11/27/23 09:15 AM EST

Bank Term Funding Program Stress

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

The Bank Term Funding Program (BTFP) was originally devised as a temporary emergency measure to provide liquidity to banks facing funding pressures. The facility allows financial institutions to pledge collateral in exchange for short-term loans, aiming to stabilize the banking system in times of stress. Initially intended as a transitory solution, the BTFP has seemingly become a more permanent element of the financial landscape, with loans reaching $114 billion. Concurrently, money market funds have swelled from $4.7 trillion to $5.9 trillion since Q4 of 2020.

Borrowing from the BTFP, as well as the Federal Home Loan Bank (lender of second resort) and the Federal Reserve's discount window (lender of last resort), often carries higher interest rates and is typically viewed as an indicator of financial strain, sometimes leading to a stigma that discourages banks from using these facilities unless necessary. It feels like a million years ago, but 2023 was the year we saw more than $300 billion in bank failures. We are watching the Fed discount window for signs of imminent stress; so far, so good as lending from the Fed discount window is down from $260 billion in Q1 of 2023 to -$-264 billion for Q2. If activity at the discount window spikes, then Fridays become more interesting as 95% of bank failures happen going into the weekend. We are still waiting for updated Q3 data from the Fed.

Mr. Dario Cox wrote an informative thread on the European banks' liquidity stresses, given their lack of access to a similar BTFP program. It's pretty grim.

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