The Federal Reserve's decision to end its emergency funding program has put an end to a once-lucrative opportunity for banks. The Bank Term Funding Program (BTFP), which was established in response to last year's regional banking crisis, will officially close on March 11. The Fed has also stated that any new loans made before the program ends will not have lower interest rates than the reserve balances.
JPMorgan, one of the largest banks in the United States, has provided a chart that highlights the arbitrage that banks have been enjoying by borrowing from the Fed facility and then depositing reserves with the central bank. Michael Feroli, Chief U.S. Economist at JPMorgan, stated, "As the BTFP rate has fallen below shorter-term funding rates, the program has seen increased borrowing from banks, presumably due to the favorability of the terms."
According to Federal Reserve data, the usage of the BTFP amounted to $161.5 billion in the week ending January 17.
Chris Turner, an analyst at ING, raised concerns about how regional bank stock prices will react to this news. While he presumes that the Fed has taken measures to ensure that regional banks do not face stress again, he acknowledges the possibility of a new risk-off tone in U.S. markets. He stated, "Let's see how this group trades today and whether it ushers in a new, potentially risk-off tone in U.S. markets."
It is worth noting that the SPDR S&P Regional Banking ETF (KRE) has already experienced a significant 50% increase in value since reaching its lowest point in May.
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