Fed Introduces Bank Term Funding Program to Support US Banks

In a time of economic turmoil, the Federal Reserve Board has established a new program to provide support to American businesses and households. On Mar. 12, the Fed announced the Bank Term Funding Program, or BTFP, which 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 will be able to secure loans with the value of their assets being equal to the face amount.[0]

The U.S. Treasury will also provide $25 billion in credit protection to the Fed from the Exchange Stabilization Fund.[0] This week, the Federal Reserve announced in a statement that they would be releasing data on their balance sheet on a weekly basis, which would include an aggregate report of the usage of the program.[1]

The introduction of BTFP is part of the Fed’s efforts to reduce the liquidity crunch caused by its interest rate hikes last year. Banks have been shifting their deposits from bank accounts to money-market funds in response to the hikes, resulting in a tight liquidity situation.[2] The new program should be able to inject reserves into the banking system to reduce reserve scarcity and reverse the tightening that has taken place over the past year, according to JPMorgan strategists.[3]

Data released by the Fed this week shows that banks have already borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week.[4] Approximately $152.85 billion was drawn from the discount window or the conventional liquidity facility for banks out of the aggregate sum.[5] This marks a significant rise from the previous week’s $4.58 billion.[5]

The Bank Term Funding Program is a crucial step in the right direction and should help shore up U.S. banks and ensure that they have the ability to meet the needs of all their depositors. The Treasury’s backstop offer provides an additional layer of protection for the program and should give banks the confidence to access the funds when needed.

0. “Federal Reserve Launches Program to Bail Out Banks” SchiffGold, 13 Mar. 2023, https://schiffgold.com/commentaries/federal-reserve-launches-qe-extra-lite-to-bail-out-banks/

1. “JP Morgan Chase: US Fed’s emergency loan can inject $2 trn in banking system to ease liquidity crunch” Business Today, 16 Mar. 2023, https://www.businesstoday.in/silicon-valley-bank/story/jp-morgan-chase-us-feds-emergency-loan-can-inject-2-trn-in-banking-system-to-ease-liquidity-crunch-373616-2023-03-16

2. “US Feds loans to provide $2 trn of liquidity in banking system: JP Morgan” Business Standard, 16 Mar. 2023, https://www.business-standard.com/article/international/us-fed-s-loans-will-provide-2-trn-of-liquidity-in-banking-system-jpmorgan-123031600305_1.html

3. “Fed May Inject $2 Trillion into US Banking System” BeInCrypto, 16 Mar. 2023, https://beincrypto.com/fed-may-inject-2-trillion-us-banking-system

4. “Banks Rush to Backstop Liquidity With $165 Billion From Fed (2)” Bloomberg Law, 16 Mar. 2023, https://news.bloomberglaw.com/bankruptcy-law/banks-rush-to-backstop-liquidity-borrow-164-8-billion-from-fed

5. “Fed ‘Stands Ready' to Provide Liquidity to Eligible Institutions” Watcher Guru, 16 Mar. 2023, https://watcher.guru/news/fed-stands-ready-to-provide-liquidity-to-eligible-institutions

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