Bank Term Funding Program Is Ending
Banking Term Funding Program is a program to give short-term funding to depository institutions to make sure that they have ability to meet the needs of all their depositors. In other words, to make sure banks have enough money if smaller or larger scale bank-run occurs. This program was created to help distressed banks in the spring of 2023. Then for example Silicon Valley Bank failed and people started to question is their money safe in other much smaller banks than Silicon Valley Bank.
The need for this program peaked in the week starting Mar 20, 2023 with about $32 billion worth of funding given to banks and other depository institutions during that week. Although the need for this program quickly ran out and hasn't basically been needed since the June 2023, smaller spikes in need has occurred during and after December 2023. Peaking in the week starting Jan 8, 2024 with about $12 billion dollars of funding given to banks during that week. So there has still been distressed banks and other depository institutions after the turmoil of spring 2023.
Federal Reserve Board announced on their Jan 24, 2024 press release that the Banking Term Funding Program would "cease making new loans as scheduled on March 11" 2024. After that distressed banks and other depository institutions would need to resolve their needs for money by selling their assets. These assets are mostly Treasury Bills and Bonds, and Mortgage Backed Securities. And in the end in case of a bank failure the deposits are insured by Federal Deposits Insurance Corporation which has money to pay-out few percentage of all money deposited in the insured banks and other depository institutions.
The recent spikes in the usage of this program has mostly been because bigger banks have used this program to loan money with lower interest rate than the shorter-term funding rates. Also other terms of these loans have been favorable to banks than their usual funding sources. This has made possible for banks to loan money cheaper and then loan it forward with higher interest rates and make profit from the difference. “As the BTFP rate has fallen below shorter-term funding rates the program has seen increased borrowing from banks, presumably due to the favorability of the terms,” said Michael Feroli, JPMorgan’s chief U.S. economist.
References
- FED - Banking Term Funding Program
- FED - Federal Reserve Board announces the Bank Term Funding Program (BTFP) will cease making new loans as scheduled on March 11
- FRED Economic Data - Assets: Liquidity and Credit Facilities: Loans: Bank Term Funding Program, Net: Change in Week Average from Previous Week Average
- MarketWatch - Fed is shutting down $161 billion facility that banks had arbitraged
Edits
- Mar 8, 2024 - Added quote from Michael Feroli about banks using BTFP for arbitrage