The End of the Bank Bailout: Cause for Concern?

The End of the Bank Bailout: Cause for Concern?

On January 24, 2024, the Fed announced that the Bank Term Funding Program (BTFP) will cease to make new loans to US banks as of March 11, 2024.

The Bank Term Funding Program (BTFP) was created by the Fed in March 2023 as a response to the unexpected bank failures of Signature Bank and Silicon Valley Bank. These were the largest bank failures since the 2008 financial crisis.

Designed to provide emergency liquidity to depository institutions, the program allowed banks to borrow against collateral assets, such as U.S. Treasuries and mortgage-backed securities, at face value rather than market value, providing a significant advantage to cash-strapped institutions grappling with plummeting bond portfolios.

Initially, the program witnessed a surge in borrowing as banks tapped into the bailout but borrowing persisted even after the initial spike. This raised questions about whether banks were genuinely in need of assistance or taking advantage of favorable terms inadvertently created by the Fed.

Banks had the opportunity to borrow funds from the BTFP at a comparatively low interest rate, leveraging undervalued bonds as collateral. They could then deposit these funds into their reserve accounts at the Fed, earning a higher interest rate than the one they were paying on the loan.

As we near the end of the program, the question of whether banks still require assistance remains unanswered. While profit-seeking behavior may have clouded the picture, especially with the November borrowing surge, it’s plausible that the bailout genuinely rescued failing banks and prevented them from collapsing. It’s also likely that some banks that took out loans early in the bailout period will face challenges in repayment.

Moving forward, banks may face heightened challenges in securing affordable funding, potentially leading to increased borrowing costs, reduced lending capacity, and constrained economic growth. If there’s significant economic contraction, we could see a recession in 2024 as many have predicted.

This poses the question: will the Fed intervene? Could it reopen the BTFP, extend repayment terms, or will the entire banking system buckle under the strain?

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Source:

https://www.fxstreet.com/analysis/fed-bank-bailout-program-ends-in-march-then-what-202402161921