Fed emergency lending to banks boosted overall Fed holdings in latest week

© Reuters. FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis/File Photo

By Michael S. Derby

NEW YORK (Reuters) -Federal Reserve emergency lending to banks, which hit record levels last week, remained high in the latest week, amid continued large scale extensions of credit to the financial system, which now includes official foreign borrowing.

The Fed reported that discount window borrowing, its main source of emergency credit to depository institutions, ticked down to $110.2 billion as of Wednesday, from the $152.9 billion reported last week.

Last week's level had surged from $4.6 billion on March 8, shredding the $112 billion record set during the fall of 2008, during the global financial crisis’s most perilous phase.

However, as of Wednesday, banks boosted borrowing under the central bank’s newly launched Bank Term Funding Program to $53.7 billion. In its first outing last week, the facility had drawn a smaller than expected $11.9 billion in lending.

The facility allows eligible financial firms to borrow against a range of bonds without the penalties normal imposed on this type of credit.

Analysts had expected to see some movement from the discount window over to the BTFP. TD Securities said Thursday that when both lending avenues are considered together, "the relatively flat combined usage suggests that banks have already borrowed sufficient funds and are transitioning to the more cost-advantageous BTFP facility."

The Fed also reported lending to foreign central banks and monetary authorities went from nothing on March 15 to $60 billion on Wednesday. Several major central banks announced recently they would draw on Fed dollar liquidity as needed.

Joined with a drop in Treasuries the Fed holds for foreign authorities, "it looks like there was a big spike in demand for dollar liquidity from overseas, most likely from Europe in the wake of the Credit Suisse merger with UBS," analysts at Jefferies said in a report.

Borrowing from the Fed caused the size of its overall balance sheet to move to $8.8 trillion from $8.7 trillion the prior week.

Last week's increase set back the Fed’s work since last summer to reduce the size of its stockpile of cash and bonds that topped out at just shy of $9 trillion during the summer, a development the Fed views as having no implications for monetary policy.

Fed data also showed the $142.8 billion in credit it had extended to the Federal Deposit Insurance Corporation to deal with the failed California banks rose further and stood at $179.8 billion.

BANKS SEEK FED CASH

Emergency lending to banks has surged in the wake of the failure of two California banks, which has in turn spurred worries about broader stresses in the financial system in part tied to the aggressive pace of tightening by the Fed to lower inflation.

The Fed pressed forward with rate rises on Wednesday but signaled that it is nearly done with rate increases and acknowledged tighter financial conditions created by the banking sector woes and market reaction will likely weigh on the economy.

Speaking after the Fed meeting, Federal Reserve chair Jerome Powell said current bank troubles are not a replay of events in 2008. “Our banking system is sound and resilient with strong capital and liquidity” and “all depositors’ savings in the banking system are safe,” he told a media conference.

Powell justified the fast-moving response of the central bank by saying “history has shown that isolated banking problems, if left unaddressed, can undermine confidence in healthy banks and threaten the ability of the banking system as a whole.”

As Powell expressed confidence in the financial system, money market funds have seen strong inflows. Analysts at investment bank Barclays (LON:BARC) have added a note of caution, however, and said in a note Wednesday “we suspect these more recent flows are rate- rather than fear-driven.”

Data from the New York Fed also gave further insight into money market flows. The bank’s reserve repo facility, which allows banks to park cash at the central bank at a return that generally beats what they could earn in the private sector, has seen already massive usage further accelerate over recent days.

Inflows have moved toward the $2.554 trillion record set on Jan. 3 and hit $2.233 billion on Thursday after several days of rising usage.