The Federal Reserve's efforts to shore up the banking industry have helped provide needed capital — and indicated just how deeply the problems run for the troubled sector. In the days after the implosion of Silicon Valley Bank and Signature Bank, financial institutions went to the Fed for nearly $300 billion in liquidity through short-term loans, according to Fed data released late Thursday. A good chunk of that money appeared to go to SVB and Signature, but more than half went to other banks in need of cash to keep operations going. The good news: Banks were willing to go to the Fed for help, and the central bank was willing and able to comply. The bad news: They needed that much help. "Right now, we are in the sea of the unknown," said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence and a former senior official at the Dallas Fed. The uncertainty stems from just how much help the financial sector needs, and how deep the problems penetrate. Following the blowups of the two banks, the Fed on March 12 launched twin initiatives that set up a special lending facility — the Bank Term Funding Program — and loosened conditions at its discount window to make it more available for borrowing. In normal times, a trip to the discount window carries a stigma, an indication that customers are in some sort of financial trouble and can't go through normal market routes to raise capital. Programs such as the BTFP can have that stigma, too, but in this case the Fed made its conditions a bit easier than the discount window. Regardless, banks borrowed from the discount window to the tune of $152 billion, while the uptake at the new program was just less than $12 billion, even though it allowed one-year loans compared to the discount window's 90 days. The BTFP also pays par value on securities offered in exchange for cash, while the discount window uses market value. "The discount window takes everything. You bring us your garbage, we'll give you a haircut, and we will send you a lifeline. But it's going to cost you," said Booth, who was an advisor to former Dallas Fed President Richard Fisher. "We have seen the largest uptake of the discount window in history. That takes out the financial crisis 2008 highs, which is a sign of severe liquidity strains in the banking system which will manifest as hugely impaired credit creation," she added. There also was some speculation that the light uptake on the BTFP was its newness. Data released this Thursday could provide a clearer picture of how much demand there is for liquidity, and how fragile the system remains. The initial demand for the two funding avenues drew notice across Wall Street. "The sharp increase in banks' emergency borrowing from the Fed's discount window speaks to the funding and liquidity strains on banks, driven by weakening depositor confidence following one bank winddown and two bank failures," Moody's Investors Service, which has downgraded its outlook on the entire banking sector during the stress, said in a report last week. More help provided The Fed followed up the March 12 program with a renewed initiative Sunday that stepped up the frequency of its global dollar swaps program from weekly to daily. While there don't appear to be signs of dollar shortages, the central bank joined with multiple global counterparts to head off any problems off before they happen. The announcement mirrored those made during other periods of uncertainty in the financial system such as the financial crisis of 2008 and the early days of the Covid pandemic in 2020. The swaps move appeared to be "precautionary" amid somewhat higher demand for dollars, particularly at the European Central Bank, but not yet a sign of broader stresses, said Padhraic Garvey, regional head of research, Americas for ING. "There are a lot of safety nets out there at this point," Garvey said. "The burning question is how weak are the weakest links, and how are they dealt with if they break." Policy decision on tap Indeed, the Fed has multiple issues to grapple with as its two-day policy meeting begins Tuesday. The post-meeting statement will provide some clues as to where officials see the economy and financial system heading, while Chairman Jerome Powell will be called to explain the central bank's policy reaction afterwards. In the first week of the new lending facilities, the Fed balance sheet jumped to nearly $8.7 trillion, an increase of some $297 billion. That came after a nine-month rundown of $573 billion during a process known as quantitative tightening. It also served as a reminder that once the Fed pumps up its holdings of securities, it's often problematic in trying to reduce them without affecting the market's functions. "That's what the Fed has learned in the last 30 days, which is that quantitative easing was great when they were buying bonds," said former Fed official Christopher Whalen, the founder of Whalen Global Advisory. "But when you try and stop it, not only is it difficult to take the liquidity out, but because of the scale of the purchases they made in 2021, their hands are now tied." Current Fed officials will have to weigh the various crosscurrents when coming up with a rate decision this week. Some market veterans, like Evercore founder Roger Altman, think not raising rates could heighten concern over instability. Altman told CNBC on Monday that he thinks a pause could "undermine" confidence. That's not a universally shared sentiment, though the market largely expects a quarter percentage point interest rate hike this week. "The system is obviously under a lot of stress, and to try to convince everyone that it's not by raising rates will just do the opposite," said Mark Zandi, chief economist at Moody's Analytics. "It just makes you seem detached from the reality of what's going on."
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