BTFP a new all time high this week $102.735 billion. Borrowing from the liquidity fairy is spiraling to make up for shrinking M2 and dwindling deposits.

While banks have the liquidity fairy, 'we' get the promise of more rate hikes this year, & Fed officials are improperly enrichening themselves.

Good evening Superstonk, I hope everyone has had a great day!

Borrowing from the Bank Term Funding Program hit a new all time high this week at $102.735 billion!

While banks have the liquidity fairy, 'we' get the promise of 2 more rate hikes this year, Atlanta Fed President Raphael Bostic yet again enrichens himself inappropriately from his position.

What we are monitoring:

1. Bank Term Funding Program (BTFP)
2. Discount Window/Primary Credit
3. "Other Credit Extensions"

I hope by the end of this post to show that borrowing from the liquidity fairy is spiraling to make up for it shrinking M2 and dwindling deposits.

Let's get to it!

Bank Term Funding Program (BTFP):

https://fred.stlouisfed.org/series/H41RESPPALDKNWW

• 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 “owned 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 over weekend:

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

Discount Window/Primary Credit:

https://fred.stlouisfed.org/series/WLCFLPCL

Primary Credit allows banks to borrow against collateral at the current federal funds rate:

Overview:

Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy.

By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

The "Primary Credit" program is the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the FOMC’s target range for the federal funds rate and is normally granted on a “no-questions-asked,” minimally administered basis. There are no restrictions on borrowers’ use of primary credit.

https://www.frbdiscountwindow.org/Pages/General-Information/Primary-and-Secondary-Lending-Programs.aspx

Examples of common borrowing situations:

• Tight money markets or undue market volatility
• Preventing an overnight overdraft
• Meeting a need for funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand

The introduction of the primary credit program in 2003 marked a fundamental shift - from administration to pricing - in the Federal Reserve's approach to discount window lending. Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source. Being prepared to borrow primary credit enhances an institution's liquidity.

Notice how use of the Discount Window has PLUMMETED as BTFP has come in to play? BTFP offers slightly lower interest and longer terms. I wonder how many folks paid back their Discount Window loans with BTFP money?

“Other credit extensions”:

https://fred.stlouisfed.org/series/WLCFOCEL

"Other credit extensions" includes loans that were extended to depository institutions established by the Federal Deposit Insurance Corporation (FDIC). The Federal Reserve Banks' loans to these depository institutions are secured by collateral and the FDIC provides repayment guarantees.

For example, $114 billion in face value Agency Mortgage Backed Securities, Collateralized Mortgage Obligations, and Commercial Mortgage Backed Securities about to be liquidated 'gradual and orderly' with the 'aim to minimize the potential for any adverse impact on market functioning' by BlackRock.

How I understand this works:

• The FDIC created temporary banks to support the operations of the ones they have taken over.
• The FDIC did not have the money to operate these banks.
• The Fed is providing that in the form of a loan via "Other credit extensions".
• The FDIC is going to sell the taken over banks assets.
• Whatever the difference between the sale of the assets and the ultimate loan number is, will be the amount split up amongst all the remaining banks and applied as a special fee to make the Fed 'whole'.
• It can be argued the consumer will ultimately end up paying for this as banks look to pass this cost on in some way.

There has been an update on this piece recently:

Whatever the difference between the sale of the assets and the ultimate loan number is, will be the amount split up amongst all the remaining banks and applied as a special fee to make the Fed 'whole'.

FDIC Board of Directors Issues a Proposed Rule on Special Assessment Pursuant to Systemic Risk Determination of approximately $15.8 billion. It is estimated that a total of 113 banking organizations would be subject to the special assessment.

https://www.fdic.gov/news/fact-sheets/systemic-risk-determination-5-11-23.html

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

$79 billion withdrawn from commercial banks in the last week (5/31-6/7). $955 billion in deposits has been pulled from the all time hit 4/13/22. Since the run picked up momentum 2/22/2023, $487 billion in deposits have been pulled.

https://fred.stlouisfed.org/series/DPSACBW027SBOG

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

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:

https://fred.stlouisfed.org/series/M2SL

A little less than a year ago (July 2022) the M2 high was hit at $21,703 billion

^{*Bank run in commercial banks picked up in February 2023.}

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

https://www.reddit.com/r/Superstonk/comments/13eme4d/bank_funding_during_the_current_monetary_policy/

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:

The blue bar in the left panel above shows that the pattern changes following the 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.

• 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:

• Banks have been replacing deposit outflows with the borrowing we have covered above.

TLDRS:

• Borrowing from the liquidity fairy continues to make up for a shrinking M2 and dwindling commercial deposits.
• BTFP hit a new all time high this week--$102.735 billion!
• Notice how use of the Discount Window has PLUMMETED as BTFP has come in to play? BTFP offers slightly lower interest and longer terms. I wonder how many folks paid back their Discount Window loans with BTFP money?

Reddit Post