In a noteworthy trend, banks have recorded an unprecedented level of borrowing from the Federal Reserve’s newest backstop facility, driven by growing speculation of imminent interest-rate cuts, which have enhanced the facility’s appeal. According to Federal Reserve data, the Bank Term Funding Program (BTFP) saw a staggering $136 billion in borrowing during the week ending December 27, setting a new record. This surpasses the previous peak of $131 billion reached in the week ending December 20.
Introduced in response to this year’s banking challenges, the BTFP allows banks and credit unions to secure funds for a duration of up to one year, utilizing US Treasuries and agency debt as collateral valued at par. The interest rate for these advances is determined as the one-year overnight index swap rate plus 10 basis points.
Recent developments in interest rate expectations, with traders increasingly betting on additional rate cuts in 2024 (approximately 155 basis points, according to Fed-swaps pricing), have contributed to a decline in the BTFP borrowing rate. Currently standing at 4.83%, this rate is now more cost-effective for institutions compared to the discount window, which charges eligible institutions 5.5%. Notably, borrowing from the discount window saw a significant drop to $2.49 billion in the week through December 27, down from the all-time high of $153 billion in March.
For banks, the reduction in BTFP borrowing costs translates into a more lucrative arbitrage opportunity. Institutions are now leveraging this facility, borrowing funds and subsequently depositing the proceeds in their accounts at the Fed, allowing them to earn interest on reserve balances at the current rate of 5.40%. This creates a favorable spread of 57 basis points, marking the widest level since the introduction of the facility in March.
