the government subsidy is the rate: no one edse will give you a loan so close to the risk-free rate when the whole purpose of the loan is that you’re a bad credit risk.
For unsecured credit, absolutely. But the BTFP specifically is secured by rounds-to-Treasurys, and the rate it gives is the market-indexed rate for T-secured lending. Your credit really shouldn’t come into the economic rate for your secured borrowing.
To the extent that a bank gets cheaper financing from BTFP, it seems to me much more like “other banks would charge you 1% over their economic costs, but the Fed will undercut them and charge only 10bp”, which seems more like a (barely profitable) public option, rather than a bailout.
(When the government runs the postal service at a profit but undercuts the theoretical price of private mail, is that helpfully described as a “bailout” to mail-senders?)
The government is agreeing to pretend that this is more-secured than it actually is, since they’re treating treasuries that everyone knows are worth $85 (or whatever) are actually worth $100. If these treasuries were actually worth $100, the banks could just sell them for that price instead of needing loans. Also I suspect the cost of a loan from someone else would be much more than 1% higher since the banks needing these loans are very bad credit risks (you’d only take this loan if you’re insolvent and hoping no one will notice). The government is taking on a fairly large credit risk in exchange for basically nothing here.
For unsecured credit, absolutely. But the BTFP specifically is secured by rounds-to-Treasurys, and the rate it gives is the market-indexed rate for T-secured lending. Your credit really shouldn’t come into the economic rate for your secured borrowing.
To the extent that a bank gets cheaper financing from BTFP, it seems to me much more like “other banks would charge you 1% over their economic costs, but the Fed will undercut them and charge only 10bp”, which seems more like a (barely profitable) public option, rather than a bailout.
(When the government runs the postal service at a profit but undercuts the theoretical price of private mail, is that helpfully described as a “bailout” to mail-senders?)
The government is agreeing to pretend that this is more-secured than it actually is, since they’re treating treasuries that everyone knows are worth $85 (or whatever) are actually worth $100. If these treasuries were actually worth $100, the banks could just sell them for that price instead of needing loans. Also I suspect the cost of a loan from someone else would be much more than 1% higher since the banks needing these loans are very bad credit risks (you’d only take this loan if you’re insolvent and hoping no one will notice). The government is taking on a fairly large credit risk in exchange for basically nothing here.