Analysts in the market believe that recent modifications to a crucial support system provided by the Federal Reserve to banks will help its capacity to offer cash to banks that genuinely require it. Furthermore, these changes have discouraged a consistent increase in borrowing that has been observed in recent months.
According to analysts, the reason behind this is that the Bank Term Funding Program, also known as BTFP, continues to provide relatively favorable conditions for accessing funds despite the increased borrowing costs from the central bank. It is crucial to note that in the past few days, certain regional Fed banks have encountered difficulties, which in turn have sparked concerns about the sector. This has led to questions about whether the central bank should have acted more quickly in restricting access to the BTFP.
The Federal Reserve Raised the Rate Under the BTFP Program
The Federal Reserve raised the interest rate on the Borrowing Term Facility Program (BTFP) a little over a week ago, shortly after the previous week. In the wake of Silicon Valley Bank’s widely publicized failure, this program was launched in March with the intention of providing qualified financial institutions with access to funds. The failure of this particular bank prompted concerns regarding the potential strain that could be placed on the banking industry as a whole.
At present, the interest rate on reserves is 5.4%, which is the same as the interest rate on borrowing for BFTP. If individuals are looking for new BTFP loans, the costs associated with lending money will immediately increase by half a percentage point. In addition, the Federal Reserve System confirmed that the program would end on March 11 as originally planned.
Despite no apparent signs of strain on the bank, there was widespread consensus that raising the interest rate was a strategy that could be utilized to address the alarming rise in the amount of money borrowed at the facility. Banks had borrowed a total of $165.2 billion from the facility as of January 31, a decrease from the $167.8 billion that was borrowed on January 24. This indicates that the modification has had a discernible impact.
Inexpensive Means of Borrowing Are No Longer Available to Banks
By increasing the rate, the Fed effectively eliminated the previous opportunity for banks to borrow inexpensive funds from the Fed and then lend them at higher rates in private markets or even back to the Fed. The BTFP borrowing rate has surpassed the rate observed on numerous private money market securities and aligns with the rate that the Fed offers banks to hold reserves at the central bank.
According to Steven Kelly, who is the deputy director of studies at the Program on Financial Stability at the Yale School of Management, the decrease in usage at the BTFP is consistent with what was anticipated, taking into consideration the new terms. There is a good chance that the overall level of borrowing has reached its highest point and is now decreasing.
According to Joseph Wang, the chief investment officer at Monetary Macro, increasing the rate was the correct decision. Adjusting the BTFP rate to match the interest on reserve rate helps filter out those who borrow for opportunistic reasons, ensuring that those genuinely in need of cash are prioritized.
Derek Tang, an analyst from LH Meyer, shares the view that the facility is still well-positioned to offer support. He points out that banks have been utilizing it not solely due to the lower BTFP rate but rather because BTFP had more lenient collateral valuation and margin requirements, which have remained unchanged.
In spite of the volatile markets, Federal Reserve officials are not worried about the well-being of the banks. Policymakers seemed more confident, leading them to remove from the Federal Open Market Committee policy statement released on Wednesday the phrase “sound and resilient” to describe the banks. This phrase had been used since the March 2023 statement and continued until the most recent FOMC meeting.