Fed bank lending facility still key liquidity source despite rate change

NEW YORK (Reuters) - Changes made last week to a Federal Reserve lifeline for banks shouldn't impair the facility's ability to provide liquidity to banks that still genuinely need the cash, market analysts believe.

That's because the facility, known as the Bank Term Funding Program, or BTFP, still offers fairly easy terms conditions to access it even as it now costs more to borrow from the central bank, the analysts said. That's important, since over recent days some regional Fed banks have run into challenges that have in turn stoked worries about the sector, thus raising questions whether the central bank was premature in tightening access to the BTFP.

Just over a week ago, the Fed raised the borrowing rate on the BTFP, an effort launched in March to provide easy cash to eligible banks amid the high-profile implosion of Silicon Valley Bank, which in turn had raised fears of broader banking sector stress.

The BFTP borrowing rate now match the interest on reserves rate at 5.4%, representing around an immediate half-percentage-point rise in borrowing costs for those aiming to take on new BTFP loans. The Fed also affirmed the program would shut down as planned on March 11.

Raising the rate was widely viewed as a way to arrest a vexing rise in borrowing at the facility despite no apparent signs of bank stress. Last week banks had borrowed $167.8 billion from the facility.

By raising the rate, the Fed in theory closed off what had been an ability by banks to borrow cheap cash from the Fed and lend at higher rates in private markets or even to the Fed itself. The BTFP borrowing rate is now higher than the rate seen on many private money market securities and matches what the Fed pays banks to park reserves at the central bank.

Raising the rate "was the right move," said Joseph Wang, chief investment officer at Monetary Macro. Moving the BTFP rate to the interest on reserve rate "weeds out the opportunistic borrowing and leaves those that actually need the cash."

Derek Tang, an analyst with forecasting firm LH Meyer, also believes the facility remains in a good place to provide support, noting banks have been using it "not because of the lower BTFP rate...but because BTFP was so much looser with collateral valuation and margin, and that hasn't changed."

Data the Fed will release later Thursday will show what effect the change in the BTFP terms has impacted borrowing levels.

(Reporting by Michael S. Derby; editing by Diane Craft)

By Michael S. Derby