Almost half a year after Silicon Valley Bank went belly up and nearly set off a national banking crisis, still-growing borrowing from a Federal Reserve emergency lending facility gives the appearance of lingering trouble for the financial sector.
But while the ongoing demand for the Fed’s Bank Term Funding Program (BTFP) may result from some overhang from the initial troubles back in March, the growth in its loan output this summer more likely arises from opportunistic money management strategies some banks may be employing.
Usage of the BTFP rocketed at launch, shooting from nothing at the start of March to $79 billion a month later. From early May onward, though, it has taken on another $32 billion, albeit at a much more plodding pace. BTFP loans stood at $108 billion on September 6 2023.
So far, there is no sense the increase signals a return to bank stress. Instead, borrowing via the program mostly represents longer-term loans taken out at its onset, likely by a limited number of institutions, coupled with some recent additional borrowing from banks who saw economic value in doing so.
“Most of the borrowing was done by the troubled banks at the beginning” and when it comes to the modest amount of growth seen over the summer, “I don’t think of this as an indication of trouble,” said Joseph Abate, strategist with investment bank Barclays.
Market conditions may also explain why some banks have found some room to tap the BTFP even as overall conditions in their industry have returned to normal. That’s because they can get a favorable treatment for bonds that have lost value due to the surge in yields seen over recent weeks.
“The treatment of collateral at par is unusual; the higher yields rise, the greater the implicit subsidy for bonds trading below par,” LH Meyer analyst Derek Tang wrote to clients in a research note last week. Tang also noted data pointing to the duration of the loans taken via the BTFP indicates some banks have been interested in locking down funding rather than possibly having to tap the discount window at an interest rate they can’t predict right now.
One sign of why some may have avoided BTFP loans? A majority of respondents said the eventual reveal of who borrowed from the program was a negative for them. The Fed will disclose this information one year after the program ends.
That echoes a long-running problem the Fed has faced with emergency lending: The perception that tapping central bank liquidity will stigmatize the borrower among other financial institutions that did not need to turn to the Fed for cash.