29 May, 2024
Demand for Fed's discount window spikes after Bank Term Funding Program sunset
By Arpita Banerjee and Gaby Villaluz
Borrowings from the Federal Reserve's discount window surged in the first quarter as banks tapped alternative funding sources following the expiry of the Bank Term Funding Program (BTFP) earlier this year.
The BTFP, established as an emergency lending tool by the Fed on March 12, 2023, after the failures of Silicon Valley Bank and Signature Bank, expired on March 11. The usage of the facility peaked at $167.77 billion on Jan. 24, but fell to $132.81 billion, as of March 27 and further down to $109.01 billion in the week ended May 22.
On the other hand, discount window borrowing, the Fed's traditional lending facility, jumped nearly 244% over two weeks following the end of the BTFP program — from $1.83 billion since the week ended March 13 to $6.27 billion March 27. Borrowings under the primary credit facility further increased to $8.56 billion as of April 17 before declining to $6.66 billion in the week ended May 22.
Bank regulators have been working toward eliminating the stigma associated with banks utilizing the discount window. In January, acting Comptroller of the Currency Michael Hsu suggested one way of doing that would be to give banks credit for their discount window borrowing capacity and add discount window borrowing to banks' liquidity requirements. In a recent speech, Fed Vice Chair for Supervision Michael Barr said the central bank is considering requiring some banks to be prepared to borrow from the facility by maintaining at least a certain amount of quickly available liquidity with reserves and pre-positioned collateral.
Banks disclose future plans to pay off BTFP balances
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With the scheduled expiry of the program and the Fed ending the favorable arbitrage opportunity, banks continued to pay off their BTFP balances in the first quarter. However, loans from the BTFP could be taken in terms of up to a year. Several banks disclosed ways in which that borrowing will roll off.
Banc of California Inc.'s BTFP balance fell 42.7% to $1.5 billion in the first quarter, which the bank will extend to March 2025. The bank paid down $1.1 billion of its outstanding balances in the first quarter but chose to retain the remaining $1.5 billion in order to hold higher liquidity as it "continue[s] to run off expense of noncore deposits," Banc of California CFO Joseph Kauder said on an earnings call.
"At this point, it is likely that we will repay the remaining balance during the second quarter, but we could choose to retain it for a longer period of time based upon the deposit flows and the loan funding trends that we see," Kauder said.
Eagle Bancorp Inc. reported a 23.1% quarterly decline in its first quarter BTFP balances, which was $1.0 billion as of March 31. The company paid back $300 million in BTFP borrowings, which was replaced with $600 million in FHLB borrowings.
At Hope Bancorp Inc., total BTFP borrowings stood at $695.6 million as of March 31, a decline of 59% quarter over quarter. The positive spread earned on BTFP borrowings contributed approximately $3.6 million to Hope's first-quarter net interest income, and the company expects the BTFP pay-off to be positive to its net interest margin going forward, CFO Julianna Balicka said during the bank's first-quarter earnings call.
CVB Financial Corp.'s total BTFP balance increased 4.5% to nearly $2 billion in the first quarter, which included $695 million of advances that mature in May and $1.3 billion of advances that mature in January 2025. The company's BTFP borrowings accounted for 13.9% of its total liabilities.
CVB Financial expects to repay the BTFP borrowings through a combination of existing cash, future principal and interest payments from its security portfolio, core deposit growth and additional wholesale funding sources, which may consist of new borrowings and/or additional broker deposits, CFO E. Allen Nicholson said during an earnings call.
Camden National Corp. refinanced its existing BTFP loan of $135 million that was scheduled to mature in May and increased its borrowings to $225 million in the first quarter as part of its effort to optimize funding costs and interest rate risk position. The bank said it may exercise its right to prepay the BTFP at any time without penalty.
Cadence Bank had the highest disclosed BTFP borrowing in the analysis, at $3.5 billion, which remained unchanged from the linked quarter. The company refinanced the borrowing early in the first quarter, lowering the cost from 4.84% on Dec. 31, 2023, to 4.76% on March 31, 2024.
"The reason we're holding that in excess is we've got the bank term funding at 5% or 4.67% and we're investing that at 5.40%. So, we're just getting a little bit of incremental spread on that for the time being," Cadence Bank CFO Valerie Toalson said during the bank's first-quarter earnings call.
