New Fed bank facility could see use of up to $2 trillion, JP Morgan analysts say -Dlight News

Moody's is now negative on US banks due to 'highly volatile funding conditions', while First Republic and other regional banks are under review

A new Federal Reserve facility set up after the collapse of two US banks last week could see the use of up to $2 trillion, according to a new analysis. The Fed last weekend established a lending program known as the Bank Term Funding Program. Its feature is that banks are allowed to pledge collateral at the same level, at a time when those securities are trading at a loss due to the rise in interest rates over the past year. Among the factors that led to the fall of SVB Financial SIVB, -60.41% was a slowdown in bond prices. Analysts at JPMorgan, led by Nikolaos Panigirtzoglou, point out that the six regional banks alone hold a combined $460 billion in uninsured deposits. They say $2 trillion is the same amount of bonds held by US banks outside the five largest banks. “There are signs of a reserve shortfall in the US, where unsecured borrowing rates in the fed funds market for the most distressed borrowers are above the Fed’s policy rate increasing in 2018/2019 parity. Another manifestation is in the collapse of SVB, as depositors sought to move deposits to other banks, there were insufficient reserves to settle these transactions and it was forced to sell debt securities and crystallize losses,” analysts said. Since the end of 2012 the US The banking system has lost $1.3 trillion in reserves. And if the banking system continues to lose deposits to government money market funds, the need for the Fed to inject more liquidity into the banking system may become even more pressing. Bank deposit rates will rise sharply in the coming months, with the events of the past few days raising the risk that more depositors (especially large institutional depositors) will seek the safety of government money. Market funding at the present time,” he said. Regional banks including First Republic Bank FRC, -32.80% and Western Alliance Bancorp WAL, -15.14% were trading lower in premarket action Thursday.

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