(Bloomberg) — Banks borrowed a record sum from the Federal Reserve’s Bank Term Funding Program, with demand climbing the most in nine months as they piled into a reliable arbitrage trade just weeks ahead of its scheduled closure.
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Data from the Fed showed a fresh high of $161.5 billion in borrowing from the BTFP in the week through Wednesday, Jan. 17. That’s a jump of $14.3 billion compared to the previous all-time high of $147 billion reached the week prior, and the biggest weekly increase since April 5.
Launched amid last 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.
Read more: Banks Seen Ramping Up Use of Fed Funding Tool Before March End
Comments last week from two top Fed policymakers — John Williams of the New York Fed and Michael Barr, vice chair for supervision — affirmed the program is likely set to expire as planned on March 11.
On Tuesday, BNY Mellon described how the shuttering of the BTFP is likely to have only a minimal impact on funding markets and bank liquidity, given it is scheduled to close around the beginning of the Fed’s monetary easing cycle. Nonetheless, the end of BTPF “could potentially affect the profitability of those banks which took advantage of this arbitrage” even if the overall market impacts are immaterial, BNY Mellon’s John Velis wrote.
Lately, the BTFP rate has come down as traders boost bets on more rate cuts in 2024 — about 140 basis points, according to Fed-swaps pricing. Institutions have found it cheaper to borrow cash through the nascent facility, currently at 4.85%, rather than turning to the discount window, which charges eligible institutions 5.5%. In fact, banks tapped the window for just $2.3 billion in the week through Jan. 17, well off the all-time high of $153 billion in March.
Read more: US Prepares Rule Forcing Banks to Tap Fed Discount Window
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%.
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