How America accidentally made BTFP a free-money machine for banks
Less than a year ago rising rates caused Silicon Valley Bank (svb) and then First Republic to fail, the largest bank collapses since 2008.
Yet on January 12th JPMorgan Chase reported its seventh consecutive quarter of record net-interest income.
One reason the crisis did not spread in 2023 is that the Federal Reserve contained it with a new—and generous—loan programme.
The bank term funding programme (BTFP ) offers banks loans secured against the face value of Treasury bonds. The idea was to stop wobbly banks having to sell Treasuries to raise cash if depositors fled.
Today, however, the BTFP is itself causing trouble.
Because investors are betting the central bank will cut rates significantly, the cost of borrowing today is only 4.8%. Yet because those rate cuts have not yet happened, the Fed still pays banks 5.4% on their cash balances.
In other words, banks can draw loans just to make a spread of 0.6 percentage points, risk-free, at the expense of the central bank.
Naturally, the use of the BTFP has shot up. Since the start of November outstanding balances have risen from $109bn to $147bn.
The Economist 18 January 2024
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