- The Fed’s Bank Term Funding Program may inject $2 trillion into US banking, JPMorgan said.
- The emergency lending mechanism was created after SVB’s failure to help prevent similar bank runs.
- “The usage of the Fed’s (Bank Term Funding Program) BTFP is likely to be big,” JPMorgan said.
After the collapse of three lenders last week, the Federal Reserve may inject up to $2 trillion into the banking system, according to a Wednesday note from JPMorgan Chase.
The estimate comes after the central bank’s weekend announcement that it’s creating an emergency loan mechanism dubbed the Bank Term Funding Program. The initiative is meant to prevent the kind of run on deposits that sank Silicon Valley Bank last week after it sold a bond portfolio for a $1.8 billion loss.
“The usage of the Fed’s (Bank Term Funding Program) BTFP is likely to be big,” JPMorgan analysts said.
The BTFP will allow banks to obtain liquidity by putting up their bond holdings as collateral. The Fed will accept the bonds at face value, instead of the current lower market values that weighed on SVB’s holdings.
Although no official quantity has been put on the BTFP by the Fed, it has said the program is big enough to cover all uninsured deposits in the US.
JPMorgan put that around $7 trillion but noted that the five largest banks are unlikely to use the BTFP, bringing the amount the Fed will actually provide closer to $2 trillion.
That volume of liquidity would help loosen financial conditions after a year of aggressive rate hikes from the Fed as well as its quantitative tightening.
In fact, the Fed’s monetary policies have worsened a reserve scarcity in US banking, JPMorgan said. The scarcity issue is made more problematic by an uneven distribution of liquidity: of the $3 trillion of reserves held by US banks, almost half is concentrated among the top five banks.
Meanwhile, small-bank depositors have been fleeing to bigger institutions in the aftermath of SVB. And as many regional banks lack the funds to settle these withdrawals, they are pressed to sell more of their bonds, uncovering further reserve weakness, JPMorgan added.
