2023 has been the year of SVBs and SBFs – but we still need to talk about SPVs!

These are one of the most casually misunderstood features of Fed interventions—even (especially?) by Fed experts.

Now out — "Why Does the Fed Really Use SPVs?": som.yale.edu/story/2023/why…
2/ Articles, books, & academic literature often simply postulate that the Fed creates SPVs to get around the legal limits of Section 13(3), which—according to this misconception—don't allow the Fed to purchase assets. But that really doesn't track with SPVs' more nuanced history:

In a speech on Saturday, the NY Fed's general counsel gave us the most explanation yet for why the Fed thought it necessary to use Section 13(3) rather than the Fed's Section 10B discount window authority.

He noted a desire to set the BTFP loan terms to one-year maturities:

1/

https://twitter.com/NewYorkFed/status/1671159597401509893

2/ Prior to this, the best explanation we had from Fed officials was Powell saying that because this was a "special" facility, the Fed should use its "special" authority.

https://twitter.com/DavidBeckworth/status/1638616514596053000?s=20

Last week, the Fed reported profits of about $760 million on the Bank Term Funding Program so far.

However, the Fed doesn't adjust for the interest paid on the reserves its emergency programs add to the system.

The yield curve is inverted, leaving the BTFP rate often below IOR: 2/ Of course, profit is not the goal of financial stability interventions.

And the Fed has been clear that losses don't impact its ability to implement monetary policy. And the impact to the taxpayer is likely immaterial. These costs are buried in Fed's monetary policy costs.

Sudden bank runs are too often characterized as spontaneous fits of irrational panic. But what we see is that they're very much tied to the business cycle.

In 2023, West Coast bank runs have followed a West Coast business cycle that has very much turned: wsj.com/articles/west-… SVB, First Republic, Silvergate, Signature (yes, NY-based, but run on for catering to the very tech-y, West Coast-y crypto industry), PacWest, Western Alliance, etc.

As the bank failure inquiries begin: What is going on with the Fed's business hours?

FDIC Chair Gruenberg's testimony today specifically notes that Signature Bank settled its negative balance with Fed with just minutes to spare before the Fed's wire services closed.

(1/6) 2/ Similarly, the WSJ's play-by-play of SVB's last days notes that the Fed did not extend its wire deadline on Thursday March 9, limiting SVB's access to the discount window that night.

SVB did not open the next day.
wsj.com/articles/how-t…

Last week's Fed balance sheet showed the Fed injecting over $300 billion of reserves via lending.

Perhaps oddly, the Fed's QT is still destroying $95B of reserves per month.

Been writing awhile about the possibility of ending up here—and the precedent & playbook for it:

(1/5) 2/ "Hike until something breaks" became monetary policy consensus in the market—and kinda/sorta among Fed officials.

But what if inflation is still high? The Fed likely has the tools to keep tightening while keeping the financial system stable:
withoutwarning.substack.com/p/hiking-beyon…

A thread on the new Fed facility invoking the Fed's Section 13(3) emergency authority:

The Board vote is up, confirming that this facility is indeed under the Fed's 13(3) authority, despite no mention of the authority's use in the press release or term sheet.

1/

https://twitter.com/federalreserve/status/1635043886409326594

15 years & 1 day ago, the Fed announced its first 13(3) program of the GFC, and didn't mention the authority for fear of ... fear.

Term Securities Lending Facility, announced 3/11/2008:
federalreserve.gov/newsevents/pre…

Bernanke later:

Short thread of thoughts on valuing the securities at par:

1) By overvaluing the assets (axing haircuts), this is effectively a capital injection into the system — an authority the Fed doesn't otherwise directly have. It will be "paid back" as the loans mature.

https://twitter.com/federalreserve/status/1635043886409326594

2.1) This should serve as a wakeup call to the Fed that it's consistently been overconfident in the emergency efficacy of a discount window and Standing Repo Facility (SRF) that lend at fair/market value.

withoutwarning.substack.com/p/improving-th…

A lot of talk over whether SVB "should" get a "bailout," but it's worth outlining that it might not be able to without legislation.

Crisis-fighters' authorities were curtailed following 2008. The Fed and Treasury almost certainly can't rescue SVB now. Maybeeee the FDIC...

[1/x] First, it's worth noting that whether SVB or any of its stakeholders "should" get rescued is not typically how *financial authorities* think about rescues.

The first test is typically "is it systemic?" - not clear we're anywhere near there yet.

Tightening monetary policy but "easing" financial stability policy? Old news for the Fed since at least the 1960s.

In 1966 and 1969, the Fed was turning these knobs in "opposite" directions.

Short thread: 2/ The 1966 monetary situation, per the Fed:

"Monetary restraint pursued by the Federal Reserve during most of 1966 was carried out through a wide variety of instruments"

"inflationary pressures generated by the business investment boom and expansion in defense spending"

1/ BlackRock has filed with the SEC to create a government money market fund exclusively available to @circlepay - a new avenue to back USDC:
sec.gov/Archives/edgar… 2/ This likely wouldn't change much about Circle's reserves. It would, however, imply the maturity of Circle's assets could get termed out from their current max of 3 months to ~1 year.

On stablecoins: the instability concerns go beyond the commercial paper, etc. holdings.

Shifting into short-term Treasury holdings brings its own suite of financial stability concerns.

Quick thread on this systemic risk. 1/x 2/ Shifting assets away from commercial paper into short-term Treasuries is often characterized as making stablecoins more run-proof. See, e.g.:
blogs.imf.org/2021/10/01/cry…
Or USDC emphasizing the shift in its portfolio: bloomberg.com/news/articles/…

There's precedent here for the Treasury to get even more of its money back now. A quick back-of-the-envelope calculation suggests that without changing the risk structure of these facilities, the Treasury could retire another $20 billion or so of debt today.

Quick thread 1/

https://twitter.com/StevenKelly49/status/1443047721380810756

Here's the status of the Fed's CARES Act facilities. As shown, only the corporate bond facilities have yet returned all the Treasury funding. They did so after selling all holdings. The other facilities need not do the same or change their stated risk profile to return funds.

2/

We know that financial crises come from innovations of short-term bank/bank-like debt that move outside of/more quickly than the regulatory regime. So, where might the next one come from? A case for the answer being right there in the name: #FinTech. An ongoing thread... Many firms providing digital payment services have large cash balances attributable to their customers who have left money “in” the app for ease of use. This cash is often deposited in banks with interest accruing to the firm...