Cost of banking turmoil mounts as Fed loans top US$300bn

President Joe Biden has pledged to do “whatever is needed” to protect depositors, central banks across the world have moved to calm financial markets but the astronomical sums involved to shore up the financial sector keep rising and are likely to soar even more.

A tumultuous week in financial markets ends with (so far) over US$300bn of loans extended to US institutions, a US$30bn support package for a US regional bank and a US$54bn bail out in Europe. 

Figures released by the Federal Reserve on Thursday showed the US central bank loaned out US$160bn during the week ending March 15 across its discount window and new emergency facility as US lenders rushed for support in the aftermath of the collapse of Silicon Valley Bank.

Data showed usage for the discount window soared to a record high of US$152.85bn, a surge of US$148.3bn in the five days ending Wednesday. The terms of the facility were loosened as part of the emergency measures for banks announced on Sunday.

Lenders also borrowed US$11.9bn from the Fed’s Bank Term Funding Program, a new scheme launched on Sunday.

Separately, the central bank also disbursed $142.8bn to guarantee all deposits at SVB and Signature Bank.

Quoted in the Financial Times, Michael Feroli, chief US economist at JPMorgan, said the more than US$300bn of loans extended by the Fed to financial institutions was “about half of what was being extended in the” great financial crisis of 2008. “But it is still a big number,” he added. “The glass half-empty view is that banks need a lot of money. The glass half-full take is that the system is working as intended.”

Neil Wilson at markets.com said: “You could look at this two ways – one being that the banking system is clearly facing a lot of pressure; the other being that the response is having the desired effect, by and large.” 

“It’s hard to think that the Fed put is back – but it is possible for the Fed to ‘ease’ by providing short-term liquidity and simultaneously tighten policy. For investors it will ultimately come down to fear and loathing – what are you most afraid of and what do you hate least?”

The data came as some of the largest Wall Street banks deposited US$30bn at embattled First Republic Bank.

Bank of America, Citigroup, JPMorgan Chase and Wells Fargo each made a US$5 billion uninsured deposit into First Republic Bank, while Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) added US$2.5 billion each and BNY Mellon (NYSE:BK), PNC Bank, State Street, Truist and US Bank each contributed US$1 billion.

This was on top of US$54bn lifeline Credit Suisse negotiated from the Swiss central bank on Wednesday night which was meant to act as a “circuit breaker” on the stricken lender’s woes.

With speculation rife in financial markets as to where the next crisis lies maybe have the calculator to hand as the sums are likely to keep mounting up.