A while back we mentioned the FOMC – Federal Open Market Committee, lead by Jerome Powell were in a Pickle .. as at that time one of their regional banks had a research report out that GDP- Gross Domestic Production -Economic Growth indicator – was dropping fast and they were going to raise interest rates against a hot CPI = Consumer Price Index – blunt inflation gauge which would exacerbate the situation.
Fast forward to today and that Pickle is not any better…. maybe even more dill! With the afore mentioned Part 1 Advance Analysis M2 review showing dramatically dropping or the pulling of liquidity out of the system, bank fatigue has been seen and felt and here our comments on Banks being a slave to confidence for solvency.
On Wednesday of this week, March 22. 2023 the FOMC is bound by their goal of slowing that sticky inflation we are all seeing, especially at the grocery store, and best measured by the CPI … BUT, this additional rate increase will add fuel to the fire of less liquidity, AND on top of that our neighbors across the pond just raised rates .50% last week, albeit from a much lower 3.00 to 3.50% rate….currently the US rate is 4.75% …
We did say Pickle ? Right….
Enter the BTFP – Bank Term Funding Loan Program – Happy Bank Program
On March 12, 2023 the Federal Reserve Created the BTFP as another backstop for possible Bank Fatigue ..
March 12, 2023
Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors
For release at 6:15 p.m. EDT
This new program is a sort of Fed Discount Window on Steroids, meant to improve Bank confidence.
Long ago the FED (going back in loose form to the 1920’s – the start of the Fed) started a program for Bank help during stressful times, the Fed Discount Window –
Fed Discount Window –
- Operation of last resort for a bank
- Overnight deposit help
- Anonymous for two years
- 30 day length, but historically has been lengthened to 90 days
- Pledge of assets for security – Treasury Securities of all Maturity among other items that are held at par (even value, no gain or loss) or better
BTFP – Bank Term Funding Loan Program
All of the above but the following additions:
- On Year in Length maximum holding period
- Pledge of asset securities that may be less than par aka at a loss
The last bullet is the most important and lending a helpful hand from the Fed’s fastest in history rate increase…. as mentioned repeatedly, increase of rates are a headwind to Fixed income aka Bonds, especially longer term bonds….
Some Banks may be seeing a need for immediate liquidity due to loss of confidence and liquidity drain, so this new program essentially gives them liquidity to meet those demands if needed and may have negative assets due to the fast fast rate increases!
While this is being written – Sunday late morning in between Newsletter Articles, UBS a Swiss neighbor of Credit Suisse has made a much telegraphed offer to buy their friend out… no idea what the market will make of this starting tonight as overseas markets open…. but something just crossed the mind that we have mentioned many times before…. and may be applicable….
“Headlines are always the worst near the end of the Cycle!”
Have a Great “Heads Up for a Busy Week” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth
The BTFP – Bank Term Funding Loan Program UPDATE, Created a new process of Banks Merge/Buyout …
Did you happen to catch the Financial System adjusting the way it does business right before your eyes?
No worry, if you said no… it was not super obvious, but worth a quick review for future knowledge…
So here we go!
BTFP- Bank Term Funding Loan Program Makes Adjustments to the Financial System
As we explained in great detail here in this post in March, the Federal Reserve set up a Backstop program for struggling banks. As several more banks have had issues, the creation of this program has changed the way mergers or buyouts will occur while this plan available.
If you are an acquiring bank, no matter desire, you would be crazy not to wait until your desired bank, if under stress, hits up the Federally backed program aka BTFP, as the Government essentially will guarantee much of the buyout once entering the program.
While it may seem unfair or counterproductive to price discovering markets and mergers, possible unintended consequences created from this program…. they are what they are … and look to continue until we are beyond the rain clouds….
Have a Great “Watch the Financial System Adjust” Day!
John A. Kvale CFA, CFP
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Posted in Economy, FOMC, Investing/Financial Planning, Market Comments
Tagged Back Stop Program, BTFP, FOMC