Why doesn't the Federal Reserve allow it to be renewed?
Meal tickets are a memory of an era,
Older friends should have used it.
And today we talk about a special kind of meal ticket,
It's called Metamorphosis Meal Ticket (BTFP)!
Actually, the perverted meal ticket mentioned here,
It's our joking name for BTFP.
BTFP是美联储2023年推出的银行定期融资计划，全称是Bank Term Funding Program。
BTFP is a tool to provide liquidity,
To put it bluntly, it is a special kind of mortgage loan, and the object of the loan is the bank.
Recently, the Federal Reserve raised the interest rate on loans for this program.
What the hell is going on?
The story also starts with the liquidity turmoil of Silicon Valley Bank in 2023, which triggered the risk of a run
Silicon Valley Bank is a bank.
It has a history of nearly 40 years and has assets under management of more than $200 billion, ranking 16th in the U.S. banking industry.
Such a large bank,
But there is a hidden crisis
This brings us to the bank's business model.
The way traditional banks make money mainly relies on deposit and loan spreads
On the one hand, banks absorb depositors' deposits and pay interest;
On the other hand, these deposits are invested in higher-yield products, such as issuing loans, or buying bonds, etc
The difference in interest between the two is the bank's earnings.
Silicon Valley Bank is a traditional bank, and its money-making model is probably the same.
At that time, the Federal Reserve implemented an accommodative monetary policy, and Silicon Valley Bank absorbed a large number of low-cost deposits, with an interest rate of about 0.25% and a short deposit period.
The deposits absorbed by Silicon Valley Bank cannot be carried in your pocket.
In addition to making some long-term loans, the money will be used to buy a large number of lower-risk securities, such as U.S. Treasury bonds and mortgage-backed securities, and the maturities are very long, mostly more than 10 years.
It can be seen that Silicon Valley Bank acquires deposits with a shorter maturity and issues loans or purchases assets with a longer maturity period, which is a maturity mismatch.
The excessively serious maturity mismatch has also laid hidden dangers for Silicon Valley Bank.
In addition, unlike traditional large banks, Silicon Valley Bank mainly serves high-tech start-ups in the United States
They provide credit funds to these tech companies.
In order to thank Silicon Valley Bank for its investment and financing support, many technology companies will also deposit the money they earn in Silicon Valley Bank
Everything looks beautiful, but things have quietly changed
Due to the early release of water too harshly, prices in the United States soared.
In order to curb inflation, the Federal Reserve began to raise interest rates aggressively and continuously.
At this time, the U.S. economy also turned on a red light, and the loans issued by Silicon Valley Bank ran into problems.
At the same time, due to the market downturn, many high-tech startups have difficulty financing in the market, and they have also had difficulties in operation, so they have to withdraw their deposits from Silicon Valley Bank
This led to the loss of a large amount of deposits at Silicon Valley Bank.
And because of the interest rate hike of the dollar, some depositors will take out their deposits to buy high-interest bonds, which is even worse for Silicon Valley Bank
Due to the mismatch of deadlines, Silicon Valley Bank was unable to come up with so much money for a while, which further caused financial constraints.
As a result, Silicon Valley Bank had to sell its securities to replenish its funds.
But the Federal Reserve has continued to raise interest rates violently, and market interest rates have reached very high levels, and these low-yielding securities held by Silicon Valley Bank cannot be sold at a price.
Silicon Valley Bank had no choice but to sell at a loss.
Selling $21 billion in securities would result in a loss of about $1.8 billion.
When the news came out, the market smelled the risk, so everyone moved to Silicon Valley Bank to withdraw their deposits, and the situation suddenly deteriorated!
That's the risk of a run, and it's contagious.
The market is terrified!
A run can not only cause the failure of one bank, but may even affect the entire financial industry.
Regulators don't want that to happen.
So what to do?
As the crisis erupted, Silicon Valley Bank also struggled and took some remedial measures
In the end, Silicon Valley Bank's self-rescue measures were aborted.
Due to insolvency and illiquidity, Silicon Valley Bank did not escape the fate of collapse.
However, the banking crisis is not over.
In order to prevent the spread of the crisis of the collapse of Silicon Valley Bank and ease the pressure on the financial system,
The Federal Reserve urgently launched the Bank Term Financing Program (BTFP),
Loans are provided to depository institutions such as eligible banks.
But in order to obtain a loan from the BTFP, banks need to use U.S. Treasury bonds, agency bonds, etc. as collateral.
What is special is that the value of the collateral is not calculated according to the market value, but according to the par value.
The maximum term of a BTFP loan is 1 year.
With BTFP, banks don't have to sell their bonds to pay for depositors' withdrawals, which is a lifeline for banks in crisis.
The interest rate of the BTFP is the 1-year overnight index swap rate (OIS) on the loan origination date plus 10 basis points,
is a fixed interest rate.
The OIS rate here can be simply understood as the market's expectation of the Fed's interest rate in the next 1 year.
If the market expects a rate cut in the future, the OIS rate will fall here.
At that time, the BTFP rate was lower than the interest rate of the discount window,
So banks have borrowed money through BTFP
The money borrowed by the bank in addition to the withdrawal payable to the depositor,
Where should I put the rest of my money?
Banks believe that it is safe and risky to keep money as reserves in the Fed. Originally, the Fed did not pay interest on reserves, and only after the subprime mortgage crisis in 2008 did it begin to pay interest on bank reserves.
And the shrewd banks found out that the BTFP borrowing rate turned out
Lower than the interest rate on reserves where money is deposited in the Federal Reserve!
The interest rate on reserves usually moves in tandem with the target for the federal funds rate.
At this time, the interest rate on reserves where banks put money in the Fed is 5.4%.
However, due to the rise in market interest rate cut expectations, the 1-year OIS rate fell, resulting in the BTFP interest rate being only about 4.9%, which is 0.5% lower than the reserve rate, and there is obvious arbitrage space between the two
Therefore, banks borrow money through BTFP and then immediately deposit it into the Fed's reserve account, easily earning risk-free spreads.
The Federal Reserve is not stupid, this kind of arbitrage behavior is naturally in the eyes
The BTFP itself was created in response to the banking crisis, and when the Fed's concerns about bank liquidity declined, it had to tighten the BTFP tool.
As a result, the Federal Reserve adjusted the interest rate on BTFP.
Adjusted BTFP borrowing rate
will not be lower than the reserve interest rate in effect on the date of loan disbursement.
It's not,
The arbitrage space is gone!
In fact, the BTFP itself is a temporary tool, which was originally scheduled to expire on March 11, 2024.
The Fed, believing that the continued existence of the tool is not necessary, announced that it would not extend the program and would stop issuing new loans when it expired
Well, that's all for today.
Whether it is the BTFP of the Federal Reserve, or the MLF and SLF of the Central Bank of the Continent,
All of them are tools for the central bank to provide liquidity to commercial banks.