Lesson of the Day: Banks do not turn down free money. 
The Fed created a Bank Term Funding Program (BTFP) to bail out banks that foolishly levered into long-term interest rate bets that went sour.
The BTFP program allows banks to swap underwater US treasuries with the Fed at par value, effectively bailing out the speculators.
BTFP use soared along with bets that the Fed will soon cut rates.
Gaming the System
The Wall Street Journal reports The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It.
Borrowing from the Fed’s bank term funding program has increased to new highs in recent weeks, a strange consequence of the market’s flip to forecasting multiple Fed rate cuts over the coming 12 months.
The rate banks pay to use the program, BTFP for short, is tied to future interest-rate expectations. Now that investors have priced in a series of rate cuts later this year, banks are able to pocket the difference between what they pay to borrow the funds and what they can earn from parking the funds at the central bank as overnight deposits.
The facility charges banks a rate equivalent to the market’s expectation for where benchmark interest rates average over the next year, plus an additional 0.1 percentage point. Initially, borrowing was expensive because investors were pricing in higher rates in the future.
A dramatic reversal in rate expectations in recent months has changed the math.
The program is set to expire on March 11, barring an extension. On Tuesday, Michael Barr, the Fed’s vice chairman for banking supervision, suggested the facility wouldn’t be extended.
Free Money, Not Stress
Some analysts thought the increase in BTFP was related to additional stress on regional banks.
But that’s not what’s going on. Rather, banks see a chance for free money and are taking it.
Meanwhile please note Debt Jumps Past $34 Trillion, $1 Trillion Interest
The fallback position is not less of anything. Rather, it’s another clean continuing resolution.
A bipartisan majority wants more of this and more of that. So that is what you should expect.
The Fed wants to get interest rates down to curtail interest on debt rising above $1 trillion.
But deficits and debt are soaring.
Spending Deal Reached
Note that A Spending Deal Reached, But the Republican Freedom Caucus Condemns It
The deal does not address the border at all.
To get any border funding (that Biden will try to find a way to not honor), Republicans will have to further cave in on both Ukraine and Israel.
The total funding will be well in excess of the deal that Kevin McCarthy once had on the table.
Another slick gimmick by the money changers…upending the leveraged hedge fund basis trade presently exhausting the ON RRP. Who is going to buy their treasuries then?
Large broker/banks borrowed liquidity from the Fed’s repo facility and margined stock indexes and long-term bonds. Broker/banks then arbitraged the BTFP. The difference between BTFP arbitrage gains and Fed lending window costs reduces overall margin loan rates. Equivalent to lowering FFR.
The Treasury and Fed worked in collaboration. The Fed’s repo facility held $2T. Equities were range bound, and Yellen complained about the lack of liquidity in bonds. With the introduction of BTFP, stock indexes soared with multiple gap-ups in price. At the same time, long-term Treasury yields gapped-down. The Fed’s $2T repo facility was drawn down, as broker/banks option stock indexes and bonds. The indexes surged up, same as they did in 2020, with help from the Fed’s pandemic bailout.
If this speculation holds, gaps in the market won’t be filled until BTFP has ended – unless FFR is lowered.
The discount rate was made a penalty rate on Jan 9, 2003. Contrary to Bagehot’s’ dictum (and that Fed credit should not be used for profit), the BTFP became an exception.
The banksters are always scheming to enrich themselves and when things go bad, the Fed is there to bail them out. Multimillion dollar bonuses are written in stone.
I thought BTFP was at prevailing market Repo rates….but the Fed set it at “a rate equivalent to the market’s expectation for where benchmark interest rates average over the next year”. How bizarre. I never knew this. How do they set the expectation of average over the next year? From the T-Bills Mkt?
So the Fed RRP signal is now “dirty”.
When they take this away, will it create a primary dealer Treasury shortage? It will be tighter money in many ways.
“I thought BTFP was at prevailing market Repo rates”
Then there would be no need for a Fed.
The sole and entire purpose of the Fed’s existence, has been to provide connected middlebrows with better-than-prevailing-market rates. All paid for by more competent and intelligent people, who are being robbed to fund the forced wealth transfers. It will never be any exception to this, as long as there exists a Fed.
Treatment center. They’re getting it. Getting the treatment. KRE WAL TFC Flying. Banks arbitraging the Fed against the Fed. When the Fed posted losses taxpayers paid for it.
The US GOV does not care about the people. Socialism for Banks, Military INdustry, and Wall Street.
Criminals.
Traitors.
War pigs.
The only saving grace of hope I have is that they pay the ultimate price in the afterlife. Their new age witchcraft and sorcery won’t protect them. Into the lake of fire to burn for eternity.
Bazel III : let the banks fail. Last year the Fed Chicked Aut and failed to keep its legal obligations. When RRP was high the Fed balance sheet was low. RRP might close Dec 29/Jan 2 2024 huge gap and move up, closing more gaps, for QE.
In 2023 QE propelled the Dow to a new all time high. The regional banks popped up.
KRE:DOW higher highs, higher lows. But there is still a lot of work to do.
Wait, banks have figured out how to game the system?
No! Never!
The amount of money banks make off of interest from the Fed is obscene.
It’s all rigged. The “lender of last resort” will backstop EVERYTHING!
The Fed member banks are the system.
Oh, really? Gee, I had no idea.
Thanks, WTFUSA!
50% inflation will halve the , so far , 34 Trln debt, won t it ?
NEVER forget that the FED has ONE and ONE only mandate.
“To insure the profits of the member banks that OWN it!”
Then as has been demonstrated so very well in times past, to bail them out of their bad trading deals.
They are now the Mother bank for all the world’s Banksters, as demonstrated in the 08 down draft when they sent NINETEEN TRILLION out to the world’s banks to bail them out.
“BTFP use soared along with bets that the Fed will soon cut rates.”
Maybe the banks had no option but either load up on total crap junk bonds or long-term treasuries in search of yield when the ZIRP forever crap was on?
The FED had patched a problem of its own making.
But screw the banks, home buyers will never see a rescue program from the insanity.
The spread at the Fed needs to be much wider so destabilizing arbitrages don’t take place when market rates fluctuate between meetings. Banks still are not healthy from last years losses on mark-to-market values of their bond portfolio. This arbitrage gives banks a change to offset those losses with immediate profits or buying 5/10 yr US bonds as interest rates head lower.
BTFP = buy the fed put! Out of zillions of acronyms, they chose to call it BTFP for a reason.
“The program is set to expire on March 11, barring an extension. On Tuesday, Michael Barr, the Fed’s vice chairman for banking supervision, suggested the facility wouldn’t be extended”
And you can refinance existing loans into 2025. In other words it ain’t ending. It’s just going to be called something else.
There is/was a facility called discount rate, forever. It was to provide rescue for individual failing bank, but as last year’s bank run demonstrates, this is history. The system is so destabilized that a single bank can tip it to a meltdown.