by Will Kessler
Banks are leveraging current interest rate projections to make a profit off of a program created last year designed to give access to funds for the sector amid a banking crisis, according to The Wall Street Journal.
The Federal Reserve created the bank term funding program in the midst of a banking crisis started by a bank run at Silicon Valley Bank (SVB) in March due to fears that SVB’s collapse would spread to the rest of the industry, according to the WSJ. Struggling banks can take depreciated bonds at face value and exchange those with the Fed for one-year loans in an effort to bolster liquidity, but since the loans are tied to future interest rate expectations and interest rates are increasingly expected to drop in the near future, banks can turn a profit on the difference.
“We think banks are exploiting a positive arbitrage,” Christopher Marinac, analyst at Janney Montgomery Scott, previously said, according to the WSJ.
Currently, the Fed is offering the loans at an interest rate of 5% while paying out interest of 5.4% for funds being held at the Fed in reserve balances, according to the WSJ.
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Borrowing from the Fed’s bank term funding program has increased to new highs in recent… pic.twitter.com/373Yb7niad— MrTopStep (@MrTopStep) January 10, 2024
The change in predictions of future interest rates follows the Fed’s December meeting, where a median of Fed board governors predicted that the body would cut its federal funds rate to 4.6% by the end of the year. That rate stands in contrast with the current range of 5.25% and 5.50%, the highest point in 22 years, which was placed in that range in an effort to bring down high inflation.
The benefits are not expected to last as the math on future interest rates changes, with the program expiring completely on March 11, according to the WSJ. The program doled out an all-time high of $141.2 billion in funds this past Wednesday, 4% higher than the previous week and 25% higher since the middle of November.
The Fed did not immediately respond to a request to comment from the Daily Caller News Foundation.
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Will Kessler is a reporter at Daily Caller News Foundation.
Photo “Federal Reserve” by William Warby. CC BY 2.0.
