Bitcoin And Ethereum Rally After The US Fed Prints $300 Billion In A Week
The collapse of Silicon Valley Bank (SVB) and Signature Bank has jerked up the Federal Reserve’s response to rescuing the U.S. banking sector. On Thursday, the central bank announced it lent $300 billion to cash-strapped banks in the country. As a result, the price of Bitcoin (BTC) and Ethereum (ETH) have soared, marking a bullish sentiment in the broader crypto market.
Banks Borrow $300 Billion From Federal Reserve To Fund Customer Withdrawals
According to the Federal Reserve, U.S. banks have borrowed a combined $164.8 billion over the past week. Out of this amount, $143 billion went to the holding companies of SVB and Signature Bank, set up by the Federal Deposit Insurance Corporation (FDIC) after it took over the banks’ operations on Sunday.
The FDIC, which insured deposits of up to $250,000, borrowed the money to settle uninsured depositors, who make up more than 90% of the SVB and Signature Bank’s customers.
Silicon Valley Bank, the sixteenth-largest bank in the United States and a prominent tech startup incubator, had assets worth $209 billion under management and held $175.4 billion in deposits. Meanwhile, Signature Bank, the 29th largest financial institution in the country, had assets worth approximately 110.36 billion under management and $88.59 billion in deposits.
The remaining amount was borrowed by mostly regional banks seeking to raise capital to pay depositors trying to withdraw money. Last week’s banking failure led many customers to move funds from smaller banks to larger, trusted megabanks.
In the last week, banks borrowed an all-time high of $153 billion from the Fed’s “discount window” program. The scheme allows financial institutions in the country to borrow cash to meet short-term needs for up to 90 days. Typically, this facility borrows between $4 billion and $5 billion weekly. The last time banks borrowed such vast amounts was during the 2008 financial crisis when the Fed lent $111 billion.
In the aftermath of the latest banking crisis, the Federal Reserve and the Department of Treasury launched the $25 billion Bank Term Funding Program (BTFP). The program will provide depository institutions with loans of up to one year in exchange for assets such as treasury bonds, agency debt, and mortgage-backed securities (MBS) as collateral to the central bank. This week, Banks borrowed $11.9 billion through BTFP to raise capital and pay depositors that want to withdraw money.
Silicon Valley Bank and Signature Bank had invested billions of dollars in customer deposits in long-term Treasury bonds and mortgage-backed securities that paid high dividends with lower yields.
However, over the past year, the Fed has been steadily raising its borrowing interest rate on the dollar to bring inflation under control, which caused yields on Treasurys and other bonds to rise and the value of bank-held long-term Treasurys to fall. As a result, the banks had to sell their investments at a loss to raise capital to settle depositors trying to withdraw money. The sale failed to provide banks with the necessary liquidity to remain solvent, leading to a classic bank run.
Bitcoin And Ethereum Continue Price Rally
Bitcoin (BTC) continued the rally that began on Sunday after the Fed announced its bailout program for the banks. On Tuesday, the world’s largest cryptocurrency by market cap crossed the $26,000 mark after February’s Consumer Price Index (CPI) data showed inflation in the U.S. economy to have come down to 6%.
Bitcoin prices cooled down to between $24,000 and $26,000 yesterday. At the time of writing, BTC, which jumped 30% over the week, is trading at $26,512 – up 6.6% in the last 24 hours.
Ethereum (ETH), the world’s second-largest cryptocurrency by market cap, also made gains this week due to overall bearish sentiment in the crypto market. News of the upcoming Shanghai upgrade, scheduled for April 12, 2023, also helped the token gain much-needed momentum. At the time of writing, ETH is trading at $1,734 – up 4.2% in the last 24 hours.
