by Michael Maharrey, Schiff Gold:
What’s going on with US banks?
Over the last month, loans outstanding in the Federal Reserve bank bailout program increased by $17.24 billion. It was the second month we’ve seen borrowing from the Bank Term Funding Program (BTFP) surge. And the pace of borrowing is increasing.
Between December 13 and December 20, the balance in the BTFP grew by $7.57 billion.
As of Dec. 20, the balance in the BTFP stood at just under $133.34 billion. It’s the largest balance since the program was created in March.
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The increase in banks tapping into the BTF started in November. As you can see from the chart, borrowing had leveled off in August before the sudden spike in November. Keep in mind that banks were still tapping into the bailout even as the total balance in the program plateaued. Some banks were paying off loans as others borrowed.
This surge in bank bailout borrowing would seem to indicate more banks are struggling in this high interest rate environment, and the financial crisis that kicked off in March continues to boil under the surface.
But thanks to the Fed bailout, the crisis remains “out of sight, out of mind.”
WHAT IS THE BTFP?
After the collapse of Silicon Valley Bank and Signature Bank, the Fed created the BTFP, allowing banks to easily access capital “to help assure banks have the ability to meet the needs of all their depositors.”
The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. Banks can borrow against their assets “at par” (face value).
According to a Federal Reserve statement, “the BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
The ability to borrow against the face value of their bond portfolios is a sweetheart deal for banks given the big drop in bond prices over the last year-plus.
Fed interest rate increases to fight price inflation decimated the bond market. (Bond prices and interest rates are inversely correlated. As bond prices fall, bond yields increase.) With interest rates rising so quickly, banks could not adjust their bond holdings. As a result, many banks have become undercapitalized on paper.
According to the FDCI, unrealized losses on securities climbed to $683.9 billion in Q3. That represented a 22.5% jump from the second quarter. Rising mortgage rates reducing the value of mortgage-backed securities drove the increase.
The BTFP gives banks a way out, or at least the opportunity to kick the can down the road for a year. Instead of selling bonds that have dropped in value at a big loss, banks can go to the Fed and borrow money at the bonds’ face value.
PAPERING OVER THE PROBLEM
The creation of the BTFP allowed the Federal Reserve to paper over the banking crisis its interest rate hikes created. But what happens when the loans come due?
