The Federal Reserve's emergency bank rescue tool (BTFP) may not be renewed upon maturity!
The Emergency Bank Assistance Tool (BTFP) provided by the Federal Reserve may come to an end in mid-March. This program allows banks to obtain advances by pledging bonds and other debts. The utilization rate of BTFP has soared to its highest level in history, with interest rates at around 4.93%, attracting banks to engage in arbitrage. Currently, the usage of BTFP has reached a new high of $141 billion. It is still unclear whether banks will be allowed to continue arbitraging in this way.
A senior official from the Federal Reserve said on Tuesday that the emergency loan program BTFP, which was established to address the collapse of Silicon Valley Bank, may end as scheduled in mid-March. Previously, Michael Barr, the Vice Chairman of the Federal Reserve responsible for bank supervision, also stated that the regular bank financing program would not be extended. The BTFP program allows banks to obtain prepayments from the Federal Reserve for up to one year by pledging US Treasury bonds, mortgage-backed securities, and other debts as collateral. They can meet customer withdrawal demands without having to sell bonds at a loss. In recent weeks, the utilization rate of the BTFP has soared to its highest level in history, as traders have increased their bets on a Fed rate cut in 2024. By borrowing cash at a cheaper rate of about 4.93% through the BTFP mechanism and then depositing the cash into the Federal Reserve's account at a rate of 5.40%, they can enjoy a free lunch. The usage of the BTFP has just reached a new high of $141 billion. Will the Federal Reserve allow banks to continue to profit in this way?