The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It.

Borrowing at the bank term funding program is up to record highs but not because of new stresses

By David Benoit and Eric Wallerstein of The WSJ. Excerpts:

"An emergency lending program the Federal Reserve created during the 2023 banking crisis has turned into easy money."

"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."

"While the Fed offers financing below 5% through its rescue program, it is currently paying banks 5.4% on parked reserve balances."

"It appears more likely the banks are just taking the easy money.

“We think banks are exploiting a positive arbitrage,” Janney Montgomery Scott analyst Christopher Marinac wrote in a note this week."