China’s Predatory Lending
February 12, 2025
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The Silicon Valley Bank crisis has prompted the Federal Reserve to evaluate its emergency funding program. The original emergency funding program i.e. the discount window was obviously not sufficient to provide funding to failing banks such as the Silicon Valley Bank. This is the reason that the bank ended up failing.
The Fed felt the need to create a different funding program that is tailored to the needs of the present situation. As a result, the Fed has created the Bank Term Funding Program (BFTP) in order to overcome the shortcomings of the discount window.
However, the Bank Term Funding Program (BFTP) seems to have certain shortcomings of its own. In this article, we will have a look at the shortcomings of the Bank Term Funding Program (BFTP) as well as how they impact the market and the economy in general.
However, the Fed is only charging 10 basis points above the market rate as interest for the loan. This markup is very small considering the fact that the Fed is taking a huge risk by overvaluing the collateral. Also, this move by the Fed is unprecedented in any part of the world. Central banks have never overvalued collateral before. This is the first time Fed is doing such as experiment!
However, critics are wary about whether even one year will be enough. This is because most of these securities are long-term securities i.e. with a maturity greater than ten years. Hence, it is not that within one year, the security will get matured. It is quite likely that the Fed may have to provide an extension to such loans if the banking system does not stabilize in one year.
However, when we consider the practical situation, this recourse may not have much value. This is because if the bank is not able to pay Fed, it means that its assets are woefully less than its liabilities. As a result, the Fed may not have any assets left which they can cease and sell in the market to recover their dues. Hence, the Fed’s ability to recover the loans in the event of a bank failure is limited.
By borrowing money from programs such as Bank Term Funding Program (BFTP), the bank is making an implicit admission that they are in duress. Also, it is not possible to hide information regarding who is using facilities provided by the Fed. This is because the Bank Term Funding Program (BFTP) uses public money i.e. taxpayer funds. Hence, the Fed is obliged to maintain full transparency regarding the usage of these funds.
It is possible that if a large number of banks start using the facility provided by Bank Term Funding Program (BFTP), the effect could be counterproductive. Instead of shoring up confidence in the banking system, it might destroy the confidence in the system and depositors might start moving funds out of the banking system as a whole.
The fact of the matter is that the Bank Term Funding Program (BFTP) is highly controversial. There are many critics who claim that in the long term, this program will end up creating more problems than it solves.
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