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  • Writer's pictureDerek Sauerwine

Recent FED/FDIC Actions

Banks essentially do two things with depositor money, they either lend that money or they buy bonds with the funds. The risk for banks is generally if the loans they make go bad (credit risk) or if the bonds they buy decline in value (duration risk). Banks largely buy government backed securities (Treasuries) that will mature at par value. However, because interest rates have risen so quickly, the bonds in their securities portfolio are showing a marked-to-market loss (when interest rates rise, bond prices decline). But these bonds ultimately would mature at par value since they are largely Treasuries. This is true for all banks, and some have larger securities portfolios than others. Because depositors can demand their money out in their demand deposits (checking account), the bank may have to sell bonds that do not mature for another year or longer and must be sold at a loss to meet the redemption request. This risk is called duration risk, basically a timing mismatch between liabilities (demand deposits) and assets (bonds) for the bank. The issue of paper losses for bonds is universal for banks, but since they are government backed bonds (Treasuries), there is no credit risk and will mature at par value. The large banks are required to comply with a conservative standard in their securities portfolio because they are deemed Globally Systemically Important Banks (GSIBs). However, Silicon Valley Bank and Signature Bank were not GSIBs and ran more aggressively. The Federal Reserve Board announced that it will make additional funding available to support the banking system. The funding will be made available through a new program called the Bank Term Funding Program (BTFD). The BTFP will extend funds at par value for government bonds that are held by the bank. This will generally eliminate the need for banks to sell bonds at a loss to meet short-term redemption requests.



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