Arthur Hayes: Without Fed support, banks may be at risk of bankruptcy due to bond sell-off

BitMEX co-founder Arthur Hayes compared in detail the different impacts of bank financing tools "Buy Default" (BTFP) and the "Discount Window" (DW). Under the BTFP mechanism, banks can use bonds with a market value of $80 as collateral to obtain a $100 loan from the Federal Reserve Bank. In the discount window operation, an $80 bond can only be exchanged for an $80 loan. Hayes pointed out that if the Fed does not cut interest rates or slow quantitative tightening (Qt) at the March FOMC meeting, there may be a large-scale sell-off in the bond market, which in turn will exacerbate losses in held-to-maturity (HTM) securities on bank balance sheets. This will cause depositors to turn to money market funds (MMFs) for higher interest rates, putting banks under pressure to repay depositors' funds. In this case, without the support of the "buy-out default" (BTFP) mechanism, banks can only rely on the "discount window" (DW) to obtain loans at market value, and the market value decreases as bond prices fall, which ultimately This may result in the bank going bankrupt due to its inability to cover unrealized losses.