Arthur Hayes: Without Fed support, banks may face bankruptcy due to bond sell-off
On January 26th, BitMEX co-founder Arthur Hayes compared the different impacts of the bank funding tools "Buyout Default" (BTFP) and "Discount Window" (DW). Under the BTFP mechanism, banks can use $80 worth of bonds as collateral to obtain a $100 loan from the Federal Reserve Bank. However, in the Discount Window operation, $80 worth of bonds can only be exchanged for an $80 loan.
Hayes pointed out that if the Federal Reserve does not take measures to reduce quantitative tightening or cut interest rates at the March FOMC meeting, there may be a massive sell-off in the bond market, which could exacerbate the losses of banks holding securities held to maturity (HTM) on their balance sheets. This will cause depositors to turn to money market funds (MMFs) for higher interest rates, putting pressure on banks to repay depositor funds. In this case, without the support of the BTFP mechanism, banks can only rely on the Discount Window (DW) to obtain loans at market value, which decreases as bond prices fall, ultimately leading to bankruptcy for banks unable to make up for unrealized losses.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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