The Federal Reserve's Bank Term Funding Program (BTFP) has seen a significant increase in borrowing, with outstanding loans reaching $141.2 billion, a nearly $30 billion rise in a month. Financial institutions are reportedly accelerating their borrowing from the BTFP to take advantage of favorable loan terms before the program potentially tightens or concludes on March 11th. However, the surge in BTFP usage is attributed not to funding stress but to banks exploiting a 40 basis points arbitrage opportunity between the Interest on Reserve Balances (IORB) rate at 5.4% and the BTFP rate pegged to the one-year Overnight Indexed Swap (OIS) plus 10 basis points. The BTFP, established in March 2023 to support American banks, businesses, and individuals, is likely to be retired in March, as indicated by Fed Vice Chair for Supervision Michael Barr. Despite the uptick in activity, the increase in BTFP borrowing is not seen as a sign of banking system stress, as bank deposits have been rising. Instead, it reflects the arbitrage opportunity currently available, with banks pocketing approximately 50 basis points by borrowing from the Fed's rescue facility and then parking it at the Fed. There is speculation that the Federal Reserve may extend the program but adjust the pricing to eliminate this arbitrage chance, and an expiry of the BTFP on March 11 has been hinted by Fed's Barr.
The pickup in the BTFP is not a sign of stress in the banking system (deposits have been *rising* recently), its reflective of an arbitrage opportunity. Odds are the Fed extends the program but cleans up the pricing to close this arb. https://t.co/O9mnnS42MS
The Federal Reserve's Bank Term Lending Program (BTFP) is likely to be retired in March $KRE according to Fed Vice Chair for Supervision Michael Barr This program was created to support American banks, businesses, and individuals in March 2023. It was to help assure that banks…
Banks are pocketing ~50 bps by borrowing from the Fed's rescue facility–then parking it at the Fed. Fed's Barr hinted yesterday the BTFP is likely to expire on March 11. https://t.co/v2I8dZj9EP
Think this needs adressing as it’s somehow ill-informed. This recent surge in the BTFP is not driven by funding stress but by profiteering from a 40bp arbitrage opportunity between IORB (5.4%) and BTFP (1yr OIS+10bp) Nothing to see here other than another exceptional measure… https://t.co/JFCeFYVTyo
The Fed's BTFP emergency loan facility reached $141.2 billion in outstanding loans this week. It is up almost $30 billion in a month. Borrowing from BTFP is accelerating as banks look to secure a sweetheart loan before the facility restricts itself or shuts off on March 11th. https://t.co/dbmKC78lcQ