26 January 2024
The Federal Reserve’s emergency lending program, the Bank Term Funding Program (BTFP), witnessed a surge in demand, reaching a record $167.8 billion in borrowing as of January 24. This spike, approximately $6.3 billion higher than the previous week, came just before the Fed raised the program’s interest rate to prevent financial institutions from exploiting its favorable terms for arbitrage. Initially, the BTFP’s borrowing rate of around 4.88% was significantly lower than the rate for parking reserves at the Fed, leading to a risk-free arbitrage opportunity for institutions. However, this loophole was closed with the Fed’s decision to align the BTFP borrowing rate with that of reserve balances, effectively ending the advantageous trade.