Tightening The Tap: Regional Banks, Tech Stocks, Bitcoin Brace For Liquidity Crunch As Fed Lifeline Ends
A safety net implemented by the Fed in the wake of the Silicon Valley Bank and Signature Bank failures in March 2023 has ceased operations this week.
The Federal Reserve’s Bank Term Funding Program (BFTP) was designed as an emergency bulwark against the looming threat of a regional banking crisis, offering an additional, affordable liquidity source to eligible depository institutions.
The cessation of this program may now raise significant concerns about the future of liquidity in financial markets, potentially altering the landscape of bullish risk sentiment that has buoyed investors in the recent past.
Chart: BFTP Funneled $164 Billion Into The U.S. Banking System
Market Performance Under BFTP’s Umbrella
The Fed promptly unleashed the BFTP last year in response to financial collapses to ensure that banks remained equipped to fulfill depositor demands and business loan requests.
The initiative successfully funneled $164 billion into the banking system, staving off a bank run and credit crunch risks.
For investors, the program has represented a much-needed infusion of liquidity that partially cushioned the negative effect of the Fed’s balance sheet tightening.
Among other factors, the Fed’s emergency umbrella has been a useful aid in driving asset gains over the past year, with riskier assets notably outperforming their more defensive, higher-quality counterparts.
The SPDR S&P Regional Banking ETF (NYSE:KRE) surged 8% since a year ago and nearly 40% since hitting a low point in May 2023. The S&P 500 Index has climbed 33% from its previous lows during the regional banking crisis, while the Dow Jones Industrial Average has seen a 22% increase.
