What Is the Bank Term Funding Program?
The Bank Term Funding Program (BTFP) is an emergency lending program created by the Federal Reserve in March 2023 to provide emergency liquidity to U.S. depository institutions. It was established in response to the sudden bank failures of Signature Bank and Silicon Valley Bank, which were the largest such collapses since the 2008 financial crisis.
The program was created to support depositors, such as American businesses and households, by making additional funding available to eligible institutions to help assure that banks have the ability to meet the needs of all their depositors.
The BTFP offers loans of up to one year in length to U.S. banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries, agency debt, mortgage-backed securities (MBS), and other qualifying assets as collateral.
The BTFP is intended as a temporary emergency measure and is set to wind down on March 11, 2024, unless renewed by the Federal Reserve.
- The Bank Term Funding Program (BTFP) is a new Federal Reserve program established in March 2023 to provide additional funding to eligible depository institutions. It is expected to wind down after one year.
- The BTFP was created in response to the bank runs that caused Signature Bank and Silicon Valley Bank to fail, intends to shore up banks’ liquidity.
- The BTFP offers loans of up to one year in length to eligible borrowers pledging collateral eligible for purchase by Federal Reserve Banks in open market operations.
- Advances under the BTFP will be made at a fixed rate. There are no fees to participate.
Understanding the Bank Term Funding Program
In March 2023, two bank failures rocked the financial sector and seemed to come out of nowhere. Signature Bank and Silicon Valley Bank both saw massive bank runs as customers rushed to withdraw their deposits while these banks did not have enough liquid funds on hand to satisfy those customers’ cash requirements.
One reason for these bank failures was that normally safe investments in U.S. Treasury securities began losing money as interest rates rose swiftly in response to inflationary pressures. When held to maturity, Treasuries have virtually zero risk of losing principal. However, bond prices in the secondary market are inversely related to interest rates, so as rates rose, those bonds were sold at a loss to increase liquidity needed to fund customer withdrawals.
Panic soon set in, amplified by social media. The Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve were forced to step in and rescue the banks. Federal deposit insurance from the FDIC, however, is limited to $250,000 per customer per institution, and a majority of accounts held at these failed banks greatly exceeded that amount.
The Fed thus set up the Bank Term Funding Program (BTFP) to provide liquidity to U.S. depository institutions. Under the program, each Federal Reserve Bank would make cash advances to eligible borrowers, taking as collateral certain types of securities (those that can be purchased by Federal Reserve Banks in open market operations). Eligible borrowers include any U.S. federally insured bank, savings association, credit union, or U.S. branch or agency of a foreign bank.
The rate for term advances is the one-year overnight index swap rate plus 10 basis points, and the rate will be fixed for the term of the advance on the day when the advance is made. The size of the advance is limited to the amount of collateral pledged. Advances can be requested under the program until at least March 11, 2024.
The U.S. Department of the Treasury, using the Exchange Stabilization Fund (ESF), will provide $25 billion as credit protection to the Federal Reserve Banks in connection with the BTFP.
BTFP vs. Primary Credit Lending
The Bank Term Funding Program (BTFP) and Primary Credit Lending are both emergency lending programs created by the Federal Reserve to provide liquidity to U.S. depository institutions. However, there are some differences between the two programs.
The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions that pledge U.S. Treasuries or other qualifying assets as collateral.
The Primary Credit Lending facility is a short-term lending program that provides overnight loans to eligible depository institutions that are in generally sound financial condition and have collateral to pledge. The primary credit program is viewed as the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the Federal Open Market Committee (FOMC) target range for the federal funds rate and is normally granted on a no-questions-asked, minimally administered basis. There are no restrictions on borrowers’ use of primary credit.
How Can a Bank Request a Loan Under the Bank Term Funding Program (BTFP)?
To obtain a loan under the Bank Term Funding Program (BTFP), eligible borrowers must submit a request using a standard template email to its lending Federal Reserve Bank at the time it requests its first advance under the program. Depository institutions do not need to have a master account at a Federal Reserve Bank to borrow under the program, but they must have a correspondent relationship with an institution that does have a master account.
Are There Any Fees to Participate in the Bank Term Funding Program?
No, there are no fees associated with the Bank Term Funding Program.
Is the Bank Term Funding Program Funding Rate Available to the Public?
Yes, the Bank Term Funding Program rate will be updated daily and posted on the Federal Reserve Discount Window website.
The Bottom Line
The Bank Term Funding Program (BTFP) is a new Federal Reserve program designed to support American depositors by making additional funding available to banking institutions. The BTFP is intended as a temporary emergency measure made in response to the fallout of the failures of Silicon Valley Bank and Signature Bank in March 2023, and it is intended to last just one year unless extended.
The program offers loans of up to one year in length to eligible borrowers pledging collateral eligible for purchase by Federal Reserve Banks in open market operations. Advances under the program will be made at a fixed rate, and there are no fees to participate. Eligible borrowers can direct their questions about the program to their local Federal Reserve Bank.