Tuesday, 25 June 2024
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FinanceWorld

Approximately 50% of US banks are prepared to borrow money in an emergency

  • Half of US banks have pledged collateral at the Federal Reserve’s emergency lending facility to establish borrowing capacity.
  • Banks increased their pledged collateral value to $2.63 trillion from $1.94 trillion in the previous year.
  • The primary role of the Fed is to maintain the stability of the financial system by lending money when nobody else would.

The bank failed in March 2021 as a result of Silicon Valley Bank (SVB), which also caused the creation of the Bank Term Funding Program, a short-term lending facility.

According to data released on Friday, fewer thanhalf of US banks have pledged collateral at the Federal Reserve’s emergency lending facility to establish borrowing capacity. There has been progressing, as evidenced by the rise in the number of banks signing up and the overall amount of collateral pledged, despite appeals from financial authorities for banks to act fast to utilize the Fed’s discount window in the event of problems.

US Banks

Additionally, the data indicates that banks are significantly more prepared for a discount window than credit unions, as an average of 40% of bank deposits are not insured, leaving them open to a run similar to the SVB.

Banks increased their pledged collateral value to $2.63 trillion from $1.94 trillion in the previous year as deposit-taking institutions strengthened their ability to obtain a discount window loan if necessary. Additionally, credit unions upped the total amount of collateral they pledged from $118 billion to $130 billion.

Just 3,900 banks have signed up for the discount window, meaning that up to 900 institutions do not have any access at all. Of the 4,824 banks, less than half have pledged collateral at the discount window. The primary role of the Fed is to maintain the stability of the financial system by lending money when nobody else would.

In March of last year, amid the turbulence in the banking industry, borrowers used the discount window to apply for a record $153 billion in emergency loans. But most of the time banks are afraid to use it, both to avoid looking weak and because the Fed has historically discouraged banks from using it if borrowers were weak.

The general lack of readiness was highlighted by a Reuters investigation from the previous year, which revealed that smaller banks in particular lacked experience with discount windows.

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