Agencies update guidance on liquidity risks and contingency planning. "The updated guidance encourages depository institutions to incorporate the discount window as part of their contingency funding plans." The liquidity fairy is now ENCOURAGED?
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230728a1.pdf
- The Fed
- Federal Deposit Insurance Corporation
- National Credit Union Administration
- Office of the Comptroller of the Currency
Wut mean?:
Given the unpredictable financial events in the first half of 2023, it's emphasized that depository institutions should have robust contingency funding plans that address potential stress scenarios.
- There's a need to prepare for rapid deposit outflows, as seen in these events.
- Institutions should gauge the reliability of their funding and ensure they have diverse sources of funding for difficult times.
Concerns about creditworthiness or general liquidity conservation might render repo lines inaccessible.
- Therefore, it's vital to have multiple backup funding sources.
- The updated guidance encourages depository institutions to incorporate the discount window as part of their contingency funding plans.
Discount Window/Primary Credit:
https://fred.stlouisfed.org/series/WLCFLPCL
| Date | Discount Window | Down from 3/15 high |
|---|---|---|
| 3/15 | $152.853 billion | $0 billion |
| 3/22 | $110.248 billion | -$42.605 billion |
| 3/29 | $88.157 billion | -$64.696 billion |
| 4/5 | $69.705 billion | -$83.148 billion |
| 4/12 | $67.633 billion | -$85.22 billion |
| 4/19 | $69.925 billion | -$82.928 billion |
| 4/26 | $73.855 billion | -$78.998 billion |
| 5/3 | $.5345 billion | -$152.3185 billion |
| 5/10 | $.9323 billion | -$151.9207 billion |
| 5/17 | $.9048 billion | -$151.9482 billion |
| 5/24 | $.4211 billion | -$152.4319 billion |
| 5/31 | $.3971 billion | -$152.4559 billion |
| 6/7 | $.3167 billion | -$152.5363 billion |
| 6/14 | $.3618 billion | -$152.4912 billion |
| 6/21 | $.3208 billion | -$152.5322 billion |
| 6/28 | $.3209 billion | -$152.5321 billion |
| 7/5 | $.3356 billion | -$152.5174 billion |
| 7/12 | $.2682 billion | -$152.5848 billion |
| 7/19 | $.2633 billion | -$152.5897 billion |
| 7/26 | $.2249 billion | -$152.6281 billiom |
Primary Credit allows banks to borrow against collateral at the current federal funds rate:
Overview:
Federal Reserve lending to depository institutions (the โdiscount windowโ) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy.
By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.
The "Primary Credit" program is the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the FOMCโs target range for the federal funds rate and is normally granted on a โno-questions-asked,โ minimally administered basis. There are no restrictions on borrowersโ use of primary credit.
https://www.frbdiscountwindow.org/Pages/General-Information/Primary-and-Secondary-Lending-Programs.aspx
Examples of common borrowing situations:
- Tight money markets or undue market volatility
- Preventing an overnight overdraft
- Meeting a need for funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand
The introduction of the primary credit program in 2003 marked a fundamental shift - from administration to pricing - in the Federal Reserve's approach to discount window lending. Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source. Being prepared to borrow primary credit enhances an institution's liquidity.
Bank Term Funding Program (BTFP):
https://fred.stlouisfed.org/series/H41RESPPALDKNWW
| Date | Bank Term Funding Program (BTFP) | Up from 3/15, 1st week of program ($ billion) |
|---|---|---|
| 3/15 | $11.943 billion | $0 billion |
| 3/22 | $53.669 billion | $41.723 billion |
| 3/29 | $64.403 billion | $52.460 billion |
| 3/31 | $64.595 billion | $52.652 billion |
| 4/5 | $79.021 billion | $67.258 billion |
| 4/12 | $71.837 billion | $59.894 billion |
| 4/19 | $73.982 billion | $62.039 billion |
| 4/26 | $81.327 billion | $69.384 billion |
| 5/3 | $75.778 billion | $63.935 billion |
| 5/10 | $83.101 billion | $71.158 billion |
| 5/17 | $87.006 billion | $75.063 billion |
| 5/24 | $91.907 billion | $79.964 billion |
| 5/31 | $93.615 billion | $81.672 billion |
| 6/7 | $100.161 billion | $88.218 billion |
| 6/14 | $101.969 billion | $90.026 billion |
| 6/21 | $102.735 billion | $90.792 billion |
| 6/28 | $103.081 billion | $91.138 billion |
| 7/5 | $101.959 billion | $90.016 billion |
| 7/12 | $102.305 billion | $90.362 billion |
| 7/19 | $102.927 billion | $90.984 billion |
| 7/26 | $105.078 billion | $93.155 billion |
https://www.reddit.com/r/Superstonk/comments/11prthd/federal_reserve_alert_federal_reserve_board/
- Association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program.
- Banks can borrow for up to one year, at a fixed rate for the term, pegged to the one-year overnight index swap rate plus 10 basis points.
- Banks have to post collateral (valued at par!).
- Any collateral has to be โowned by the borrower as of March 12, 2023."
- Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations.
Richard Ostrander (one of the architects of BTFP) spoke about it the other day:
When the Federal Reserve established the BTFP, the lawyers of the New York Fed played an important role in facilitating its rapid implementation. I was responsible for coordinating among my team of attorneys at the New York Fed and the Board of Governors to ensure that our actions complied with applicable statutes and regulations.
Over the weekend of March 11 and 12, the Fed designed the BTFP to support the stability of the broader financial system by providing a source of financing for banks with Treasury, Agency and other eligible holdings whose market value had significantly diminished given interest rate increases.
There was not enough time to set up special purpose vehicles as the Fed had done for some of the pandemic programs. The only way to have the program up and running so quickly was to leverage our discount window facilities.
As a result, we turned to Section 13(3) of the Federal Reserve Act, which authorizes specialized lending in unusual and exigent circumstances. The BTFP extends the maximum term of lending from the Section 10B limit of four months up to a special limit of one year. Additionally, unlike traditional discount window operations, the BTFP authorizes banks to borrow against eligible holdings up to their par value rather than their market value less a haircut
Notice how use of the Discount Window has PLUMMETED as BTFP has come in to play?
BTFP offers higher interest rates now but longer terms--to need over $100 billion in liquidity at near 5.5% interest must really be all about 'surviving another day'?
The Fed has created an emergency backstop program so that banks wonโt have to sell assets into the market if customers pull deposits in search of more attractive yields for their savings....
It is starting to smell idiosyncratic all up in here:
https://www.marketwatch.com/story/u-s-bank-lending-falls-in-latest-week-fed-says-b633e731
To me, this is looking more and more like over-reliance on Central Bank Funding!
TLDRS:
- Updated guidance ENCOURAGES depository institutions to incorporate the discount window as part of their contingency funding plans.
- Knowing that the discount window is available and ECOURAGED reduces the incentive for banks to manage their balance sheets and maintain appropriate liquidity buffer.
7/19/23 saw usage in the Bank Term Funding Program over $100B for the 8th week in a row ($105.078B) .
- Use of the Discount Window has PLUMMETED as BTFP has come in to play!
Could this updated guidance have to do with the FDIC noticing that some banks aren't correctly reporting the amount of deposits they have that aren't covered by federal insurance?
- Some banks mistakenly think that if a deposit is backed by assets (like collateral), it doesn't need to be reported as uninsured.
- This isn't right! The deposit's status doesn't change just because it has collateral.
- When banks incorrectly report uninsured deposits, it could create a perception in the market that these banks are more stable than they actually are.
- Banks that incorrectly report uninsured deposits might face liquidity challenges in extreme circumstances, where depositors simultaneously demand their funds.
- Reminder, while banks have the liquidity fairy, 'we' get the promise of 2 more rate hikes this year, Atlanta Fed President Raphael Bostic yet again enrichens himself inappropriately from his position.
- To fix one end of their mandate (price stability) from the inflation problem they created, the Fed will continue sacrificing employment (the other end of their mandate) to bolster price stability by continuing to raise interest rates--causing further stress to businesses and households.
- I believe inflation is the match that has been lit that will light the fuse of our rocket.
