Fed to wind down emergency lending facility in March

Bloomberg News

The emergency lending facility set up by the Federal Reserve to stem last spring's banking crisis will sunset starting in March.

The Bank Term Fund Program, or BTFP, will stop making new loans on March 11, the central bank announced Wednesday night. Until then, banks and other depository institutions will still be able to borrow from the facility, albeit at a slightly higher interest rate.

For the final weeks of the program, the Fed will put a floor on the program's interest rate that is equal to the interest rate on reserve balances, or IORB, on the day the advance is made. As of Wednesday, the BTFP rate — equal to the one-year overnight index swap rate plus 10 basis points — is 4.88%, while the IORB rate is 5.4%.

"This rate adjustment ensures that the BTFP continues to support the goals of the program in the current interest rate environment," a press release from the Fed reads. "This change is effective immediately. All other terms of the program are unchanged."

Advances come with terms of up to one year, giving banks an option to temporarily refinance their holdings into early 2025. All U.S. federally insured banks, savings associations and credit unions are eligible for using the facility, as are U.S. branches of foreign banks that are eligible for primary credit.

The Fed set up the BTFP in response to a series of bank runs at large regional banks. The episode led to the rapid failures of Silicon Valley Bank and Signature Bank, as well as significant stress at several other similar sized institutions, including First Republic Bank, which failed several weeks later. 

Section 13(3) of the Federal Reserve Act gives the Fed broad powers to lend to both banks and nonbanks in emergencies, but such facilities can only be granted during "unusual and exigent circumstances" and can only be authorized for one year at a time. Continuing the program would have required the Fed to determine that such circumstances continued to exist with at least five affirmative votes from the Board of Governors.

By allowing the authorization to lapse, the Fed is formally acknowledging the end of the crisis — though it has been out of the public spotlight for months. The acute part of the episode largely ended after regulators took the twin measures of setting up the facility and announcing that uninsured depositors at Silicon Valley and Signature would be made whole.

"During a period of stress last spring, the Bank Term Funding Program helped assure the stability of the banking system and provide support for the economy," the Fed's statement reads. "After March 11, banks and other depository institutions will continue to have ready access to the discount window to meet liquidity needs."

Regulation and compliance

OCC's Hsu calls for five-day liquidity requirement for large banks

January 18, 2024 1:13 PM

The BTFP accepts the same collateral that can be pledged to the discount window, the Fed's last-resort lending facility. However, the BTFP accepts securities at their full par value, rather than their market value minus a set discount, or haircut. The terms allows banks to temporarily offload high-quality securities with unrealized losses. The Silicon Valley Bank run was triggered, in part, by the bank selling such assets at a loss to generate liquidity. 

Use of the facility has, at times, been dwarfed by other short-term funding sources, such as the Federal Home Loan Banks, which provide advances with more flexible terms. But use of the BTFP has risen steadily since it was set up, hitting $79 billion within the first month before climbing to $100 billion, where it sat for most of the summer and early fall.

In recent months, Fed officials had been signaling that the facility's authorization would not be renewed. During that time, its use has picked up sharply, reaching $161 billion last week.

Federal regulators have made emergency readiness a top priority in the wake of last spring's bank runs, issuing guidance on liquidity management and urging banks to test their ability to borrow from the Fed's discount window regularly. 

Earlier this month, Acting Comptroller of the Currency Michael Hsu called for a rule establishing a five-day liquidity requirement for large and midsize banks. 

"The characteristics of bank runs are changing. Banks and regulators need to adapt accordingly," Hsu said. "As the speed of banking and finance accelerates, so too does the need for better brakes to enable a safe and sound system."