$336.9408 billion as of 4/19 ($2,144 billion so far…): An update on the tools the Fed is using to give banks liquidity while ‘we’ get Inflation & Rate Hikes: Discount Window, Central Bank Liquidity Swaps, Bank Term Funding Program (BTFP), “Other credit extensions”, & “Foreign Official”

by Dismal-Jellyfish

This week’s Fed balance Sheet:

www.federalreserve.gov/releases/h41/20230420/

What we are monitoring:

  • Discount Window/Primary Credit
  • Central Bank Liquidity Swaps
  • Bank Term Funding Program (BTFP)
  • “Other credit extensions”
  • “Foreign Official”

Tool 3/15 3/22 3/29 4/5 4/12 4/19
Discount Window/Primary Credit $152.85 billion $110.248 billion $88.157 billion $69.705 billion $67.633 billion $69.925 billion
Central Bank Liquidity Swaps $.47 billion $.59 billion $.5875 billion $.4885 billion $.4787 billion $.4188 billion
Bank Term Funding Program (BTFP) $11.943 billion $53.669 billion $64.403 billion $79.021 billion $71.837 billion $73.982 billion
“Other credit extensions” $142.8 billion $179.8 billion $180.1 billion $174.609 billion $172.615 billion $172.615 billion
“Foreign Official” $0 $60 billion $55 billion $40 billion $30 billion $20 billion
Total $308.063 billion $404.307 billion $388.2475 billion $363.8235 billion $342.5637 billion $336.9408 billion

Discount Window/Primary Credit

fred.stlouisfed.org/series/WLCFLPCL

Tool 3/15 3/22 3/29 4/5 4/12 4/19
Discount Window/Primary Credit $152.85 billion $110.248 billion $88.157 billion $69.705 billion $67.633 billion $69.925 billion

Primary Credit allows banks to borrow against collateral at the current federal funds rate:

Overview:

Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy.

By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

The “Primary Credit” program is the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the FOMC’s target range for the federal funds rate and is normally granted on a “no-questions-asked,” minimally administered basis. There are no restrictions on borrowers’ use of primary credit.

www.frbdiscountwindow.org/Pages/General-Information/Primary-and-Secondary-Lending-Programs.aspx

Examples of common borrowing situations:

  • Tight money markets or undue market volatility
  • Preventing an overnight overdraft
  • Meeting a need for funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand

The introduction of the primary credit program in 2003 marked a fundamental shift – from administration to pricing – in the Federal Reserve’s approach to discount window lending. Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source. Being prepared to borrow primary credit enhances an institution’s liquidity.

I wonder which institution(s) are seeking “no-questions-asked” “no restrictions on borrowers’ use of primary credit.” to the tune of to the tune of $69.925 billion this past week @ 5.00%?

The sudden rise in Primary Credit shows big players are trying to get as much liquidity backstop as possible and are increasing their borrowing from the Fed, happily paying 5.00% to borrow billions. These are not cheap loans…

I do wonder if this trickles further into BTFP and down into Secondary and Seasonal Credit as this goes on?

Oh, one more thing, this happened this happened AGAIN today:

Sunshine Meeting Notice for a CLOSED meeting under Expedited Procedures of the Board of Governors of the Federal Reserve System at 11:30 a.m. on April 10, 2023.

Matter(s) considered: Review and determination of the advance and discount rates to be charged by the Fed.

It looks like the discount window has been on their minds and they may be tweaking it? Can’t imagine they are pleased with what looks like BTFP loan money paying off Discount Window loans.

Central Bank Liquidity Swaps

www.newyorkfed.org/markets/desk-operations/central-bank-liquidity-swap-operations

Tool 3/15 3/22 3/29 4/5 4/12 4/19
Central Bank Liquidity Swaps $.47 billion $.59 billion $.5875 billion $.4885 billion $.4787 billion $.4188 billion

About Central Bank Liquidity Swaps:

In April 2009, the Federal Reserve announced foreign-currency liquidity swap lines with the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank.

The Federal Reserve lines constitute a part of a network of bilateral swap lines among the six central banks, which allow for the provision of liquidity in each jurisdiction in any of the six currencies should central banks judge that market conditions warrant. In October 2013, the Federal Reserve and these central banks announced that their liquidity swap arrangements would be converted to standing arrangements that will remain in place until further notice.

How it works:

In general, these swaps involve two transactions. When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank.

The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first.

At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.

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When the foreign central bank loans the dollars it obtains by drawing on its swap line to institutions in its jurisdiction, the dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.

The foreign currency that the Federal Reserve acquires is an asset on the Federal Reserve’s balance sheet. Because the swap is unwound at the same exchange rate that is used in the initial draw, the dollar value of the asset is not affected by changes in the market exchange rate. The dollar funds deposited in the accounts that foreign central banks maintains at the Federal Reserve Bank of New York are a Federal Reserve liability.

Recall, a few weeks ago the operations became daily: Coordinated central bank action to enhance the provision of U.S. dollar liquidity

Source: www.federalreserve.gov/newsevents/pressreleases/monetary20230319a.htm

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

To improve the swap lines’ effectiveness in providing U.S. dollar funding, the central banks currently offering U.S. dollar operations have agreed to increase the frequency of 7-day maturity operations from weekly to daily. These daily operations will commence on Monday, March 20, 2023, and will continue at least through the end of April.

The network of swap lines among these central banks is a set of available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.

Remember, the Swiss National Bank had used this facility 10 times since September 2022 for 7-day swaps totaling $20.738 billion:

 

The Swiss National Bank has likely swapped $20.738 billion since September 2022 to provide short-term liquidity to Credit Suisse, right?!?!?!

Bank Term Funding Program (BTFP)

fred.stlouisfed.org/series/H41RESPPALDKNWW

Tool 3/15 3/22 3/29 3/31 4/5 4/12 4/19
Bank Term Funding Program (BTFP) $11.943 billion $53.669 billion $64.403 billion $64.59588 billion $79.021 billion $71.837 billion $73.982 billion

  • Association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program.
  • Banks can borrow for up to one year, at a fixed rate for the term, pegged to the one-year overnight index swap rate plus 10 basis points.
  • Banks have to post collateral (valued at par).
  • Any collateral has to be “owned by the borrower as of March 12, 2023.”
  • Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations.

“Other credit extensions”

fred.stlouisfed.org/series/WLCFOCEL

Tool 3/15 3/22 3/29 4/5 4/12 4/19
“Other credit extensions” $142.8 billion $179.8 billion $180.1 billion $174.609 billion $172.615 billion $172.615 billion

“Other credit extensions” includes loans that were extended to depository institutions established by the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Banks’ loans to these depository institutions are secured by collateral and the FDIC provides repayment guarantees.

For example, $114 billion in face value Agency Mortgage Backed Securities, Collateralized Mortgage Obligations, and Commercial Mortgage Backed Securities about to be liquidated ‘gradual and orderly’ with the ‘aim to minimize the potential for any adverse impact on market functioning’ by BlackRock.

How I understand this works:

  • The FDIC created temporary banks to support the operations of the ones they have taken over.
  • The FDIC did not have the money to operate these banks.
  • The Fed is providing that in the form of a loan via “Other credit extensions”.
  • The FDIC is going to sell the taken over banks assets.
  • Whatever the difference between the sale of the assets and the ultimate loan number is, will be the amount split up amongst all the remaining banks and applied as a special fee to make the Fed ‘whole’.
  • It can be argued the consumer will ultimately end up paying for this as banks look to pass this cost on in some way.

“Foreign Official”

fred.stlouisfed.org/series/H41RESPPALGTRFNWW

Tool 3/15 3/22 3/29 4/5 4/12 4/19
“Foreign Official” $0 $60 billion $55 billion $40 billion $30 billion $20 billion

There is always money in the Fed’s banana stand, right?!? It looks this is preferred to Central Bank Liquidity Swaps as it is much more opaque? We just see the dollar amount, not the counterparties like with the Central Bank Liquidity Swaps.

One last thought:

St. Louis Federal Reserve President James Bullard sums all of this up in a speech the other week:

“Financial stress can be harrowing, but also tends to reduce the level of interest rates” “Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation”

Translation?

Liquidity to keep banks afloat, rate hikes and inflation for the rest of us. Totally not a ‘bailout’…

TLDRS:

This liquidity for banks to keep them afloat, rate hikes for the rest of us is up to $2,144 billion as of 4/19:

Tool 3/15 3/22 3/29 4/5 4/12 4/19
Discount Window/Primary Credit $152.85 billion $110.248 billion $88.157 billion $69.705 billion $67.633 billion $69.925 billion
Central Bank Liquidity Swaps $.47 billion $.59 billion $.5875 billion $.4885 billion $.4787 billion $.4188 billion
Bank Term Funding Program (BTFP) $11.943 billion $53.669 billion $64.403 billion $79.021 billion $71.837 billion $73.982 billion
“Other credit extensions” $142.8 billion $179.8 billion $180.1 billion $174.609 billion $172.615 billion $172.615 billion
“Foreign Official” $0 $60 billion $55 billion $40 billion $30 billion $20 billion
Total $308.063 billion $404.307 billion $388.2475 billion $363.8235 billion
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