Banks are pocketing real money by borrowing money from the Fed's newest backstop facility, which charges a lower rate, & then parking it at another unit of the Fed, which pays higher interest

Unusual Whales

Dec 28, 2023 • 1 min read

Banks are pocketing real money by borrowing money from the Fed's newest backstop facility, which charges a lower rate, & then parking it at another unit of the Fed, which pays higher interest, per Lisa Abramowicz.

Read more: https://www.bnnbloomberg.ca/demand-for-fed-s-bank-term-funding-facility-grows-to-record-high-1.2014790

Per Bloomberg:

Banks borrowed a record amount from the Federal Reserve’s newest backstop facility in the most recent week as increasing wagers on interest-rate cuts made it a more attractive choice.

Data from the Fed showed an all-time high $131 billion in borrowing from the Bank Term Funding Program, or BTFP, in the week through Dec. 20. That compares to a previous record of $124 billion, reached in the week ended Dec. 13.

Launched amid this year’s banking crisis, the BTFP allows banks and credit unions to borrow funds for up to one year, pledging US Treasuries and agency debt as collateral valued at par. The rate for these advances will be the one-year overnight index swap rate plus 10 basis points.

Lately, that rate has come down as traders increase bets on more rate cuts in 2024 — about 155 basis points, according to Fed-swaps pricing. Institutions have found it cheaper to borrow cash through the nascent facility, currently at 4.88%, rather than turning to the discount window, which charges eligible institutions 5.5%. In fact: Banks tapped the window for just $2.4 billion in the week through Dec. 20, down from an all-time high of $153 billion in March.

For banks, the drop in BTFP borrowing costs spells a larger arbitrage opportunity, one where institutions borrow from the facility before parking the proceeds in their accounts at the Fed to earn interest on reserve balances — currently 5.40%. That spread is now 52 basis points, matching the highest level since the Fed introduced the facility back in March.

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