The wordsmiths at the Federal Reserve wisely omitted the line about a "Sound and resilient" banking system in its statement on January 31.
According to the Wall Street Journal's Andrew Ackerman, the popularity of the program was not because of new stresses on banks.
"Some banks had recently figured out a way to game the program by pocketing the difference between what they pay to borrow the funds and what they can earn from parking the funds at the central bank as overnight deposits." On January 31, banks had borrowed more than $165 billion from the facility.
It's doubtful there are no new stresses on banks.
Harold Bordwin, a principal at Keen-Summit Capital Partners LLC in New York, which specializes in renegotiating distressed properties, told Bloomberg, "Banks' balance sheets aren't accounting for the fact that there's lots of real estate on there that's not going to pay off at maturity."
"The percentage of loans that banks have so far been reported as delinquent are a drop in the bucket compared to the defaults that will occur throughout 2024 and 2025," David Aviram, principal at Maverick Real Estate Partners told Bloomberg.
To hide their embarrassment over banks using the facility for risk-free interest rate arbitrage, they say they are shutting the program down because there is no stress in the banking system.
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