The U.S. banking industry is facing huge financial fallout as the collapse of big banks such as Silicon Valley Bank disrupts the sector. While other banks are considered at risk, the Fed has had to ease the country's ongoing liquidity crisis, according to JPMorgan.
The Fed's emergency lending program is expected to bring $2 trillion worth of funds to the U.S. banking system, according to JPMorgan. In this way, the current liquidity problem may be temporarily resolved. U.S. authorities drew up the scheme earlier this month after three lenders failed. The program is designed to provide these institutions with an additional source of liquidity. At the same time, it would eliminate the need to quickly sell securities during a crisis. According to JPMorgan strategists, the bank's term funding program should be able to add enough reserves to the banking system to alleviate the shortage of reserves.
While it is doubtful that the big banks will use the scheme, they say its maximum utilization is expected to be close to $2 trillion. That is equivalent to the value of bonds held by U.S. banks, all but five of the largest institutions. Elaborating on this, strategists led by Nikolaos Panigirtzoglou said,
"Use of the Fed Bank's Term Funding Program is likely to be substantial."
Additionally, it should be noted that the top banks hold a sizable share of the $3 trillion in reserves that still exist in the U.S. financial system. JPMorgan strategists blame tightening liquidity for the Fed's quantitative tightening and rate hikes that led to a shift from bank deposits to money market funds. Speculation that the Federal Reserve may abandon rate hikes next week to stabilize the banking sector sent two-year Treasury yields down more than 60 basis points this week.
