Fed’s BTFP Offers $2 Trillion in Liquidity to U.S. Banks

On March 12, the Federal Reserve Board announced the creation of the Bank Term Funding Program (BTFP), a $25 billion emergency loan program offering loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions.[0] The loans are available to depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.[1] Furthermore, the Treasury Department has provided $25 billion in credit protection to the Federal Reserve Banks in connection with the BTFP.[2]

The introduction of the BTFP is meant to provide liquidity to US depository institutions, which may be facing increasing withdrawals by depositors due to the collapse of Silicon Valley Bank (SVB).[3] JPMorgan Chase & Co analysts believe that the BTFP could inject up to $2 trillion of funds into the US banking system over the next 12 months. This could be the par amount of bonds held by banks outside of the Big five banks.[4]

The Fed also increased interest rates by 25 basis points in March 2022 for the first time since 2008.[5] This has led to a shift to money-market funds from bank deposits and has induced a liquidity crunch.[6] It is expected that the BTFP should be able to inject enough reserves into the banking system to reduce reserve scarcity and reverse the tightening that has taken place over the past year.[5]

Banks have already borrowed a record-high amount from the Fed, totaling $164.8 billion from two backstop facilities over the past week.[7] Of this amount, $152.85 billion was borrowed through the discount window or the traditional liquidity backstop for banks.[7] All eyes are on the Federal Reserve to see whether it would hike the interest rates further after the collapse of two U.S. banks last week.[6]

0. “Banks take advantage of Fed crisis lending programs” CNBC, 16 Mar. 2023, https://www.cnbc.com/2023/03/16/banks-take-advantage-of-fed-crisis-lending-programs-.html

1. “The forgotten rescue plan that could prevent another SVB-like collapse” CNN, 15 Mar. 2023, https://www.cnn.com/2023/03/15/investing/premarket-stocks-trading/index.html

2. “US Backstops Bank Deposits to Avert Crisis After SVB Failure” Yahoo News, 13 Mar. 2023, https://news.yahoo.com/us-says-svb-deposits-safe-233407286.html

3. “Recent Bank Failures and Fallouts Addressed by US Agencies” The National Law Review, 15 Mar. 2023, https://www.natlawreview.com/article/us-government-agencies-address-recent-bank-failures-and-fallout

4. “Fed Money Printing To Go Overboard? JPMorgan Sees $2T Infusion Into Banking System Amid Central Bank's Mo” Benzinga, 16 Mar. 2023, https://www.benzinga.com/news/23/03/31374517/fed-money-printing-to-go-overboard-jpmorgan-sees-2t-infusion-into-banking-system-amid-central-banks

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

6. “JP Morgan says Fed's emergency loan program may inject $2T into the US banking system” InvestorsObserver, 16 Mar. 2023, https://www.investorsobserver.com/news/qm-news/7942715967266514

7. “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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