Banks that are low on cash recently borrowed $300 billion from the Federal Reserve, the central bank revealed on Thursday.
Over half of the funds—$143 billion—went to the holding companies of Silicon Valley Bank and Signature Bank, two sizable banks that failed over the previous week and sent financial markets into a frenzy.
The Fed did not specify which banks received the remaining 50% of the financing or how many did.
The Federal Deposit Insurance Corporation, which has assumed control of both banks, established the holding corporations for the two failing banks.
Bonds owned by both banks were pledged as collateral when they borrowed money to pay their uninsured depositors.
The FDIC has sold to cover the repayment of the loans.
The data offer a first impression of the scope of the Fed’s support for the financial sector following the weekend failure of two banks.
Banks borrowed the remaining funds to obtain cash, possibly partly to compensate depositors who attempted to withdraw their funds.
After the bank failures last weekend, many megabanks, including Bank of America, have reported receiving money inflows from smaller banks.
A long-standing program known as the “discount window” was used to borrow an extra $153 billion from the Fed over the previous week; this represented a record level for that program.
The discount window allows banks to take out loans for up to 90 days. Generally, only one week contains about $4 billion to $5 billion borrowed through this program.
The Fed has already advanced an extra $11.9 billion in loans from a new lending facility unveiled on Sunday. Thanks to the new initiative, banks can now raise funds and compensate any depositors who make withdrawals.
According to a research paper by JPMorgan Chase economist Michael Feroli, the Fed’s help has been less than half of what it was during the previous financial crisis 15 years ago.
But it’s still a significant amount, he added. The gloomy perspective holds that banks desperately need funding. According to the “glass half full” perspective, the system is operating as planned.
Emergency lending from the Fed during the past week aims to address one of the main reasons for the failure of the two banks: Silicon Valley Bank and Signature Bank had billions of dollars worth of toxic assets.
Longer-term Treasury yields and other bond yields increased during the past year as the Fed gradually increased its benchmark interest rate.
As a result, the banks’ holdings of lower-yielding Treasury bonds lost some of their value.
Due to the large number of depositors attempting to withdraw their money, the banks could not pay them all with the proceeds from selling their Treasury securities. It was essentially a traditional bank run.
Financial firms can borrow money from the Fed via its lending programs, including the new one it introduced on Sunday, without selling their bonds.
The Federal Reserve reported receiving $15.9 billion in collateral for its new lending facility, more than the $11.9 billion it lent.
Banks occasionally provide the Fed security before borrowing, implying that more lending is ongoing.
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