Premarket stocks: The forgotten rescue plan that could prevent another SVB-like crash

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Following the bankruptcy of Silicon Valley Bank and Signature Bank, the US government took an emergency bailout of customers, some of whom held multimillion-dollar uninsured deposits that would otherwise have been wiped out.

But the second, arguably more important bailout plan has been largely lost in public discussion: the Fed’s Bank Term Loan Program. Economists have called it main tool to prevent the collapse of another bank like SVB.

Here’s what you need to know about the Fed’s emergency stabilization plan.

What it is?

The Fed says it created the BTLP to provide “an additional source of liquidity for high-quality securities, eliminating the need for the institution to sell securities quickly during times of stress.”

This new program has three main parts.

Firstly, these are loans that he provides to banks.

Financial institutions will be able to borrow cash from their Federal Reserve Bank for up to one year, using bonds, mortgage-backed securities and other types of debt as collateral. This means that if a bank needs to strengthen cash quickly to keep up with the pace of customer withdrawals, it will be able to do so.

The second part of the program evaluates the bank’s treasury bonds and other securities at face value.

The Fed’s rate hike has eroded the value of Treasury bonds, which banks rely on as their most important source of capital (read more on this here). Here). US banks are currently sitting at about $620 billion in unrealized bond lossesaccording to the FDIC, if either of them needed quick access to a lot of cash, they would have to sell it at a loss — possibly a significant loss, as SVB did last week.

BTLP seeks to address this issue by valuing bonds used as collateral for a loan at “face value”. If the bank brings in the bond they bought for $1,000, which is now only worth $600, they still get $1,000 in cash.

The third part of the program is designed to instill confidence in the US banking system. These loans will be secured by $25 billion from the US Treasury. If the bank cannot repay its loan, the government will.

What is the meaning of the program?

BTLP is partly the brainchild of Douglas Diamond and Philip Dibwig, who won the Nobel Prize last year (along with former Fed Chairman Ben Bernanke) for their work on bank runs and how to prevent them. They found that if customers knew their bank deposits were insured, a massive bank failure was unlikely.

That’s exactly what this program aims to do: when banks sell large amounts of ultra-safe assets like Treasuries at a loss, it signals that they’ve exhausted all other avenues to raise capital to pay back customers—and failed. The Fed’s program eliminates this scenario from discussion, giving bank customers assurances that their money is safe and backed by the US Treasury.

It seems to work. Banking stocks rebounded significantly on Tuesday after a record drop on Monday and a week earlier.

Has anyone used it?

We don’t know yet! But we will next Monday. That’s when the Fed releases its weekly balance sheet. No names will be attached to the loans, but we will see how much money went into the banks.

For those with more patience, the Fed will release the names of the banks and the amount they borrowed a year after the end of the program. You may have to wait a bit, the program is designed for a year, but nothing prevents the Fed from extending it indefinitely.

Will anyone use it?

This is where things get more complicated. If a bank borrows from the Fed, it is loudly projecting its liquidity struggle onto investors. They are basically marked with the Scarlet Letter, RSM chief economist Joe Brusuelas told CNN.

But the Fed knows this, he said. This was a common problem with similar programs established during the 2008 financial crisis.

That’s why Brusuelas suspects that New York Federal Reserve President John Williams and some of the largest US banks may be doing some maneuvering. These banks will coordinate to borrow from the Fed at about the same time on the same day along with the smaller banks. Thus, the total amount of loans will be quite large and amorphous, making it difficult for investors to understand which banks have borrowed what.

Wait a minute, I thought the Fed was making money more expensive, not less.

You’re right, although the Fed wouldn’t call it “quantitative easing,” the asset-buying program it used to stimulate the economy during the global financial crisis. He prefers “large-scale asset purchases.”

For about a year now, the Fed has been practicing quantitative tightening (QT) to reduce high inflation rates. They currently sell about $60 billion in Treasury bonds every month.

This new program does the opposite, it injects money into the banking system. But Bruceuelas says the $25 billion in loans will, at best, slightly offset the effects of the tightening. He added that it was worth it to prevent an epic bank run that could destabilize the entire economy.

▸ The US February Producer Price Index, which measures how much suppliers charge businesses, is expected to be 5.4% yoy (down from 6% in January) and 0.3% m/m (down from 0.7 % in January).

PPI is one of several carefully monitored indicators of inflation. Because the producer-facing index captures price shifts upstream of the consumer, it is sometimes seen as a potential leading indicator of how prices may end up stalling at store level.

According to the CME Group’s FedWatch tool, Fed policymakers will next meet in a week, when they are expected to raise rates by another quarter of a point.

▸ Shares of American banks rose on Tuesday, recouping part of the losses after the collapse of three banks on Monday.

Shares of regional banks rose: First Republic

Bank closed the day up 27% after a record fall on Monday. PackWest Bancorp

grew by 34%, and Western Alliance

shares rose more than 14%.

Large banks also showed growth on Tuesday. JPMorgan Chase

up 2.6%, Citigroup

grew by 6%, while Wells Fargo

was higher by 4.6%.

The question is whether bank stocks can sustain their gains, or whether Tuesday was just a sector-wide dead cat jump.

“Banks have been given a breather as Treasury yields are down and market prices are at a lower terminal rate than expected just a week ago,” said Quincy Crosby, chief global strategist at LPL Financial. “But in this headline-driven market, a lot depends on banking stocks to see capital inflows to suggest the worst is indeed behind us.”

▸ US retail sales data for February, which is an important indicator of consumer spending, is also due on Wednesday morning. These spending account for the bulk of US economic activity, and the Fed keeps a close eye on them.

Analysts expect a significant drop in February, with sales falling 0.3% from a 3% increase last month. But in this bad economy, which could give Wall Street a reason to rejoice, it could mean the Fed will feel pressure to loosen its rate hike regime.

Another bad news for the banking sector. shares of Credit Suisse crashed more than 20% to a record low after its largest shareholder appeared to have ruled out providing additional financing to a struggling Swiss lender.

In an interview with Bloomberg, the chairman of the National Bank of Saudi Arabia said he would not increase his stake in the Swiss lender.

Credit Suisse stated in its annual report that it found “the group’s internal control over financial reporting was not effective” as it failed to adequately identify potential financial reporting risks.

Hannah Ziadi of CNN reports that the revelations came just days after the bank delayed the release of its annual report after the eleventh hour of a U.S. Securities and Exchange Commission inquiry about 2019 and 2020 cash flow reports.

The board concluded that “material weakness could result in misstatement of account balances or disclosures that could result in a material misstatement of Credit Suisse’s annual financial statements,” the annual report said. Credit Suisse is urgently developing a “correction plan” to tighten control.