I’m not sure what you mean?
They haven’t intervened in SVB or Sovereign bankruptcies.
They’re merely providing a means of overnight UST liquidity without going to the bond market.
I am merely presenting the facts, this is what has been announced.
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf
They need GDP to grow faster than debt in order to avert a Malthusian event.
If debt/GDP gets too high then the cost of servicing your debt can accelerate faster than your ability to service it and ultimately outrun you.
This is how South American currencies collapse.
So the Fed actually needs high inflation in order to bring down debt/GDP ratio because GDP inflates with inflation, whereas debt does not.
They probably want 5-10% inflation, not so hot to trigger capital flight but hot enough to inflate away some debt.
Not sure they will touch rates. They will use esoteric tools now that they have the patient sedated and the thorax open.
Infinite backstop bazooka?
Is that what you call the $25bn capped, 12 month limited, Bank Term Funding Program they announced today?
This program is small by recent standards. QE was $85 billion per month and it ran for 5+ years.
QE was equivalent to doing BTFP every single week for 5+ years!
So a little context here, please.
The Fed exists to fight inflation and to mop up the stains on the carpet left by all the banks that get rekt in the process.
That’s what the Fed is.
They’ve been killing banks for 90 years. It’s literally what they do. They knew exactly what they were doing, and they told everyone “this is what we are doing”.
This is the Central Bank system.
BTFP is $25bn of funding available for 1 year at overnight rate + 10bps.
The budget deficit is $723 billion.
The BTFP program is about 3% the size of what the government borrows EACH YEAR.
You personally can sell any Treasuries you have at par value because you are small enough to not test the liquidity of the UST market.
So BTFP is of zero use to you. You would be stupid to use it, even if you had access to it.
An institution is big, and selling at par might not be possible if the liquidity of the bid side of the book isn’t strong enough to support their selling.
The Fed is taking a precaution in the event that UST liquidity is too weak tomorrow to accommodate orderly liquidation of bonds to finance deposit withdrawals at some banks.
It’s always been this way.
This is a $25bn program. It’s small in the scheme of Open Market Operations.
QE ran for 5 years and was $85bn per month.
Also QE was asset purchases and not loans. Meaning QE liquidity injections stayed in the system indefinitely, whereas BTFP will be repaid and drained from the system within a year.
It’s not 0%.
It’s overnight swap rate + 10bps.
https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf
Daily traded volume for US Treasuries is about $500bn.
If there are $100bn of withdrawals tomorrow and banks have to liquidate bonds to provide liquidity for those, then that’s gonna crater T-Bills and push interest rates higher.
So the Fed has stepped in and offered a route for banks to get cash without selling their UST.
Lots of money will move tomorrow, some banks will struggle, but UST should be solid and interest rates and money markets should be insulated.
Not really.
Any bank who is known to touch that discount window, risks suffering a withdrawal run.
Strong banks don’t need it.
Moi?
I don’t think we have disagreed anywhere?
The book valuation is fine.
The problem is that the bond market isn’t liquid enough to support a run of deposit withdrawals.
The Fed is offering a way for banks to get cash liquidity from their bond holdings without selling bonds.
I don’t think they are making anyone whole?
The banks have the asset value on their books. This isn’t an FTX situation.
Fed is just offering zero interest loans in exchange for staking Treasuries at FRBNY.
It means institutions can get cash immediately by staking treasuries without having to sell their treasuries.
Fed is really protecting SovX
BTFP is cash loans for Treasuries.
It allows financial institutions to turn T-bills into cash without selling them.
The Fed isn’t printing money to buy impaired assets. The Fed is loaning money, which will be drained out of the system again 12 months from now.
Anyone read about the Feds BTFP response to SVB?
“No losses would be borne by the taxpayer. Any shortfall will be funded by a levy on the rest of the banking system. Shareholders and certain unsecured debtholders will not be protected.”
Didn’t really see that coming.
