The Federal Reserve on Sunday unveiled a new program to ensure banks can meet the needs of all their depositors amid escalating chances of bank runs following the abrupt collapse of two major banks in the space of 72 hours.
A key element of the program is acceptable loan collateral - including U.S. Treasuries and mortgage-backed securities among others - will be valued at "par," meaning open-market bond values that have been impaired by a year of Fed rate hikes will not reduce what a bank may borrow from the central bank.
"This will allow banks to fund potential deposit outflows Without crystalizing losses on depreciated securities," Goldman Sachs wrote Sunday after the Fed announcement.Loans of up to a year in length will be available under the new facility. Borrowers may prepay the loans without penalty. Advances can be made until March 11, 2024.
In fact, the Fed loans are made with "recourse beyond the pledged collateral," which takes into account the fact that the collateral may be impaired.
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