US Fed's loans to provide $2 trillion of liquidity in the banking system: JP Morgan

The Bank Term Funding Program should be able to inject enough reserves into the banking system to reduce reserve scarcity and reverse the tightening.

The Federal Reserve’s emergency loan program may inject as much as $2 trillion of funds into the US banking system and ease the liquidity crunch.

While the largest banks are unlikely to tap the program, the maximum usage envisaged for the facility is close to $2 trillion, which is the par amount of bonds held by US banks.

The US authorities set up the program earlier this month following a collapse of three lenders with the aim of preventing a firesale of sovereign debt from obtaining funding.

While there are still $3 trillion of reserves in the US banking system, a significant proportion of that is held by the largest banks.

Tighter liquidity has been caused both by the Fed’s quantitative tightening and the rate hikes that have induced a shift to money-market funds from bank deposits.

The Fed will report the use of the program on an aggregate basis every week when releasing data on its balance sheet, the central bank said in a statement this week.