QT on track, bank liquidity measures unwind.
By Wolf Richter for WOLF STREET.
Total assets held by the Fed dropped by $50 billion in the week, to $8.38 trillion, down by $118 billion for the month and by $348 billion in the 10 weeks since peak-bank-crisis. Quantitative Tightening (QT) continued on track, and as the remaining bank liquidity support measures continued to unwind, according to the Fed’s weekly balance sheet today.
From the historic peak of the balance sheet in April 2022, total assets have dropped by $580 billion. This month, total assets will fall below where they’d been before the banking crisis, and will set a new low in this QT cycle.
To see the details of the banking crisis, here are total assets viewed through a magnifying glass:
The banking crisis measures.
Repos with “foreign official” counterparties: paid off in April. The Swiss National Bank likely used this program to provide dollar-liquidity support for the take-under of Credit Suisse by UBS.
Discount Window: nearly paid off, down to $4 billion. Since the last rate hike, the Fed charges banks 5.25% to borrow at the Discount Window (or “Primary Credit”), and banks have to post collateral valued at “fair market value.” So this is expensive money for banks, and they pay it off as soon as they can.
Bank Term Funding Program (BTFP): +1.7 billion in the week, to $94 billion. Under this program, rolled out on March 13, banks can borrow for up to one year, at a fixed rate, pegged to the one-year overnight index swap rate plus 10 basis points. Banks have to post collateral, but valued “at par.” So this is still expensive money, but less expensive money than the Discount Window, so some banks paid off the Discount Window loans with proceeds from BTFP loans.
The amount borrowed at both facilities combined had peaked in mid-March at $165 billion and has since then dropped to $98 billion.
And so we put them on the same chart to see the flows between them, the loans at the Discount Window (red), and the loans at the BTFP (green):
Loans to FDIC: -$5 billion in the week, -$40 billion for the month to $188 billion. That spike in the week through May 3 was caused when JP Morgan acquired the assets of First Republic from the FDIC.
JPM paid the FDIC $182 billion for those assets. The payment came in different forms (we walked through the details here). To make the $182 billion payment, JPM also obtained a $50 billion loan from the FDIC, similar to when you buy a shack with a collapsed roof for $182,000, and you pay $132,000 in various ways to the seller, including some cash, and the seller provides a $50,000 interest-bearing loan that you have to pay back to the seller over the next five years. It’s that loan that caused this spike because the FDIC borrowed this $50 billion from the Fed.
The FDIC is now busy selling the assets – mostly loans and securities – that it took over from the collapsed Silicon Valley Bank and Signature Bank. As it sells those assets and closes the deals, and returns the funds to the Fed, the loan balances to the FDIC drop.
QT continued on track throughout the banking crisis.
Treasury notes and bonds: -$30 billion for the week, -$58 billion for the month, -$607 billion from the peak in June 2022, to $5.16 trillion.
Treasury notes and bonds “roll off” the balance sheet mid-month or at the end of the month when they mature and the Fed gets paid face value for them.
The roll-off is capped at $60 billion per month, and about that much usually rolls off. But the $368 billion of inflation-indexed TIPS (Treasury Inflation Protected Securities) that the Fed holds earn inflation protection pegged on the current CPI rate. Unlike interest, this inflation compensation is not paid in cash, but is added to the principle of the TIPS, which causes the balance of the TIPS to increase by that amount, which keeps the roll-off just under the $60 billion cap in most months.
MBS: -$12 billion for the week, -$17 billion for the month, -$182 billion from peak, to $2.56 trillion. The Fed only holds government-backed “Agency MBS,” and taxpayers carry the credit risk, not the Fed.
The way mortgage-backed securities come off the balance sheet is primarily via pass-through principal payments that holders receive when mortgages are paid off – when mortgaged homes are sold or mortgages are refinanced – and when regular mortgage payments are made.
The reduction in MBS has been below the monthly cap of $35 billion per month because fewer mortgages are getting paid off because home sales have plunged and refis have collapsed, and passthrough principal payments to the Fed have slowed:
From crisis to crisis to raging inflation. This is the long view of total assets on the Fed’s balance sheet:
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