The folks at the Federal Reserve haven’t said whether they will continue the Bank Term Funding Program (BTFP) which is set to expire on March 11, 2024. Jay Powell was asked about it during the November meeting Q & A and said they’d start thinking about it in 2024. With $131 billion outstanding in loans to banks and credit unions collateralized by U.S. Treasury and agency debt at par value one would assume the program like most other central bank and government programs would be extended, indefinitely.
However, Wrightson ICAP economist Lou Crandall made Bloomberg headlines with a note to clients which included, “In justifying the generous terms of the original program, the Fed cited the ‘unusual and exigent’ market conditions facing the banking industry following last spring’s deposit runs. It would be difficult to defend a renewal in today’s more normal environment.”
Crandall’s claim that today’s environment for banks is normal is, well, questionable. The 12/22/2023 issue of Grant’s Interest Rate Observer lays out the particulars of a mid-December sale of loans by the failed Signature Bank which brought 70.5 cents on the dollar. “But even that shocking discount overstates the prices,” writes Evan Lorenz. The FDIC was only able to sell 20% of the loan portfolio, keeping the rest and “financing half of the purchase price.” Blackstone Inc., a buyer of part of the 20% share will manage the assets and earn a higher than typical fee “to avoid a price of less than 70 (a valuation that might have pushed other real estate lenders to the wall).” Loans on rent-controlled apartments were not included in the sale.
More broadly, Lorenz cites Erica Jiang and three others from the National Bureau of Economic Research (NBER) who have determined that 14% of all commercial real estate (CRE) bank loans are under water, with 44% of loans collateralized by office properties having negative equity. “A 10% default rate on those CRE loans would lead to $80 billion in charge-offs and could precipitate dozens of bank failures,” explains Lorenz.
Real estate firm Green Street estimates that in the coming two years property owners will be asked to come up with $400 billion in cash to pay down loans that are maturing and that will need extension or refinance.
Of course lower interest might fix all this but the 10-year Treasury yield would have to plunge 100 to 150 basis points (to less than 2.9%) just to “decelerate these issues,” according to the NBER researchers.
In Los Angeles, Bloomberg reports “Harbor Associates and F&F Capital Group bought the five-story property at 1640 Sepulveda Blvd. for about $44.7 million, according to a statement Tuesday. The building last sold in 2018 for $92.5 million.” That’s a 52% drop.
Come March, the BTFP may be called something else, tinkered with to include other assets to be pledged at favorable values and extended indefinitely. What is always “normal” is the Fed creating money to keep fractional-reserve banks afloat.
