caution, saying in a note on Wednesday: “We suspect these more recent flows are being driven by interest rates rather than fear.”
Data from the New York Fed also provided further insight into money market movements. The bank’s reserve repo facility, which allows banks to park cash with the central bank at a yield generally in excess of what they could earn in the private sector, has already seen massive use in recent days. Inflows have moved towards a record of $2.554 trillion set on Jan. 3, hitting $2.233 billion on Thursday after several days of rising usage.
(Reporting by Michael S. Derby; Editing by Daniel Wallis)