Bank Term Funding Program-Fed’s Strategy Maintain Bank Liquidity

Bank Term Funding Program: Background

In March 2023, the Federal Reserve launched the Bank Term Funding Program (BTFP) in response to liquidity issues caused by the failure of Silicon Valley Bank (SVB) and Signature Bank. SVB and Signature experienced massive deposit withdrawals, and then the banks were seized by regulators in March 2023.

These bank failures led to concerns about liquidity and lending in the broader banking system.

The BTFP provides emergency liquidity and restores stability.

What is the BTFP?

The BTFP lending program provides 1-year collateralized loans to eligible banks and credit unions.

It offers funding at near-market rates to support liquidity and lending.

The BTFP allows borrowing against Treasuries, agency debt, and mortgage-backed securities pledged as collateral.

Note that collateral is valued at par, not at a lower “current market value.”

Why was the BTFP created?

The BTFP aims to address the liquidity crisis, and panic experienced due to the Silicon Valley Bank and Signature Bank runs and subsequent bank failures.

In other words, it’s designed to prevent bank failures due to short-term panics and “bank runs.”

Preventing further bank runs by backstopping liquidity and restoring confidence.
Supporting lending by providing a liquidity buffer so banks don’t have to restrict credit.
Restoring stability in the banking system.

Who is eligible?

The BTFP is available to insured depository institutions, including banks, savings associations, and credit unions.

What are the terms?

Banks can borrow for up to 1 year at a variable rate of 5.40% as of October 4, 2023. There are no fees, limits, or prepayment restrictions.

How long will it last?

The BTFP is a temporary program scheduled to end on March 11, 2024. Borrower identities will be confidential until one year after the program ends.

It’s widely rumored that over 19 banks, lenders, savings associations, and credit unions have already utilized BTFP loans.

*I’ve been told the names of several banks that have already borrowed from the Bank Term Funding Program by someone who tends to know these things.

*However, since I cannot verify the accuracy of what was mentioned, I won’t state any names. I view that information as “rumor” and not fact and should be taken with a “grain of salt.”

*I will only state that the names mentioned are well known to me, and I even have 2 personal bank accounts at one of the banks mentioned (a relatively small regional bank).

What are the benefits of the Bank Term Funding Program?

The BTFP backstops liquidity to prevent fire sales of assets and abrupt lending reductions, providing stability after the SVB and Signature failures.

The BTFP has provided over $150 billion in loans, showing it is fulfilling its emergency liquidity role.

Key Points:

Purpose: Provide funding after SVB & Signature failures caused liquidity issues.
Eligible: Banks, credit unions, insured depositories.
Collateral: Treasuries, agency debt, MBS valued at par (valued at “par” is a key takeaway to remember).
Loan Terms: Up to 1 year, 5.40% rate as of 10/4/23. No fees/limits.
Duration: Through March 2024 (The Fed could extend this date).
Confidential: Borrowers private for one year after the loan program ends.
Usage: Over $150 billion borrowed.
Benefits: Restores confidence, prevents fire sales & lending reductions.
Created: Launched March 2023 by Federal Reserve.
Motivation: Backstop liquidity, support lending, and restore stability.