Almost 2/3 of the monetary tightening by the Federal Reserve Banks has been erased in just days according to the latest release.
The Federal Reserve balance sheet has increased by $400 billion in the past two weeks, $100 billion added since last week.
The central bank made about $36 billion in loans and $60 billion in repurchase agreements, or repos, in the past seven days.
Repos are a mechanism whereby the bank gives dollars in exchange for securities, including government bonds and mortgages.
Recently the Fed announced the bank term funding program (BTFP), which values these assets, like bonds, at the price they were bought, not the current price, allowing potentially even insolvent entities to get money from the Fed.
On the other side of the balance sheet we have reverse repos, where Fed is given dollars in exchange for bonds and other assets the Fed holds.
These have reached a new high of $2.65 trillion and the best way to think of them is basically as a bank account at the Fed where you can park money outside of the commercial banking system.
Repos give money to the banks, reverse repos take it out and about $200 billion in reverse repos have been added in the past week.
The overall balance sheet has increased however because some deposits were taken out, including about $100 billion by the US Treasury.
We have a movement therefore on two parts. First, Fed is giving money to the banks, though in loans, and second, market participants are taking out money from the banks to hold it at the Fed.
Overall therefore liquidity in the banking sector is still tightening, even as Fed prints, and this is a reason for concern because in the minutes of the Fed board meeting in February, last month before the collapse of the Silicon Valley Bank, they said:
“In their discussion of issues related to financial stability, several participants discussed vulnerabilities in the financial system associated with higher interest rates, including the elevated valuations for some categories of assets, particularly in the CRE sector; the susceptibility of some nonbank financial institutions to runs; and the effect of large, unrealized losses on some banks’ securities portfolios.”
The minutes also point out a significant deterioration in bank assets:
“In the January [Senior Loan Officer Opinion Survey on Bank Lending Practices] SLOOS, banks reported expecting a deterioration in the quality of business loans in their portfolio over 2023…
Banks reported expecting a further deterioration in the quality of household loans in 2023, especially for consumer loans.”
As it turned out, the San Francisco Federal Reserve Bank, starting early last year, had “fired off a series of formal warnings to the [SVB’s] leaders, pressing them to fix serious weaknesses in operations and technology, according to people with knowledge of the matter.
Then late last year they flagged a critical problem: The bank needed to improve how it tracked interest-rate risks, one of the people said,” according to Bloomberg.
Fed’s chair Jerome Powell was asked about it this Wednesday by Catarina Saraiva of Bloomberg News: “Can you confirm whether or not the board knew about these escalations by the examiners in San Francisco?”
After a pause, “I will have to come back to you on that,” Powell said. He then cleared his throat, and moved on to the rest of the conference.
The Silicon Valley Bank remains in receivership by the Federal Deposit Insurance Corporation and has filed for bankruptcy.
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- Source: https://www.trustnodes.com/2023/03/24/fed-prints-another-100-billion
