Nobody overdoes it like the Fed, except maybe the fiscal side of Government. Not only does the Bank Term Funding Program (BTFP) make bank collateral owned as of March 12th whole, the BTFP has a more attractive rate (at today’s rate), compared to the Fed’s discount window.
When a bank borrows from the Fed’s discount window, collateral is valued at market prices. As we wrote previously, the BTFP does not value collateral at market prices, but rather at par. That’s one incentive to not use the discount window in favor of the BTFP.
Further, today’s BTFP rate is 4.50%, well below the various discount window rates (see table below). One would therefore expect BTFP borrowing to be quite heavy.
It will be interesting to observe where the Fed will draw the line as it relates to BTFP applicants. For example, will the Fed allow J.P. Morgan to borrow from the BTFP?