Record interest in Fed's crisis funding

As interest rate cut expectations strengthen, banks have started to turn more to the Fed's costly crisis funding. Interest rate cut expectations in the US are reflected in funding preferences. The BTFP funding window, which the Fed developed for the banking crisis that broke out in March this year, reached a record level of 131 billion dollars in the week ending December 20. The reason for choosing this window was the decrease in its cost as a result of interest rate cut expectations. With the BTFP window, banks can provide funding at a cost 10 basis points higher than the one-year OIS (overnight index swap) rate. With the OIS rate being linked to swap pricing reflecting Fed interest rate cut expectations, the funding cost through this channel has fallen to 4.88 percent. This rate creates an arbitrage opportunity for banks. Banks funded by BTFP can benefit from the 5.4 percent reserve balance interest by depositing money back into their accounts at the Fed. The difference between the two rates is 52 basis points, the highest level since March.