Arthur Hayes: Without Fed support, banks may face bankruptcy due to bond sell-off
BitMEX co-founder Arthur Hayes compared the different impacts of the bank funding tools "buy-to-fail put" (BTFP) and "discount window" (DW). Under the BTFP mechanism, banks can use bonds worth $80 to obtain a $100 loan from the Federal Reserve Bank. In contrast, in the discount window operation, $80 in 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 interest rates at the FOMC meeting in March, there may be a large-scale sell-off in the bond market, which could exacerbate losses on banks' hold-to-maturity (HTM) securities 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 situation, 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 bank bankruptcy due to the inability to make up for unrealized losses.
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