JP Morgan says Fed’s emergency loan program may inject $2T into the US banking system

Three days after the US Federal Reserve announced a new Fed emergency loan program in the wake of the collapse of the Silicon Valley Bank (NASDAQ:SIVB), Signature Bank, and Silvergate Capital Corp (NYSE: SI), JPMorgan Chase & Co issued a statement approximating the total amount to be used at about $2 trillion.

JP Morgan in the statement said that the Fed emergency loan program, Bank Term Funding Program (BTFP), should inject up to $2 trillion into the US banking system to aid the struggling bank in the US amid the ongoing liquidity crunch. The $2 trillion was arrived at as per the amount of bonds held by US banks outside the five biggest banks.

Largest banks unlikely to tap into the program

JP Morgan further stated that it was unlikely the largest banks will tap into the emergency loan program.

The BTFP program aims to make sure that financial institutions can “meet the needs of all their depositors.” the program is aimed at preventing the rushed sale of sovereign debt to raise funds.

According to JP Morgan, there are about $3 trillion of reserves in the US banking system most of which are held by the largest banks.

Reserve scarcity

Fed’s interest rate hikes last year resulted in tight liquidity that has resulted in a shift to money-market funds from bank deposits. Currently, all eyes are on the Federal Reserve to see whether it would hike the interest rates further after two banks collapsed in less than a week.

Consequently, JP Morgan strategists said that the new Fed emergency loan program should be able to inject enough reserves into the US banking system to reduce the current reserve scarcity and tightening witnessed over the past year.

In a statement, the Fed stated that it will report on the use of the new emergency loan program on an aggregate basis every week and release data on its balance sheet.