How was the Fed allowed to lend $142.8 billion to the two bridge banks (incl. SVB) if it "would not" lend to insolvent banks?

Question

I'm rather confused how this was legally possible:

Banks borrowed $152.85 billion at the Fed on Wednesday, up from $4.58 billion a week before, according to new data released Thursday. The daily average for borrowing last week was $85 billion, compared with $4.4 billion a week earlier, and the most since the 2008 financial crisis.

Meanwhile, the Federal Home Loan Bank system had its biggest day of issuance ever on Monday, issuing $112 billion worth of debt to fund requests from banks looking to solidify their balance sheets.

Banks tapped the Fed’s new funding program for $11.94 billion on Wednesday. The two banks that failed last week borrowed another $142.8 billion. [...]

Banks are generally skittish about using the discount window and especially afraid of it becoming public. The program is known as the industry’s lender of last resort, offering overnight loans that banks can use to ease a liquidity issue. The Fed would reject an insolvent bank from borrowing, but the program has long carried a stigma that to need the discount window is a sign of dire trouble.

Borrowing is secret and names are withheld for two years, but borrowing has been largely nonexistent since the financial crisis. It spiked briefly in the pandemic, when a group of the biggest banks said they would borrow publicly in an attempt to ease the stigma.

So "would reject" there is just a description of common practice (but thus allows for exceptions) or is the Fed legally not allowed to lend to insolvent banks? (And/or are bridge banks not necessarily considered insolvent by the Fed, even if they are created as a result of "failed" banks?)

Answer 1

I consider this only a partial answer, but apparently two things happened. The Fed cut their haircut on some instruments to zero, which essentially seems to mean they now use the full face value of collateral

A few days ago the haircuts on Treasuries, agency debt, and agency MBS were 1-5 percent depending on the duration of the security. As of Tuesday [March 14], however, those haircuts were all dropped to zero. That is, the Fed is lending the full market value of those securities. Haircuts on other assets pledged to the window, including the loans that make up most of the collateral, appear to have been unchanged.

Since the SVB is said to have held a lot of Treasuries/bonds, that might have helped, but I can find no analysis on the effect.

And the FDIC is apparently backing those DW loans. It's not entirely clear [to me, for now] if the collateral is just from the bridge banks' assets or FDIC's own:

Remarkably, on Wednesday, the Fed was also lending $143 billion to the bridge banks the FDIC established for SVB and Signature. Footnote 7 of the H.4.1 states

Includes loans that were extended to depository institutions established by the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Banks’ loans to these depository institutions are secured by collateral and the FDIC provides repayment guarantees.

As far as I know, the Fed has provided no other information on these loans. The loans may largely be discount window loans that had been extended to the institutions before they closed.