2024-02-28 10:35:00
The US Federal Reserve has announced that the Bank Term Funding Program (BTFP) will no longer issue new loans as planned on March 11th. It is unlikely that this end will lead to a repeat of last spring’s banking crisis. Nevertheless, the end of the BTFP will further restrict banks’ lending options. The end of the BTFP is therefore only logical: the American Federal Reserve is already trying its best to bring inflation back to the target zone of 2%.
The deadline is March 11, when the U.S. central bank, the Federal Reserve, ends the Bank Term Funding Program (BTFP) one year after it began. The BTFP was launched in response to the bankruptcies of regional banks Signature, Silvergate and Silicon Valley. These banks were brought down by mass withdrawals of customer deposits, simply because many customers were tech or crypto companies that needed money to cover losses elsewhere, but also because there were better savings rates elsewhere.
The end of the BTFP is unlikely to trigger these disastrous developments again. At that time, the leading Nasdaq 100 index for tech stocks was trading a third below its twelve-month high and the stress on technology companies was correspondingly high. Today the index is two thirds higher than it was back then and at the same time higher than ever before. In addition, Bitcoin is only a good $10,000 away from its all-time high. The stress in the tech and crypto scene back then has turned into a boom.
The Fed’s discount window is now available as a replacement for the BTFP. It allows loans for 90 days rather than up to a year, as was common with the BTFP. In addition, a variable interest rate applies, whereas with the BTFP it was fixed. However, commercial banks will continue to be able to deposit government bonds and certain other securities at face value with the Federal Reserve through the discount window. This emerges from a corresponding change by the Federal Reserve in March 2023. Commercial banks with high-quality assets will therefore be able to continue to act as if the rise in interest rates in the market had never happened in the first place. This greatly mitigates the effect of the end of the BTFP. In addition, commercial banks now had enough time to adapt to the abrupt rise in interest rates. BTFP loans that have already been used will continue to run for up to a year, such as those that are used shortly before the end of the BTFP.
Nevertheless, increased interest rates are having an effect. They have already led to the strictest credit standards and weakest consumer and business credit demand in the United States in recent memory. Meanwhile, banks are grappling with other major challenges such as a collapse in demand for office space as a result of home working. This has brought the medium-sized New York Community Bank, for example, to the brink of ruin in recent weeks. Deutsche Pfandbriefbank is also under pressure on the stock market and is therefore becoming a victim of the problems in the USA.
Weak development of regional banks on the stock market
The performance of regional banks lags behind the overall market. For example, the S&P Regional Banking Index has fallen by 12% since the beginning of the year, while the S&P 500 Index has risen a good 8% to a new record. It is quite possible that bank stocks will make up for their losses on the stock market, especially if the end of the BTFP does not cause the problems feared and the Fed turns the interest rate screw again for the first time by June at the latest.
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