visimoney
TL;DR: The Federal Reserve is shutting down its Bank Term Funding Program, ending a profitable arbitrage opportunity for banks. The program was established during the regional banking crisis in 2023 and allowed banks to borrow from the Fed facility at a lower rate and then park reserves at the central bank. However, with interest rates on short-term funding falling below the Bank Term Funding Program rate, banks took advantage of the favorable terms and increased their borrowing. The program will officially end on March 11, and new loans made before that date will be at no lower than the interest rate on reserve balances.
Key points:
- The Federal Reserve is ending its Bank Term Funding Program, which was established during the regional banking crisis in 2023.
- Banks were able to borrow from the Fed facility at a lower rate and then park reserves at the central bank, taking advantage of the favorable terms.
- The program saw increased borrowing from banks as interest rates on short-term funding fell below the program rate.
- Usage of the Bank Term Funding Program reached $161.5 billion in the week ending January 17.
- The program will officially end on March 11, and new loans made before that date will be at no lower than the interest rate on reserve balances.
According to JPMorgan’s chief U.S. economist, Michael Feroli, the increased borrowing from banks was due to the favorability of the terms. However, the end of the program may impact regional bank stock prices. Chris Turner at ING questioned whether the Fed has a good handle on the situation to prevent regional banks from coming under stress again.
The SPDR S&P Regional Banking ETF has climbed 50% since May. The impact of the program’s ending on U.S. markets remains to be seen.
