This is not a 'bailout'! A review of the tools the Fed is leveraging ($308.063 Billion so far as of 3/15) while attempting to navigate the current environment.
Good morning Superstonk, resident jellyfish back with you! I hope everyone had a great weekend. Seeing as yesterday saw coordinated central bank action to enhance the provision of U.S. dollar liquidity, I thought it would be useful to review these tools at the Fed's disposal as they attempt to navigate this mess they made while calling none of this a 'bailout'.
Mainly:
- Primary Credit
- Central Bank Liquidity Swaps
- Bank Term Funding Program (BTFP)
- “Other credit extensions”
Let's get to it!
Primary Credit ($152.85 Billion)
https://ycharts.com/indicators/us_loans_to_depository_institutions__primary_credit
Federal Reserve lending to depository institutions (the “discount window”) 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 FOMC’s target range for the federal funds rate and is normally granted on a “no-questions-asked,” minimally administered basis. There are no restrictions on borrowers’ use of primary credit.
https://www.frbdiscountwindow.org/Pages/General-Information/Primary-and-Secondary-Lending-Programs.aspx
Here are some 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.
Final thoughts on Primary Credit (for now):
I wonder which institution(s) are seeking “no-questions-asked” "no restrictions on borrowers’ use of primary credit." to the tune of to the tune of $152.85 billion this past week @ 4.75% up from 4.581B last week and up from 2.306B one year ago. This is a change of 3.24K% from last week and 6.53K% from one year ago.
The sudden rise in Primary Credit shows big players are trying to get as much liquidity backstop as possible and are increasing their borrowing from the Fed, happily paying 4.75% to borrow billions. These are not cheap loans...
I do wonder if this trickles down into Secondary and Seasonal Credit as this goes on?
Central Bank Liquidity Swaps ($.47 Billion--for now...)
In April 2009, the Federal Reserve announced foreign-currency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.
The Federal Reserve lines constitute a part of a network of bilateral swap lines among the six central banks, which allow for the provision of liquidity in each jurisdiction in any of the six currencies should central banks judge that market conditions warrant. In October 2013, the Federal Reserve and these central banks announced that their liquidity swap arrangements would be converted to standing arrangements that will remain in place until further notice.
How it works:
In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.
When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank's account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.
The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve's balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.
The Swiss National Bank has used it 6 times for 7-day swaps totaling $20.5 billion:
Back in September, the Swiss National Bank (SNB) used the long-standing swap line with the Fed for five 7-day swaps in a row. The largest swap amounted to $11.1 billion matured on October 27. Then again once more for a 7-day swap in December (matured on December 15th for $1,000,000).
Last night, Coordinated central bank action to enhance the provision of U.S. dollar liquidity:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.To improve the swap lines' effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.
The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.
Final thoughts on Central Bank Liquidity Swaps (for now):
increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.
It is going to be VERY curious to watch these numbers through the end of April. The SNB likely swapped $20.5 billion to provide short-term liquidity in September to Credit Suisse, right?!?!?! What about now?
Bank Term Funding Program (BTFP) ($11.943 Billion, so far...):
- Borrower Eligibility: Any U.S. federally insured depository institution (including a bank, savings 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 “owned 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
As of March 15th, the Fed has dropped $11.943 Billion into this facility:
Final thoughts on BTFP (for now):
'Banks have to post collateral (valued at par)' is NUTS. From what I have been able to read, this is not how this typically goes down--usually there is a haircut, not 'valued at par'.
Any collateral has to be “owned by the borrower as of March 12, 2023." This should rule out banks buying securities at today's market prices and using them as collateral at the aforementioned ridiculous par.
“Other credit extensions” ($142.8 Billion, so far...):
Includes loans that were extended to depository institutions established by the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Banks' loans to these depository institutions are secured by collateral and the FDIC provides repayment guarantees.
Final thoughts on "Other credit extensions" (for now):
The Fed has loaned the newly created FDIC banks for covering depositors in Silicon Valley Bank and Signature bank (so far): $142.8 Billion. This number will be interesting to watch as other banks teeter.
This not bailout is how much?!?! As of 3/15:
- Primary Credit ($152.85 Billion)
- Central Bank Liquidity Swaps ($.47 Billion)
- Bank Term Funding Program (BTFP) ($11.943 Billion)
- “Other credit extensions” ($142.8 Billion)
Total (so far): $308.063 BillionHow the Fed is doing:
REMEMBER: none of this 'matters' to the Fed. The Fed creates its own money, and cannot become insolvent.
The above mentioned tools help its balance sheet as they are stored as assets. Especially as the Fed fights not being 'profitable' to the Treasury itself:
Again, the Fed is playing slight of hand here.
Storing losses (-41.067 billion as of 3/15/2023) on the balance sheet as an asset like what is happening above, rather than showing the loss on the income statement right away, is an old corporate accounting trick.
The Fed explains this in footnote:
The Federal Reserve Banks remit residual net earnings to the U.S. Treasury after providing for the costs of operations, payment of dividends, and the amount necessary to maintain each Federal Reserve Bank's allotted surplus cap. Positive amounts represent the estimated weekly remittances due to U.S. Treasury. Negative amounts represent the cumulative deferred asset position, which is incurred during a period when earnings are not sufficient to provide for the cost of operations, payment of dividends, and maintaining surplus. The deferred asset is the amount of net earnings that the Federal Reserve Banks need to realize before remittances to the U.S. Treasury resume.
In other words, each week going forward, the linked chart will show the Fed’s total losses starting from September 2022. The bigger the negative number, the bigger the accumulated loss.
So, 'wut mean'? This number will get bigger to indicate the amount of money the Fed owes the treasury (-41.067 billion and counting).
The Fed gets to just sit on this negative balance and when it starts making money for treasury again (from money it makes on interest and fees, lowering its operating expenses, paying less on dividends), will see that negative number start to shrink (in theory).
However, losses in the six months since September now total More than half of all the earnings the Fed remitted over the entire year of 2022 (-$41.067billions vs. $76.0 billion all of 2022):
During 2022, Reserve Banks transferred $76.0 billion from weekly earnings to the U.S. Treasury, and, in September 2022, most Reserve Banks suspended weekly remittances to the Treasury and started accumulating a deferred asset, which totaled $18.8 billion by the end of the year.
TLDRS:
This not bailout is how much?!?! As of 3/15:
- Primary Credit ($152.85 Billion)
- Central Bank Liquidity Swaps ($.47 Billion)
- Bank Term Funding Program (BTFP) ($11.943 Billion)
- “Other credit extensions” ($142.8 Billion)
- Total (so far): $308.063 Billion
None of this is supposed to have implications for the Federal Reserve's conduct of monetary policy or its ability to meet its financial obligations.
However, what this will mean for Treasury I am not sure--with the current debt ceiling nonsense seeing Yellen taking extraordinary measures to keep everything afloat through June. You can bet they wish the Fed was sending those weekly earnings while having to navigate this environment.
