Banks increased emergency borrowings from the Federal Reserve for the second week in a row, underscoring ongoing stress in the financial system following a string of bank collapses last month.
(Bloomberg) — Banks increased emergency borrowings from the Federal Reserve for the second week in a row, underscoring ongoing stress in the financial system following a string of bank collapses last month.
The US central bank had $155.2 billion of loans outstanding to financial institutions through two backstop lending facilities in the week through April 26, compared with $143.9 billion the previous week, according to data published Thursday.
Bank stocks have come under renewed pressure this week after deposit outflows from First Republic Bank saw its shares plunge to a record low. The bank’s future remains uncertain amid a standoff between the US government and the lender’s largest rivals over how to rescue the troubled firm.
Resurgent volatility in the banking sector, reflected in the uptick in emergency lending, could complicate the decision Fed officials face at next week’s monetary policy meeting. Policymakers will probably evaluate how credit tightening is going to weigh on growth.
The central bank is widely expected to raise its benchmark interest rate by 25 basis points next week, bringing it above 5% in a bid to keep downward pressure on inflation, which remains well above its target.
Read more: First Republic Stuck in Standoff Between US, Bank Industry
“They’re going to check the resilience of the economy, especially in the face of tightening credit conditions,” said Priya Misra, head of global rates strategy at TD Securities. “In the minutes we might get a sense if some are getting nervous about the recovery.”
Fed officials have worked to respond to the financial strain through their emergency lending programs and other measures, keeping that separate from their monetary-policy decisions targeting inflation. But that could change if the banking stresses begin to drag on growth, said Misra, who expects the Fed to hike by a quarter point twice more, and then begin cutting rates in December as an economic slowdown unfolds.
The weekly Fed balance sheet data showed $73.9 billion of outstanding borrowing from the central bank’s traditional backstop lending program, known as the discount window, compared with $69.9 billion the previous week and the record $152.9 billion reached last month.
Demand in the new Bank Term Funding Program also rose, to $81.3 billion, compared with $74 billion the previous week.
The discount window is the Fed’s oldest liquidity backstop for banks. The BTFP, meanwhile, was launched March 12 after the Fed declared emergency conditions following the collapse of California’s Silicon Valley Bank and New York’s Signature Bank.
Fed loans to bridge banks established by the Federal Deposit Insurance Corp. to resolve SVB and Signature Bank ticked down to $170.4 billion, from $172.6 billion.
Usage of the Fed’s Foreign and International Monetary Authorities repurchase-agreement facility by foreign central banks dropped to zero, from $20 billion the week prior, in a sign that financial strains were easing on the international front.
(Updates with chart, analyst quote in sixth paragraph.)
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