The Fed & The Regional Banking Challenge
Most financial networks are missing the point here.
Everyone is waiting for the next “blow up”/bank failure. To stem this possibility the Fed has opened the Bank Term Funding Pro
gram (BTFP). Under the program the Fed will lend at 100% against U.S. treasury securities even if they are temporarily under water due to the higher market interest rates.
But while this program may prevent blow ups, it has done nothing to stem the larger pressure that the Fed and its interest rate policies are placing on the banks. Right now, the interest rate that one can get on U.S. treasuries is competing against bank deposits. A regional bank will either have to let those deposits go or step up and offer higher rates to clients to hold onto their deposits. And by offering higher rates they will likely reduce their profit margins on the loan portfolio that they currently hold. At least this will mean lower bank earnings. To manage this environment the banks are likely taking a couple steps. First of all, they are diligently monitoring their deposit flows to understand exactly how much they might need to offer to entice depositors to stay at the bank. The second step is they are likely to reduce new loans and may, shortly, cut back on credit lines etc. The goal being to reduce credit exposure.
Even so, borrowing from the Fed at 5% would require that the bank get a much higher rate to simply make it worth their while to lend. With economic uncertainty on the horizon this won’t happen. In his braver talk, Jerome Powell asserts that rates will be “higher for longer” (a meme often repeated by the networks). But such a practice will continue to challenge the banks. So, while we may not see “blow ups”, we may see a quiet fading of many regional banks as their profit margins erode further. There is currently a disconnect between what the market expects the future interest rate curve to be and what the Fed itself expects the curve to be. The market sees Fed cuts during this year. Perhaps the market has a better understanding of the issues in the regional banking sector.
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