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The financial crisis that kicked off in March continues to bubble under the surface.

Total outstanding loans in the Federal Reserve’s bank bailout program jumped by just over $5 billion in November.

There was a sudden spike in banks tapping into the bailout program during the first week of the month with financial institutions borrowing $3.87 billion from the Bank Term Funding Program (BTFP). There was another surge in borrowing between Nov. 15 and Nov. 22, according to Fed data.

As of Nov. 22, there was $114.1 billion in outstanding loans in the BTFP bank bailout program.

As you can see from the chart, borrowing had leveled off in August before the sudden spike in November. Keep in mind that banks were still tapping into the bailout even as the total balance in the program plateaued. Some banks were paying off loans as others borrowed.

The fact that banks are still accessing the bailout program, and suddenly at a faster rate, would seem to indicate that the banking sector remains shaky.

After the collapse of Silicon Valley Bank and Signature Bank, the Fed created the BTFP, allowing banks to easily access capital “to help assure banks have the ability to meet the needs of all their depositors.”

The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. Banks can borrow against their assets “at par” (face value).

According to a Federal Reserve statement, “the BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”

The ability to borrow against the face value of their bond portfolios is a sweetheart deal for banks given the big drop in bond prices.

As the Fed jacked up interest rates to fight price inflation, it decimated the bond market. (Bond prices and interest rates are inversely correlated. As interest rates rise, bond prices fall.) With interest rates rising so quickly, banks were not able to adjust their bond holdings. As a result, many banks have become undercapitalized on paper. The banking sector was buried under some $620 billion in unrealized losses on securities at the end of last year, according to the Federal Deposit Insurance Corp.

The BTFP gives banks a way out, or at least the opportunity to kick the can down the road for a year. Instead of selling bonds that have dropped in value at a big loss, banks can go to the Fed and borrow money at the bonds’ face value.

In the first week of the BTFP, banks borrowed $11.9 billion from the program, along with more than $300 billion from the already-established Fed Discount Window.

The Discount Window requires banks to post collateral at face value and loans come with a relatively high interest rate and must post collateral at fair market value. While Discount Window borrowing surged in the weeks after the collapse of SVC and Signature Bank, the balances were quickly paid back down, and Discount Window borrowing returned to normal levels.

But borrowing through the bailout program never slowed down and then suddenly accelerated this month.

It’s notable that the sudden spike in bailout borrowing happened even as the bond market rallied and bonds regained some of their value. This ostensibly provided some relief on banks’ balance sheets.

Granted, the $114 billion outstanding is insignificant compared to the $22.8 trillion in commercial bank assets held by the 4,100 commercial banks in the US. The fact that some troubled banks are still tapping into a bailout program eight months after the crisis doesn’t necessarily mean the banking system is on the verge of collapse. But while the bailouts might not be a fire, it’s at least smoke. There are still problems in the banking system bubbling under the surface.

This is a predictable consequence of the Fed raising interest rates to battle price inflation.

Artificially low interest rates and easy money are the mother’s milk of this bubble economy. With everybody from corporations, consumers, and the federal government buried in debt, this economy and the financial system simply can’t function long-term in a high interest rate environment. The banking crisis earlier this year was the first thing to break as a result of rising interest rates. Other things will follow. We’ve already seen some tremors in the commercial real estate market.

While you might be tempted to blame the Fed’s recent rate hikes for these issues, the real problem started years ago.

After the Great Recession, Federal Reserve policy intentionally incentivized borrowing to “stimulate” the economy. It cut rates to zero and launched three rounds of quantitative easing. After an unsuccessful attempt to normalize rates and shrink its balance sheet in 2018, the Fed doubled down on easy money policies during the pandemic. This monetary inflation inevitably led to price inflation. That forced the Fed to raise interest rates. The central bank appears to have cooled price inflation (for now), but it also broke the financial system.

In effect, the Fed managed to paper over the financial crisis with this bailout program. It basically slapped a bandaid on it. But it has not addressed the underlying issue – the impact of rising interest rates on an economy and financial system addicted to easy money.

And it’s only a matter of time before something else breaks

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