Goldman Sachs said in a Sunday, March 12 research note that a March 22 rate hike by the Fed may be off the table. The note came after the Fed and Treasury’s protection for Silicon Valley Bank depositors and liquidity for banks. It also includes details on how the programs work. Below key excerpts from Goldman (with emphasis in bold from me), and links to the Fed and Treasury programs.
– The FDIC has used the ‘systemic risk exception’ (SRE) to protect uninsured depositors in two bank resolutions, Silicon Valley Bank and Signature Bank. In both cases, the costs not covered by the banks’ assets would be funded out of the FDIC’s Deposit Insurance Fund (DIF), which had a $125bn balance as of Q4 2022. The SRE waives the requirement that FDIC resolution uses the method that is least costly to the DIF. This option is available to the FDIC if resolving a bank in the least costly method would have “serious adverse effects on economic conditions or financial stability”. The FDIC’s decision to make this designation should reduce the perceived risk of holding uninsured deposits in other institutions and is likely to be helpful in reducing deposit outflows. An open question is whether the FDIC would continue to address other institutions in the same manner if they are of smaller size than the two banks in question.
2. The Fed and Treasury also announced the Bank Term Funding Program (BTFP), which would provide advances of up to one year to any federally insured bank that is eligible for discount window access, in return for eligible collateral (generally Treasuries and agency securities). A key aspect of the facility is that the Fed would value collateral at par without the standard haircut the Fed applies in other programs. This will allow banks to fund potential deposit outflows without crystalizing losses on depreciated securities. The loans are made with “recourse beyond the pledged collateral to the eligible borrower” suggesting that the par valuation of the collateral would only become relevant if the borrowing institution lacks sufficient assets to repay the loan. The facility is backstopped with $25bn from the Treasury’s Exchange Stabilization Fund (ESF), which has a net balance of $38bn. The Fed has indicated that it “does not anticipate that it will be necessary to draw on these backstop funds” likely because of the full-recourse nature of the advances under the program. Related to this, the Fed announced that it would apply the same collateral terms for discount window credit.
3. Both of these steps are likely to increase confidence among depositors, though they stop short of an FDIC guarantee of uninsured accounts as was implemented in 2008. The Dodd-Frank Act limits the FDIC’s authority to provide guarantees by requiring congressional passage of a joint resolution of approval, which is only marginally easier than passing a new legislation. Given the actions announced today, we do not expect near-term actions in Congress to provide guarantees.
4. In light of the stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its next meeting on March 22 (vs. our previous expectation of a 25bp hike). We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June, and July and now expect a 5.25-5.5% terminal rate, though we see considerable uncertainty about the path.