JPMorgan Says Fed’s Loans Will Provide $2 Trillion of Liquidity

(Bloomberg) — The Federal Reserve’s emergency loan program may inject as much as $2 trillion of funds into the US banking system and ease the liquidity crunch, according to JPMorgan Chase & Co.

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“The usage of the Fed’s Bank Term Funding Program is likely to be big,” strategists led by Nikolaos Panigirtzoglou in London wrote in a client note Wednesday. While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks outside the five biggest, they said.

The US authorities set up the program earlier this month following a collapse of three lenders with the aim of preventing a firesale of sovereign debt to obtain funding. Treasury two-year yields have tumbled more than 60 basis points this week amid speculation the Fed will skip an interest-rate hike next week as it seeks to stabilize the banking sector.

While there are still $3 trillion of reserves in the US banking system, a significant proportion of that is held by the largest banks, the JPMorgan strategists wrote. Tighter liquidity has been caused both by the Fed’s quantitative tightening and also the rate hikes that have induced a shift to money-market funds from bank deposits, they said.

The Bank Term Funding Program should be able to inject enough reserves into the banking system to reduce reserve scarcity and reverse the tightening that has taken place over the past year, the JPMorgan strategists wrote.

The Fed will report the use of the program on an aggregate basis every week when releasing data on its balance sheet, the central bank said in a statement this week.