The Federal Reserve is poised to terminate its Bank Term Funding Program (BTFP) in March, as indicated by the widening gap between the program’s rate and the interest on reserve balances, according to insights from Wrightson ICAP. Launched earlier this year amidst market turmoil, the BTFP enables banks and credit unions to secure funds for up to one year, utilizing US Treasuries and agency debt as collateral. The current rate for these loans, standing at 4.84%, is 56 basis points lower than the interest on reserve balances.
With the recent shift in the Federal Reserve’s outlook towards more interest-rate cuts in the coming year, rates tied to the BTFP, including one-year overnight index swaps, have experienced a decline. This has fueled increased usage of the program, reaching a record-high borrowing of $131 billion in the week ending December 20, according to the latest data from the Fed.
The appealing arbitrage opportunity and the surge in borrowings have led market participants to question whether the Federal Reserve will extend the BTFP beyond its scheduled expiration on March 11, 2024. The evolving landscape, marked by normalized banking conditions and reduced emergency liquidity needs, poses challenges to justifying the continuation of the program.
Wrightson ICAP economist Lou Crandall noted, “It would be difficult to defend a renewal in today’s more normal environment,” highlighting the altered market conditions compared to the original launch.
Although Federal Reserve officials are yet to provide formal comments on the potential extension of the BTFP, they maintain alternative tools available for banks requiring last-minute liquidity. The discount window and the standing repo facility (SRF), established as a permanent tool in July 2021, are among these alternatives.
The SRF, accessible to eligible counterparties such as primary dealers and selected banks, facilitates lending eligible securities and borrowing dollars at an administered rate, approximately 5.5%. Fed Governor Michael Barr emphasized the importance of banks being prepared to borrow from the discount window, aiming to eliminate the historical stigma associated with such actions.
Wrightson ICAP’s Crandall highlighted the significance of overcoming the stigma debate, emphasizing that the success of the standing repo facility relies on banks viewing borrowing from the SRF as a commercial decision rather than a reputational or regulatory risk.
