Amid the normalization of wholesale borrowing by banks in 2022, some institutions entered the first-quarter liquidity crunch with a greater reliance on more expensive debt than before.

Wholesale borrowing, now involving higher interest rates, increased by $213.46 billion sequentially in the 2022 fourth quarter, driven by growth in brokered deposits and Federal Home Loan Bank (FHLB) advances, according to S&P Global Market Intelligence data. Since then, banks' scramble for funds amid two of the biggest US bank failures in history has been evident in record emergency borrowing from the Federal Reserve, deposit outflows at small banks and a sharp return to buildups of cash stockpiles across the industry.

While emergency Fed borrowing has roughly leveled off according to the most recent weekly data, and daily FHLB issuance appears to have subsided from a spike in the middle of March, funding shifts have been uneven.

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Biggest increases

The 10 banks with the biggest year-over-year increases in brokered deposits relative to total liabilities through the end of 2022 posted gains of 27.1 to 97.7 percentage points, while the banks with the largest year-over-year increases in FHLB advances to total liabilities reported growth of 20.5 to 39.9 percentage points.

The numbers have quickly become outdated. Silvergate Capital Corp., which ran a platform that enabled cryptocurrency traders to exchange holdings with each other for cash, said it was repaying all of its FHLB advances in early March, and shortly thereafter started the process of liquidating itself.

The flows have gone mostly in the other direction, however. FHLB bond issuance, which is used to fund advances to banks, was $130.04 billion in January and $54.62 billion in February, compared with a monthly average of $48.98 billion in 2022.

Trading desk data shows that net FHLB issuance on a daily basis shot up to $156.49 billion on March 13, the Monday after the failures, and $66.43 billion on March 14, according to rates strategists at BofA Global Research. Over the subsequent days through March 30, daily net issuance ranged from negative $10.66 billion to positive $19.18 billion.

Some banks have told analysts that they took out advances as a precaution against deposit outflows, but that they have already paid them off, or plan to if the outflows do not materialize for them.

Biggest borrowing

Among the biggest banks and banks with the largest amounts of FHLB borrowing, the embattled First Republic Bank announced that it added massively in March to its already rapidly growing wholesale funding.

The bank's FHLB advances had increased 27.3% sequentially in the 2022 fourth quarter to $14.00 billion. In the days leading up to an infusion of $30 billion of market rate deposits from a group of other big banks, First Republic added $10 billion of FHLB borrowing at 5.09% and borrowed as much as $109 billion from the Fed at 4.75%, it said on March 16.

The biggest banks, many of which have large trading and wholesale operations, generally rely on higher levels of wholesale funding than the industry as a whole. That includes increases in FHLB advances and brokered deposits at some, though banks like JPMorgan Chase & Co. and Bank of America Corp. have relatively low borrowing in both those categories.

The sum of emergency borrowing from the Fed through primary credit at the discount window and the recently created Bank Term Funding Program has been roughly stable for two weeks after an initial spike to $164.80 billion on March 15. The sum was $163.92 billion on March 22 and $152.56 billion on March 29.

With subsiding FHLB issuance, the bottom line is that "banking system stress remains high, but there are some signs of stabilization [or] tentative improvement," the BofA Global Research analysts said in a March 31 note.