By
Bhushan Akolkar
April 17th, 2024
The trio of the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) have been pledging support to depositors.
Analysts at American banking giant JPMorgan Chase & Co (NYSE: JPM) believe the Federal Reserve will inject massive liquidity into the banking ecosystem to help cushion the current crisis in the industry. The strategists, led by Nikolaos Panigirtzoglou said the funds that will be injected into the system could be as high as $2 trillion.
“The usage of the Fed’s Bank Term Funding Program is likely to be big,” the strategists said in a client note on Wednesday. According to them, while “the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest.”
The implosion of Silvergate Bank, Signature Bank, and the much bigger Silicon Valley Bank (SVB) has had many experts question the Federal Reserve’s quantitative tightening in its frantic efforts to fight off inflation. The repercussions of the banking liquidity crisis have stirred a massive plunge in the Treasury 2-year yields which fell by 60 basis points this week.
This yield slump was also impacted by the sentiment that the US Federal Reserve Open Market Committee (FOMC) will skip its regular interest rate hikes this coming week when it concludes its next policy meeting. Experts have hinted that skipping the interest rate hike will be good to stabilize the banking industry at this time when it remains unclear how many more firms could be headed for another bank run.
According to JPMorgan strategists, despite the designated funds for the Bank Term Funding Program (BTFP), the Fed still has about $3 trillion in the US banking ecosystem. The majority of these funds, they note are owned by the top 5 banks.
More Approaches to Funding Stability in the Banking System
Many did not foresee the collapse of the Silicon Valley Bank and it shows how frail the banking system in the United States, and around the world can be. For what its worth, regulators and lawmakers have made an attempt to blame digital currencies for the woes of the current mishaps in the financial ecosystem, a move that forced regulators to close Signature Bank.
With all that has happened, the trio of the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) have been pledging support to depositors. This is one crucial attempt to fund stability in the banking system as a restoration of trust among depositors with respect to the safety of their funds can largely prevent future bank runs.
While the BTFP is also designed to provide emergency funding to banks that needed it, it can notably be complemented by a more dovish approach and Fed regular prop of the financial ecosystem. Though this prop-up has been tagged as a bailout by many experts, for those in the crypto world, it is considered a move that can trigger the next phase of the bull market.