Don’t look a gift horse in the mouth. We’re not really sure what a “gift horse” is, exactly, but the sentiment is spot on - if someone gives you a benefit, you might as well take it. Banks, apparently, think the same way.
Here are Five Fast Facts on banks gaming a rescue plan:
- 🤝 The Program - When Silicon Valley Bank crashed in 2023, other banks were desperate for cash to prove to their investors that they were still fluid. So, the Fed created the bank term funding program (BTFP) to help shore them up and stabilize things. A little helping hand, if helping hands were massive amounts of cash.
- 💰 The Support - The BTFP gave one-year loans to banks using the face value of bonds as collateral rather than the actual value (which was a lot lower given the markets at the time). Hmm, now why can’t we get that kind of a deal on loans?
- 💡 The Loophole - The rate that banks got on these loans was tied to future interest rates. So, now that the Fed has signaled rates would be cut later this year, banks suddenly find themselves in a spot where they can take out money at a lower interest rate (5%) than they’ll have to pay it back (5.4%)...meaning they can borrow money, pay it back, and pocket the difference. Seems like the sort of thing you or I would get thrown in jail for…
- 📈 The Results - This has, not surprisingly, prompted a massive uptick in use of the program. As of last week, over $141 billion has been tapped by banks, up 4% from the previous week and up 25% since November. Ya’ think??
- 🤔 The Prospects - The loophole is going to close at some point. The BTFP itself is scheduled to expire in March, unless the government extends it for some reason. Like banks making donations to political campaign funds, perhaps? Nah, surely not.
🔥Bottom line: Look, we get it. The Fed is there to stabilize and shore up our financial system - it’s literally one of the reasons for its existence. But this does seem a bit, well, sketchy, especially from banks that typically have loads of assets. But, it’s definitely a gift horse, so they’re just accepting what the government is giving them. If the government just lets them get away with it, well, it would appear that they’re either in on the scam or ignorant of it. Either way, it helps explain why there are so many issues with the way our government handles money.
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