Connecting the dots of what could be a major banking Black Swan event.
When a series of notable US banks faced collapse earlier this year, the US Federal Reserve responded by instituting an emergency loan facility – the Bank Term Funding Program (BTFP) – to provide short-term liquidity and avert a potential systemic banking contagion.
However, with the expiration of this emergency bank bail-out program approaching in early 2024, questions arise about the potentially serious consequences since banks continue to utilize the BTFP today in ever increasing amounts.
By connecting the dots around a chain of events the potential for a major Black Swan Event comes into view.
The interconnectedness of interest rates, loans, inflation, and financial stability creates a plausible scenario of the Federal Reserve allowing the BTFP to expire, and its significant consequences and who stands to gain most from such an Event.
Clearly the Fed could simply extend the life of the BTFP and keep the bail-out loans flowing.
But are there strategic reasons by powerful interests to let this emergency fund expire as planned and allow banks to fail?
The Chain of Events Leading to the March 2023 Banking Crisis and BTFP Bail-out Program
This chain of events underscores the interconnectedness of interest rates, loans, inflation, and financial stability, ultimately leading to the creation of emergency measures like the BTFP to address the crisis.
1) Low Interest Rates Encourage Banks to Increased Lending
Extended periods of historically low interest rates create a favorable environment for borrowing. Banks are motivated to issue loans to businesses and consumers due to the reduced cost of capital, stimulating economic activity and investment.
2) Low Interest Rates Increase Bond Holdings by Banks
Simultaneously, the prolonged low interest rate environment boosts the value of long-term treasury bonds. Seeking higher returns than those offered by traditional savings accounts or short-term investments, banks increase their holdings of these bonds as assets on their balance sheets.
3) Increased Bank Loans Boost Money Supply
The surge in lending activities by private banks contributes to the expansion of the money supply within the economy. As loans are issued, new money is created, circulating and increasing liquidity.
4) A Growing Money Supply Creates Higher Inflation
The growing money supply, fueled by increased loans, translates into higher demand for goods and services. When the supply of goods cannot keep pace with the heightened demand, prices rise, resulting in inflationary pressures.
5) The Fed Responds to High Inflation by Raising Interest Rates
To curb rising inflation and maintain price stability, the Federal Reserve responds by implementing a series of interest rate hikes. This monetary policy measure is intended to cool down economic activity and reduce inflationary pressures.
6) Rapid Interest Rate Hikes Cause Treasury Bond Depreciation
The Federal Reserve’s swift and aggressive interest rate hikes lead to a sharp depreciation in the value of long-term treasury bonds. Bond prices move inversely to interest rates, causing a decline in the market value of bonds held by banks.
7) Bond Depreciation Creates Unrealized Losses at Banks
The rapid depreciation of bond values results in accumulating unrealized losses on the balance sheets of banks. As the value of their bond holdings decreases, banks face financial challenges and potential capital erosion.
8) High Unrealized Losses Trigger Bank Depositor Concerns
The escalating level of unrealized losses on the balance sheets of banks raises concerns among depositors. The perceived risk of financial instability prompts depositors to fear for the safety of their funds held in these institutions.
9) Rapid Withdrawals Spark Public Panic and Bank Runs
Fueled by anxiety over potential bank failures, depositors initiate rapid withdrawals from their accounts. This sudden and widespread demand for cash triggers public panic and leads to bank runs as individuals seek to safeguard their assets.
10) The Fed Created the BTFP Facility to Prevent a Major Banking Crisis Contagion
In response to the escalating banking crisis and to prevent a broader contagion effect, the Federal Reserve and the US Treasury collaboratively introduce the Bank Term Funding Program (BTFP) in March 2023. The BTFP provides emergency liquidity to depository institutions, offering loans and support to stabilize the financial system, restore confidence, and prevent the crisis from spreading further.
Ending the BTFP: A Strategic Black Swan Event to Quickly Reshape the Financial Landscape
In a surprising move, indications are emerging that the Federal Reserve may allow the Bank Term Funding Program (BTFP) to expire on March 12th, 2024. This decision raises eyebrows, especially considering the ongoing need for emergency funding among banks to stabilize liquidity, a need that became apparent in the wake of the significant banking crisis triggered in March 2023.
Despite the passage of eight months since the inception of the BTFP, banks continue to rely extensively on this emergency lending facility to meet withdrawal demands and ensure financial stability. As of today, Fed loans via the BTFP have risen to $112.7 billion, indicating a continued dependence on this crucial program.
So what is to be gained by allowing the BTFP to expire and triggering a major banking crisis? And who will benefit the most?
The Consequences of Allowing the BTFP To Expire and a Widespread Banking Crisis
Allowing the BTFP to expire could lead to severe consequences, with a major banking crisis looming on the horizon. The potential fallout from such a crisis is a matter of concern not only for the financial sector but for the broader U.S. economy.
Inflation Evisceration
– A banking crisis in 2024 would swiftly dry up bank loans to businesses and consumers, leading to the evisceration of the current high level of persistent inflation. The failure or consolidation of numerous smaller regional banks could trigger a rapid decline in lending, impacting economic activity across the nation.
Decline in Interest Rates and Treasury Bond Yields
– The subsequent decline in inflation would force the Federal Reserve to significantly lower interest rates, dramatically decreasing Treasury Bond Yields. This would benefit the U.S. Treasury tremendously as the interest payments on the $34 trillion U.S. government debt would decline precipitously.
The Big-Boy Banking Country Club
Big banks stand to benefit significantly from the fallout of a banking crisis. As they buy up distressed banks for pennies on the dollar, the financial landscape would witness a consolidation, thinning out the number of independent banks that compete with the major players.
Given that big commercial banks are also under the umbrella of the Federal Reserve, the central bank would wield more influence and control over lending levels. This strategic move could be a concerted effort to keep inflation low and maintain stability within the financial sector.
The Strategic Reason for this Black Swan Event: The Implementation of a U.S. CBDC
Allowing a banking crisis in 2024 by ending the BTFP facility may well be a strategic move by the Fed and big banks.
The Relationship Between Big Banks and the Federal Reserve Bank
Contrary to common misconceptions, the Federal Reserve is not owned by the government or private corporations but by its member banks.
The ownership structure of the U.S. Federal Reserve involves member banks holding shares, and their role as shareholders is unique and distinct.
- Member banks of the Federal Reserve System hold stock in their respective Federal Reserve Banks. Each of the 12 regional banks in the Federal Reserve System is separately incorporated.
- Despite holding stock, member banks do not possess the same level of control as typical shareholders in public companies. The stock cannot be traded or sold.
- Member banks, being shareholders, play a role in electing six of the directors for their District’s Reserve Bank.
In other words, the relationship between the Federal Reserve and the big banks is like a financial country club and the implementation of a Federal Reserve CBDC would consolidate tremendous power and influence for this big boys banking club.
As I have reported in a previous article, a U.S. CBDC will likely face resistance by Congressional Lawmakers.
However, a Black Swan Event, such as a major banking crisis, would certainly create the ideal conditions to hastily pass CBDC legislation, create massive banking industry consolidation and eliminate regional bank competition in one fell swoop.
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