US Banks Create Profits Out Of Thin Air Thanks To This Fed Trick: A Burden For US Taxpayers?
Portfolio Pulse from Piero Cingari
U.S. banks are profiting by borrowing from the Fed's bank term funding program (BTFP) at rates lower than what the Fed pays on reserve deposits. Banks have borrowed $141 billion at rates below 5%, while the Fed pays 5.4% on reserves, creating a 0.4% profit margin. This arbitrage has helped financial sector stocks, including BAC, C, GS, and WFC, outperform the market. However, this practice has a downside for taxpayers, as the Fed's interest payments on reserves exceed its income, leading to a deferred asset of $116.9 billion, which delays Treasury remittances until 2027.
January 10, 2024 | 5:50 pm
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POSITIVE IMPACT
Bank of America has gained 25% in the past three months, benefiting from the arbitrage opportunity provided by the Fed's BTFP.
Bank of America's recent stock performance is likely influenced by the profit margin banks are earning through the Fed's BTFP. The positive arbitrage situation is expected to continue supporting the stock in the short term.
CONFIDENCE 90
IMPORTANCE 70
RELEVANCE 80
POSITIVE IMPACT
Citigroup has risen by 30% in the past three months, capitalizing on the low-interest funding from the Fed's BTFP.
Citigroup's significant stock increase can be attributed to the additional profits generated from the Fed's BTFP, which is likely to have a continued positive impact on the stock in the short term.
CONFIDENCE 90
IMPORTANCE 70
RELEVANCE 80
POSITIVE IMPACT
Goldman Sachs has increased by 22% in the past three months, benefiting from the Fed's BTFP funding and arbitrage opportunity.
Goldman Sachs' stock performance is positively impacted by the bank's ability to profit from the difference in interest rates between borrowing from and depositing to the Fed, which should support the stock in the short term.
CONFIDENCE 90
IMPORTANCE 70
RELEVANCE 80
POSITIVE IMPACT
Wells Fargo has advanced by 24% in the past three months, taking advantage of the Fed's BTFP to generate profits.
Wells Fargo's stock rise is partly due to the bank's exploitation of the Fed's BTFP, which allows for a risk-free profit margin and is expected to continue to have a positive effect on the stock in the short term.
CONFIDENCE 90
IMPORTANCE 70
RELEVANCE 80
POSITIVE IMPACT
The Financial Select Sector SPDR Fund (XLF) has exceeded pre-March 2023 crisis values, with a 20% surge since late October 2023, outperforming SPY.
XLF's performance is reflective of the overall financial sector's benefit from the Fed's BTFP, which has led to a significant surge in the fund's value. This trend is likely to persist in the short term.
CONFIDENCE 90
IMPORTANCE 80
RELEVANCE 90
NEGATIVE IMPACT
The SPDR S&P 500 ETF Trust (SPY) has been outperformed by the financial sector and XLF since late October 2023.
SPY's relative underperformance compared to XLF indicates that the broader market is not benefiting as much from the Fed's BTFP as the financial sector is. This may lead to a short-term negative impact on SPY.
CONFIDENCE 80
IMPORTANCE 60
RELEVANCE 70