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(Bloomberg) -- More than 1,600 financial firms and their subsidiaries tapped the Federal Reserve’s emergency lending program created to support the industry during the regional banking turmoil two years ago.
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Beal Bank USA and First Republic Bank took out the biggest loans through the Bank Term Funding Program, which was established in March 2023 to bolster liquidity within the financial system after the collapse of Silicon Valley Bank. At their peak, they each borrowed loans in excess of $8 billion from the Fed, according to data released from the Fed on Wednesday.
Ranging from the largest global systemically important firms to community institutions, banks borrowed $168 billion through the BTFP during a peak, one-week period last year.
The BTFP was created under the Fed’s emergency authority given the “unusual and exigent circumstances” of early 2023, when Silicon Valley Bank became the biggest US lender to fail in more than a decade after a massive cash exodus. Trouble in the regional banking industry, at the time, had stirred concern among investors that a bigger crisis was brewing.
The program offered a solution to one of the financial system’s main challenges of 2023: giving banks and credit unions the ability to borrow funds for as long as a year.
Back then, the Fed had been raising interest rates at the fastest clip since the 1980s, pushing investors to park cash in Treasury bills, money markets and other higher-yielding instruments. Bank deposits, therefore, fell, and institutions had to boost rates on offerings like certificates of deposit to stem outflows and tap wholesale funding markets.
Once the BTFP was introduced, though, concern about evaporating bank deposits and unrealized losses on securities eased.
Representatives for JPMorgan Chase & Co., which has since acquired First Republic, declined to comment. A representative for Beal Bank didn’t immediately respond to requests for comment.
Arbitrage Trade
Still, the program was not without controversy. Some institutions started using the loans as part of an arbitrage trade.
At one point in late January 2024, banks could borrow a loan through the program at a rate of roughly 4.90%, or the one-year overnight index swap rate plus 10 basis points. Then, they could take the cash and park it, risk-free, at the Fed and get paid the Fed’s then rate of interest on reserve balances — which was then 5.4% — for it.