The US central bank (The FED) will close the emergency bank lending program (BTFP) on March 11, 2024. In the remaining time, The FED also raised the interest rates for emergency bank loans effective since Thursday (01/25/2024). This policy was taken by The FED because they saw banks' current conditions were getting stabilized.
Before the new policy announced, the demand for loans surged in recent weeks as several banks took advantage of the old requirements before interest rates rose. As of January 17, 2024, the total outstanding loans reached a significant figure of $161.5 billion. The increase in loan interest rates surprised many observers.
What is BTFP Program?
The BTFP policy program was introduced during critical banking moments, starting with the bankruptcies of Silicon Valley Bank and Signature Bank. In just one week, major US banks closed down operations. It started with Silvergate on March 8th, followed by Silicon Valley/SVB on March 10th, and Signature on March 13th.
Crypto-friendly bank Silvergate shut down operations after suffering a $1 billion loss due to the collapse of FTX and being forced to sell assets below market value. Meanwhile, SVB's failure was caused by the decline in the value of SVB bond portfolios during the rise in US interest rates.
What's the Point for Crypto?
Analysts said that the increase in interest rates may reduce the demand for BTFP loans. It will cause the Fed's balance sheet to shrink faster than expected. Therefore, this decision has the potential to close arbitrage opportunities for US lenders.
Arthur Hayes said that this new policy could be a big problem for some banks. If a bank holds US government bonds or mortgage securities that incur losses upon maturity, the bank should exchange those bonds for cash before March 11.
However, if the FED stops its policy of tightening regulations on banks, bond prices could rise. It can be so hard for a bank to obtain cash at favorable prices. A chart posted by Hayes indicates that there is a lot of cash available in the market, which may suggest that many banks are in a difficult situation. During the banking crisis, the prices of BTC and other top cryptocurrencies rebounded.
"FED says no more BTFP. In theory any bank with a HTM loss on UST or MBS should swap them for fresh money by Mar 11th to buy 1 year more time. But if the Fed cuts or ends QT and bonds rip then the bank CFO locked in shitty funding. Oooo decision time for bankrupt banks," said Arthur Hayes on his X account.
From March 10th to March 13th, BTC experienced a surge of +24.8% in just 3 days. Market liquidity in crypto space also decreased during that period. So, maybe there's a potential rebound for Bitcoin according to this new policy. Some investors started to choose to liquidate cash and purchase Bitcoin or ETFs as transitional vehicles.