New Fed Bank Backstop Has Scope to Inject as Much as $2 Trillion

(Bloomberg) - Market observers are on alert to find out just how much extra funding the Federal Reserve’s new backstop program will ultimately add into the system, with analysts at JPMorgan Chase & Co. positing that it could inject anywhere up to $2 trillion in liquidity.

That’s their maximum estimate. The analysts’ prediction based on the amount of uninsured deposits at six US banks that have the highest ratio of uninsured deposits over total deposits is closer to $460 billion. That’s a smaller amount, but still enormous compared to historic usage of the so-called discount window, another Fed facility that is often seen to carry a stigma and has historically involved banks taking a haircut on the amount borrowed relative to collateral.

The Fed has said that it plans to publish figures weekly in the same balance-sheet statement that it uses to reveal uptake of funding from the window. That release is scheduled for around 4:30pm Thursday New York time.

“The usage of the Fed’s Bank Term Funding Program is likely to be big,” strategists led by Nikolaos Panigirtzoglou in London wrote in a client note Wednesday. While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest, they said.

The US authorities set up the program earlier this month following a collapse of three lenders with the aim of preventing a fire sale of sovereign debt to obtain funding. Treasury two-year yields have tumbled more than 60 basis points this week amid speculation the Fed will skip an interest-rate hike next week as it seeks to stabilize the banking sector.

While there are still $3 trillion of reserves in the US banking system, a significant proportion of that is held by the largest banks, the JPMorgan strategists wrote. Tighter liquidity has been caused both by the Fed’s quantitative tightening and also the rate hikes that have induced a shift to money-market funds from bank deposits, they said.

The Bank Term Funding Program should be able to inject enough reserves into the banking system to reduce reserve scarcity and reverse the tightening that has taken place over the past year, the JPMorgan strategists wrote.

Lou Crandall at Wrightson ICAP appears more circumspect about how quickly banks will ramp up their funding from the new facility. His reserve balance projections assume that combined activity at the discount window and the new Bank Term Funding Program rose by roughly $100 billion over the past week. That would take it above the discount window’s previous highs for the year to levels last seen amid the pandemic-related upheaval of 2020.

“Our guess is that the new program will be attractive to a large number of institutions beyond those currently facing liquidity questions,” Crandall wrote. “We expect the advantageous financial terms of the new program to overcome stigma concerns at many institutions in the weeks ahead. However, the speed and magnitude of the run-up in Fed lending is highly uncertain.”

(Updates throughout, adds Wrightson ICAP views.)

By Masaki Kondo and Alexandra Harris
With assistance from Benjamin Purvis


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