Wally Adeyemo at CNBC’s Delivering Alpha, September 28, 2022.
Scott Mill | CNBC
WASHINGTON — The record-breaking number of emergency loans extended to banks by the Federal Reserve this week was key to stabilizing withdrawals from small and medium-sized U.S. banks, Deputy Treasury Secretary Wally Adeyemo told CNBC on Friday.
The fallout from federal agencies’ swift action to stabilize the US banking system last weekend helped contain the fallout, but was still impacting the economy almost a week later.
Markets still haven’t fully priced in government aid or the $30 billion that 11 banks have contributed Bank of the First Republic to boost confidence in the system, he said.
“It will take time for the markets to catch up with the actions that have been taken by us and by these banks,” Adeyemo said on CNBC’s “Squawk on the Street.” “And what we’ve done now is give these institutions time to think about how to organize their businesses going forward.”
After the collapse of California’s Silicon Valley Bank and New York’s Signature Bank last Friday and Sunday respectively, regulators announced a series of contingency measures to stabilize the country’s banking system.
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These included guaranteeing customers’ deposits at the two failed banks; Creation of a new fund, the Bank Term Funding Program, to provide short-term loans to banks on generous terms; and the easing of conditions on the Fed’s traditional overnight credit arm, the so-called “discount window”.
The result of the measures is a dramatic turnaround in the fortunes of numerous banks, said Adeyemo. These included banks, anticipating potential mass withdrawals, and prematurely pledging collateral in anticipation of needing emergency credit.
“While a number of banks coming into the weekend anticipated the need to raise more liquidity, as the week progressed we found they had to use less and less of it,” Adeyemo said. “And now that we’ve seen stabilization in terms of deposits with these institutions.”
But while trends were moving in the right direction, the amount of money banks borrowed from the Fed’s discount window last week through Wednesday set a new record at $153 billion, according to the Fed’s weekly bulletin.
The previous record for discounted window loans was $111 billion, set at the height of the financial crisis in 2008.
The identities of the banks that took out loans will not be published for another two years. However, the total indicates that the banking sector is not quite stable yet.
The ongoing bank stability questions come with another question arising from the Fed’s actions. Whether uninsured deposits with banks that default in the future are covered in the same way as with SVB and Signature.
“Are all uninsured depositors in the US banking system currently protected?” CNBC’s Sara Eisen asked Adeyemo.
The response was that this is a goal for the time being for the Biden administration, but not a reality.
“Ultimately, the President has made it clear that our goal is to protect depositors, to ensure they have the money they need to run their businesses and to ensure their families are taken care of,” Adeyemo said.