US banks are still reliant on hundreds of billions of dollars in government funding, which was critical in reviving the industry following the failure of Silicon Valley Bank about four months ago, according to the “Financial Times.”
Despite a recent bounce in their share prices and second-quarter earnings that were regarded favourable by investors, regional lenders are tapping the support.
One source of capital comes from the Federal Home Loan Banks, a group of 11 government-sponsored wholesale regional lenders that would almost certainly be bailed out by Washington if they failed.
According to data released last week by the FHLB Office of Finance, US banks and credit unions had $880 billion in outstanding loans from the businesses that specialize in providing financing to banks at the end of June.
That was down from well over $1 trillion at the end of the first quarter, when FHLB borrowing reached an all-time high, but it was still up more than 150% from the end of 2021.
“We served to stabilize the system, and as long as rates stay where they are, you will see elevated FHLB advances to banks,” Teresa Bazemore, the San Francisco FHLB’s head, said to the “Financial Times.”
The FHLB has drawn fresh criticism from critics who believe the network should be reined in because government funding encourages excessive risk taking. SVB and Signature Bank, both failed lenders, borrowed from the network before failing.
“Yes, there is an implied government guarantee,” Bazemore said.
Banks are not compelled to inform investors whether or if they have borrowed from FHLBs. During the recent earnings season, however, some banks emphasized their ability to repay FHLB loans as a indication of financial health.
“Even if you’re paying relatively high interest rates on your interest bearing deposits, it’s often lower than what FHLB advances would cost,” Citizens Financial CEO Bruce van Saun told the Financial Times.
Many other banks, particularly those whose stock prices fell earlier this year, have only minimally reduced their reliance on the funding.
According to BankRegData, FHLB funding accounted for 15% of Comerica’s total assets, which was three times more than its peers. It was also more than the $10 billion in total cash on hand at the end of the quarter.
Another source of money has come from the Federal Reserve, which rapidly launched a loan scheme in late March that allowed banks to swap highly rated long-term assets that were underwater in exchange for a 12-month cash loan equivalent to the original cost of the paper.
Banks borrowed $105 billion as of July 26, up $2 billion from the previous week and a new record high.
