As of 10/31/23 total outstanding amount of all advances from the liquidity fairy under the Bank Term Funding Program was $120,605,902,000. $3,132,539,000 (+$486,854,000 since September 30) in interest to survive another day...

$3,132,539,000 (+$486,854,000 since September 30) in interest to survive another day...
$3,132,539,000 (+$486,854,000 since September 30) in interest to survive another day...
BTFP details
$3,132,539,000 in interest to survive another day...
+$486,854,000 since September 30$3,132,539,000 in interest to survive another day...
Date Amount outstanding Pledged collateral Interest paid
3/15 $11,942,528,000 $15,855,798,000 $662,000
3/31 $64,595,880,000 $79,569,489,000 $93,568,000
4/30 $83,061,693,000 $104,229,674,000 $369,957,000
5/31 $107,376,686,000 $128,972,991,000 $762,960,000
6/30 $115,629,868,000 $136,535,267,000 $1,211,623,000
7/31 $119,127,391,000 $144,379,894,000 $1,683,694,000
8/31 $121,234,139,000 $145,422,700,000 $2,173,066,000
9/30 $119,104,573,000 $145,371,270,000 $2,645,685,000
10/31 $120,605,902,000 $146,215,465,000 $3,132,539,000

+$486,854,000 in interest since September 30 to survive another day...

BTFP rules
  • Association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program.
  • Banks can borrow for up to one year, at a fixed rate for the term, pegged to the one-year overnight index swap rate plus 10 basis points.
  • Banks have to post collateral (valued at par!).
  • Any collateral has to be โ€œowned by the borrower as of March 12, 2023."
  • Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations.

Richard Ostrander (one of the architects of BTFP) spoke about it the other day:

When the Federal Reserve established the BTFP, the lawyers of the New York Fed played an important role in facilitating its rapid implementation. I was responsible for coordinating among my team of attorneys at the New York Fed and the Board of Governors to ensure that our actions complied with applicable statutes and regulations.
Over the weekend of March 11 and 12, the Fed designed the BTFP to support the stability of the broader financial system by providing a source of financing for banks with Treasury, Agency and other eligible holdings whose market value had significantly diminished given interest rate increases.
There was not enough time to set up special purpose vehicles as the Fed had done for some of the pandemic programs. The only way to have the program up and running so quickly was to leverage our discount window facilities. As a result, we turned to Section 13(3) of the Federal Reserve Act, which authorizes specialized lending in unusual and exigent circumstances. The BTFP extends the maximum term of lending from the Section 10B limit of four months up to a special limit of one year. Additionally, unlike traditional discount window operations, the BTFP authorizes banks to borrow against eligible holdings up to their par value rather than their market value less a haircut

Why are the Banks borrowing so heavily? Commercial deposits have been shrinking along with M2!

A tad over a year ago (4/13/2022) the high was hit at $18,158.3536 billion.

Deposits, All Commercial Banks

All this money pulled from commercial banks as M2 (U.S. money stock--currency and coins held by the non-bank public, checkable deposits, and travelers' checks, plus savings deposits, small time deposits under 100k, and shares in retail money market funds) is decreasing:


So how are they getting money? They sure as heck are not lending:

Commercial and Industrial (C&I) loans are loans made to businesses or corporations, not to individual consumers. These loans can be used for a variety of purposes, including capital expenditures (like buying equipment) and providing working capital for day-to-day operations. They are typically short-term loans with variable interest rates 1.

C&I loans are a key driver of economic growth because they provide businesses with the funds they need to expand, invest, and hire, which can stimulate economic activity. They are a major line of business for many banking firms as they provide credit for a wide array of business purposes 2.

As interest rates have risen, it has becomes more expensive for banks to borrow money. This increased cost can be passed on to businesses in the form of higher interest rates on commercial and industrial loans. This means that businesses would have to pay more to borrow money, which would make them less likely to take out loans for things like expansion or equipment upgrades--lining up with the recent downturn we can observe:

Commercial and Industrial Loans
Bah God!

However, as we have seen, borrowing from the liquidity fairy is spiraling to make up for shrinking M2 and dwindling deposits!

The Fed has created an emergency backstop program so that banks wonโ€™t have to sell assets into the market if customers pull deposits in search of more attractive yields for their savings....

Banks replaced deposits with borrowing
Over the few weeks prior to the FDIC receivership announcements on March 10 and 12, the banking sector lost another approximately $450 billion. Throughout, the banking sector has offset the reduction in deposit funding with an increase in other forms of borrowing which has increased by $800 billion since the start of the tightening.

The right panel of the chart below summarizes the cumulative change in deposit funding by bank size category since the start of the tightening cycle through early March 2023 and then through the end of March. Until early March 2023, the decline in deposit funding lined up with bank size, consistent with the concentration of deposits in larger banks. Small banks lost no deposit funding prior to the events of late March. In terms of percentage decline, the outflows were roughly equal for regional, super-regional, and large banks at around 4 percent of total deposit funding:
deposit flow

run on SVB. The additional outflow is entirely concentrated in the segment of super-regional banks. In fact, most other size categories experience deposit inflows.

The right panel illustrates that outflows at super-regionals begin immediately after the failure of SVB and are mirrored by deposit inflows at large banks in the second week of March 2022.

Further, while deposit funding remains at a lower level throughout March for super-regional banks, the initially large inflows mostly reverse by the end of March. Notably, banks with less than $100 billion in assets were relatively unaffected.

However, during the most acute phase of banking stress in mid-March, other borrowings exceeded reductions in deposit balances, suggesting significant and widespread demand for precautionary liquidity. A substantial amount of liquidity was provided by the private markets, likely via the FHLB system, but primary credit and the Bank Term Funding Program (both summarized as Federal Reserve credit) were equally important.
Deposit Runoff
  • Large banks increased borrowing the most, which is in line with deposit outflows being strongest for larger banks before March 2023.
  • During March 2023, both super-regional and large banks increase their borrowings, with most increases being centered in the super-regional banks that faced the largest deposit outflows.
  • Note, however, that not all size categories face deposit outflows but that all except the small banks increase their other borrowings.
  • This pattern suggests demand for precautionary liquidity buffers across the banking system, not just among the most affected institutions:
Borrowing after SVB Failure

Wut Mean?

  • Banks have been replacing deposit outflows with the borrowing we have covered above.
  • 'Strong and resilient' indeed....
  • It is starting to smell idiosyncratic all up in here:

To me, this is looking more and more like over-reliance on Central Bank Funding!

Oh yeah...

Fed, FDIC, NCUA, Comptroller Alert! Agencies update guidance on liquidity risks and contingency planning. "The updated guidance encourages depository institutions to incorporate the discount window as part of their contingency funding plans."

FDIC 2023 Risk Review: "Unrealized losses present a significant risk should banks need to sell investments & realize losses to meet liquidity needs." In Q1 2023, unrealized losses at $515.5 billion. Also, "banking industry is increasingly exposed to the broad & varied risks from nonbank activities"

Fed & FDIC ๐Ÿฆต๐Ÿฅซ can't hide unrealized losses

FOMC Minutes, July 25-26, 2023: "Various participants commented on risks that could affect some banks, including unrealized losses on assets resulting from rising interest rates, significant reliance on uninsured deposits, and increased funding costs."

the total unrealized losses as of now: $17.5T ร— 3.9 ร— 2.7% = $1.84 trillion  $0.14 trillion more in unrealized losses  $107.4 billion  $40 billion ($0.04 trillion)  on the bleeding edge of bankruptcy


the total unrealized losses as of now: $17.5T ร— 3.9 ร— 2.7% = $1.84 trillion $0.14 trillion more in unrealized losses $107.4 billion $40 billion ($0.04 trillion) on the bleeding edge of bankruptcy
Banks would be bankrupt already if it wasn't for BTFP.


Unrealized losses on securities totaled $558.4 billion in the 2nd quarter, up $42.9 billion (8.3%) from the prior quarter. Unrealized losses on held-to-maturity securities totaled $309.6 billion in the 2nd quarter, while unrealized losses on available-for-sale securities totaled $248.9 billion.

Unrealized Losses

Vice Chair for Supervision Michael S. Barr:

The stress only abated after invocation of the systemic risk exception that permitted the Federal Deposit Insurance Corporation to protect all depositors (including uninsured depositors) of the failed banks and the creation of the Bank Term Funding Program (BTFP) using the Fed's emergency lending authorities.
Ahh, so without the Bank Term Funding Program (BTFP) aka the liquidity fairy it was game over--I have certainly been arguing this but great for him to confirm it!

It is also interesting that Barr also calls out banks turning to 'pay-day' loans to make up for lost deposits!
jelly gif


Good Day!

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