Banks' borrowings from Fed's emergency funding facility surge in Q4 2023

Borrowings from the Federal Reserve's Bank Term Funding Program increased throughout the 2023 fourth quarter to record highs in January, but the hike does not indicate broader liquidity concerns in the banking sector.

The balance of the Fed's emergency lending facility jumped more than $50 billion since mid-October 2023 to reach an all-time high of $167.77 billion Jan. 24 as banks took advantage of the lower interest rate compared to parking cash at the Fed.

For example, Home BancShares Inc. increased its Bank Term Funding Program (BTFP) borrowings by $500 million in the fourth quarter of 2023, a 180% increase sequentially. The bank is earning a 64-basis-point spread on it, executives said on the company's earnings call.

"That wasn't what the intention of the program was for. The intention of the program was to save these banks that are broke, and they did that work, and it saved them," co-founder, Chairman, President and CEO Johnny Allison said. "I thought we ought to get something out of this deal, so we're getting a little spread on that."

However, the Fed recently increased the cost of borrowing from the facility, which led to a drop in activity.

On Jan. 24, when the Fed said BTFP would expire March 11 as scheduled, the agency also said that, effective immediately, the interest rate on new loans will not be lower than the interest rate on reserve balances until the program's expiry date. In doing so, the central bank curbed risk-free arbitrage trade opportunities for financial institutions.

Borrowings declined over the next two weeks, totaling $165.24 billion Jan. 31 and $164.87 billion Feb. 7.

Banks move to pay off BTFP balances

Thirty US banks reported $17.63 billion in BTFP borrowings as of Dec. 31, 2023, through various disclosures, according to an analysis by S&P Global Market Intelligence. Some banks reported quarter-over-quarter declines in their BTFP balances in the three months ended Dec. 31, 2023, as they moved to pay off those borrowings.

Banc of California Inc.'s BTFP balance dropped 46.7% in the 2023 fourth quarter after the bank repaid $2.3 billion. The bank plans to repay the rest of its $2.62 billion balance soon, following the Fed's recent announcement increasing the cost of borrowing, Vice Chairman, President and CEO Jared Wolff said on the company's earnings call.

"The Fed made our decision really easy on BTFP with the announcement," Wolff said.

Several other banks disclosed plans to pay off their BTFP borrowings.

Cadence Bank, which had $3.5 billion in BTFP borrowings at Dec. 31, 2023 — the highest among banks in the analysis — plans to bring its balance down when rates start dropping. The bank hopes to replace that funding with core deposit growth, Chairman and CEO Dan Rollins said on the company's fourth-quarter 2023 earnings call.

"That's a fixed rate product. And so if rates begin to fall, I don't know that we want to leave that out there in a fixed rate product," Rollins said. "Today, it's good price funding for us. If rates begin to drop as early as the curve says they are, then we could lose some of that advantage, and you'd want to find other sources of funding."

As Glacier Bancorp Inc.'s $2.74 billion in BTFP borrowings mature next month, the company is looking for ways to replace that funding. It locked in $1.8 billion in forward starting Federal Home Loan Bank advances in the fourth quarter of 2023 at a similar rate to its BTFP borrowings, but it still has about $940 million left to refinance, Senior Vice President and Treasurer Byron Pollan said.

"We've got some flexibility and options there. We've got a little bit of extra cash right now. We could use some of that to pay down that $940 million. We'll look at what the overnight borrowing environment is, then we'll look at what the curve looks like in terms of term FHLB advances. And so we'll keep our options open. We'll evaluate that last $940 million as we get closer to maturity," Pollan said.

Hope Bancorp Inc.'s net interest income will take a hit after it repays its $1.7 billion in BTFP borrowings, which contributed $4 million in net interest income in the 2023 fourth quarter, at the end of March, CFO Julianna Balicka said.

Discount window borrowing goes up

Discount window borrowing, the Fed's traditional lending facility, picked up in the second week of January but remained lower than the levels seen in the wake of the bank failures in March 2023.

Discount window borrowing increased for four consecutive weeks since the week ended Jan. 10, to reach $3.19 billion Jan. 31, but declined to $2.33 billion as of Feb. 7.