Equity analysts believe that the Federal Reserve's attempt to calm consumers' concerns about banks' liquidity is a good first step, but some questioned if it is enough to stop the movement of deposits.
On March 12, the Fed established the Bank Term Funding Program, or BTFP, which will allow banks, savings associations and credit unions to draw loans of up to one year in length from the Fed. The program was created after the recent failures of Silicon Valley Bank and Signature Bank, which have sparked concerns about banks' liquidity positions. The program aims to provide additional liquidity against financial institutions' securities so they do not have to sell those quickly in times of stress.
Another purpose of creating the facility was to instill confidence in depositors in that they will be able to access their funds and "thereby attempt to reduce the withdrawal of funds from perceived at-risk banks to perceived stronger banks," such as global systemically important banks, Compass Point analyst Ed Groshans wrote in a note.
However, equity analysts expressed varying opinions on the program's potential effectiveness in calming the ongoing confidence crisis among consumers.
Deposit flow worries
Piper Sandler analysts Casey Whitman and Alexander Twerdahl said the Fed facility should temper consumer concern, but it may not be enough to stop the outflow of deposits.
"The creation of the BTFP should help tamp down market panic by ensuring bank access to funding and taking forced loss sales (and therefore capital raise concerns) off the table," they wrote. "However, with no explicit deposit guarantee going forward, the announcement may do little to stem the flow of deposits from institutions investors perceive to be weaker. Bottom line, should reduce panic, but maybe not deposit flow concerns."
Jefferies analysts agreed, saying the "mere presence" of the Fed facility "should on its own improve confidence in the system and in individual banks (and hopefully even avoid the BTFP from being widely used)," they wrote. However, "questions will remain about deposit flows that have already happened over the past week and could still occur looking ahead," they wrote.
Equity analysts said consumers may flock to larger institutions, namely the global systemically important banks.
"The largest banks are disproportionately benefiting from the crisis of confidence," Wells Fargo analysts wrote in a March 12 note.
Piper Sandler's Whitman and Twerdahl believe the Fed's facility "may do little to stem deposit flow concerns from perceived weaker institutions toward those that may be perceived as stronger."
Helping banks with long duration securities
Conversely, some analysts think this move instills enough confidence to stop deposit outflows.
JMP Securities analysts labeled the facility "an important step to avoid a negative cascade" in a March 12 note.
Wells Fargo analysts called it a "silver lining" for mid-cap banks that "should stem the hemorrhaging of deposits and allow for cooler heads (and confidence) to prevail," the analysts wrote.
Moreover, the program will help banks by giving them another liquidity lever to pull if they need it, analysts said.
The program should alleviate investors' worries that banks will have to sell unrealized losses because the facility minimizes "the risk that other banks could be forced to sell securities at losses (to fund deposit outflows) and thereby impact capital levels," the Jefferies analysts wrote.
Wells Fargo analysts echoed that sentiment, writing that the program will specifically help banks with longer duration securities.
"While not soon enough for [Silicon Valley Bank] and [Signature Bank], we hope this availability of additional liquidity will help assuage depositors' fears," they wrote.
Drawbacks
However, one analyst believes banks will likely be hesitant to access the facility, depending on the reporting requirements.
"We could envision there being a stigma associated with tapping the facility," Isaac Boltansky, managing director and director of policy research at BTIG, wrote in a note.
Boltansky also believes that the program is a near-term solution, not a long-term one.
"More broadly, while the Fed's bank funding facility should provide liquidity leeway in the near term, there is still work to be done to address the asset-liability mismatches in the system," Boltansky wrote. "We believe this facility will meaningfully lessen liquidity pressure in the near term, but it should not be viewed as a panacea given preexisting asset-liability mismatches on bank balance sheets."
