Following the cessation of the Federal Reserve’s Bank Term Funding Program (BFTP) – an emergency measure implemented after the March 2023 Silicon Valley Bank and Signature Bank failures – concerns loom over the liquidity outlook in financial markets.
The BFTP was a safety net designed to prevent a regional banking crisis by offering affordable liquidity to eligible depository institutions.
The halt of this program raises questions about the future of liquidity, potentially reshaping the bullish risk sentiment that has prevailed among investors.
The Fed launched the BFTP in response to financial turmoil, ensuring banks could meet depositor demands and business loan requirements.
The program injected $164 billion into the banking system, mitigating the risks of bank runs and credit crunches.
For investors, the BFTP provided vital liquidity support amidst the Fed’s balance sheet tightening, aiding asset growth over the past year.
Notably, riskier assets have outperformed safer alternatives due in part to the Fed’s emergency measures.
The SPDR S&P Regional Banking ETF (KRE) climbed 8% in the last year and nearly 40% since the regional banking crisis in May 2023. The S&P 500 and Dow Jones Industrial Average also showed solid gains.
Moving up the risk scale, tech stocks represented by the Invesco QQQ Trust (QQQ) surged by 51%, while Bitcoin soared an impressive 218%.
Bank of America analyst Mark Cabana notes three potential options for BFTP-dependent borrowers: renewing loans, securing alternative funding, or allowing loans to expire without seeking replacements.
Data on banks utilizing the liquidity window prior to its expiration has yet to be disclosed by the Fed.
Cabana anticipates that without the BFTP, reserve balances held at the Fed may dwindle. However, banks have not yet significantly reduced their cash reserves.
The evolving liquidity landscape faces the Federal Reserve’s quantitative tightening efforts and the possibility of prolonged high-interest rates amidst rising inflation.
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