Saturday, June 3, 2023
HomeEconomyFed's new banking support may slow balance sheet shrinkage

Fed's new banking support may slow balance sheet shrinkage


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Michael S. Derby

The key plank is the action announced by the U.S. Treasury Department and the Federal Reserve on Sunday – the Bank Term Funding Program – which aims to fund the Bank’s The bonds they own are exchanged for the cash these institutions need to shore up their deposits and capital positions to stabilize the financial system. The bonds — collateral for Fed loans with maturities of up to one year — will end up on the Fed’s $8.4 trillion balance sheet.

Analyst at Wrightson ICAP (London: 100NXGN

) on Monday of this week The new facility “is likely to attract significant interest volumes from banks” because it is attractively priced compared to other options, said a research note. It also allows the bonds that banks now hold that have been greatly depreciated by Fed rate hikes to enter the central bank at face value.

depends on the final use range of BTFP, it can be used as near $. are not replaced. So far it has managed to reduce almost $52 $1 billion in bonds on a balance sheet of over $9 trillion in the middle of last year.

The overall goal of these efforts is to drain liquidity from the banking system, and while Fed officials aren’t sure how long that process will last, Wrightson’s economic Experts and others think it may now take longer. The Fed doesn’t look ready to exit the QT program for now, but the influx of new bonds backed by BTFP loans could boost overall financial system liquidity as measured by bank reserves.

“The more favorable financial terms of the Fed’s new facility could divert substantial borrowing from (Federal Home Loan Banks) and expand the size of the Fed’s assets balance sheet,” Wrightson said. “(T) The long-awaited liquidity crunch from the Fed’s asset drawdown may be delayed again.”

Derek Tang, an economist at forecasting firm LH Meyer, said he did not see any near-term changes to the Fed’s balance sheet plans, but added that the central bank found It is in a difficult position to take further action against high inflation in an environment where monetary policy may be too tight for a stressed banking system.

“I don’t see the runoff changing immediately” as bank reserves combined with the massive Fed reverse repo pool mean financial The sector has ample reserves, Tang said, giving the Fed room to shrink its balance sheet further.

However, “reserve balances may not fall as much as they previously thought, as BTFP will actually increase reserves and expand its balance sheet. ”


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