RTX - Fed Update: What's Going On With The Bank Term Funding Program - Unexpected Rate Hike

2024-01-26 09:15:00 ET

Summary

• The Fed tightened interest rates to combat inflation, causing regional banks like Silicon Valley Bank to suffer from an asset/liability mismatch.
• SVB Financial Group's Treasury bond holdings declined in value as interest rates spiked, leading to a liquidity crisis and the need for a takeover by the Fed and FDIC.
• The Fed implemented the Bank Term Funding Program, or BTFP, to provide liquidity to troubled banks, but an arbitrage opportunity arose, prompting the Fed to raise borrowing costs and announce the end of the BTFP program.

By early March 2023, the Fed had been aggressively tightening, through a series of interest rate hikes, to combat a spike in inflation that saw the CPI peak at 9% in June 2022, a forty-year-high.

Over the preceding twelve months, the Fed had raised the Fed Funds rate eight times to 4.50-4.75%, for a total increase of 450 basis points....

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