The Federal Reserve’s Bank Term Funding Facility (BTFP) witnessed an unprecedented surge in demand, reaching a record high as banks increasingly favored it due to growing expectations of interest rate cuts. Data released by the Fed revealed that borrowing from the BTFP hit an all-time high of $131 billion in the week ending December 20, surpassing the previous record of $124 billion set in the week ending December 13.
Introduced during this year’s banking crisis, the BTFP enables banks and credit unions to borrow funds for up to one year, using US Treasuries and agency debt as collateral valued at par. The rate for these borrowings is set at the one-year overnight index swap rate plus 10 basis points.
Recent trends indicate a decrease in this rate, driven by traders betting on more rate cuts in 2024—approximately 155 basis points, according to Fed-swaps pricing. As a result, financial institutions have found it more cost-effective to borrow cash through the BTFP at the current rate of 4.88%, compared to utilizing the discount window, which charges eligible institutions 5.5%. Notably, borrowing from the discount window amounted to just $2.4 billion in the week ending December 20, a significant decline from the all-time high of $153 billion in March.
For banks, the reduction in BTFP borrowing costs presents a lucrative arbitrage opportunity. Institutions can borrow from the facility and then deposit the proceeds into their accounts at the Fed, earning interest on reserve balances at the current rate of 5.40%. This creates a spread of 52 basis points, matching the highest level since the Fed introduced the facility back in March.
