On March 10 and 12, respectively, the Silicon Valley Bank (SVB) and Signature Bank were taken into receivership by the Federal Deposit Insurance Corporation (FDIC) after large and sudden withdrawals by their depositors. The government then responded swiftly to concerns that arose about the systemic risk these failures posed with several actions designed to stabilize the banking system. The US’ Congressional Research Service (CRS) provides insight discusses the Federal Reserve’s (Fed’s) actions, including the creation of the Bank Term Funding Program (BTFP).
To create this program, the Fed used emergency authority. As required by statute, the Fed Board of Governors unanimously found “unusual and exigent circumstances” to justify its creation and the program was approved by the Treasury Secretary. Treasury pledged $25 billion in assets from the Exchange Stabilization Fund (ESF) to backstop potential future losses that the program might incur.
According to the Fed’s balance sheet, as of March 29, advances from the BTFP totaled $64.4 billion. The discount window showed significantly more activity, peaking at $152.9 billion on March 15, and most recently at $88.2 billion as of March 29. Lending through the discount window surpassed lending during the 2008 financial crisis and the pandemic. According to its balance sheet, the Fed has also lent about $180 billion to the “bridge banks” established by the FDIC to resolve SVB and Signature Bank as of March 29, 2023. According to the Fed, these loans are fully collateralized and guaranteed by the FDIC, so they pose no risk to the Fed.
Compared to the financial crisis, current Fed lending to banks has been lower but it is still significantly higher than during normal conditions and about 6.5 times higher than it was during the COVID-19 pandemic. Thus far discount window lending has been higher than in these episodes, but use of the temporary crisis program has been smaller. Discount window lending has been higher than normal since February 2022.
The creation of the BTFP raises several issues for Congress:
- Moral hazard: the favorable BTFP terms, notably collateral valuation at par, reduces the incentive for banks to manage interest rate risk if they believe the Fed will lend them money regardless of the market value of the securities pledged.
- Exchange Stabilization Fund (ESF) backing: the BTFP is being backed by ESF funds. This could be controversial given that it is not the originally intended use of the ESF and similar actions were prohibited in the past.
- Inflation: the BTFP increases the size of the Fed’s balance sheet, and could, therefore, increase inflationary pressures at a time when the Fed has been raising interest rates to reduce inflation.
- Risk: the BTFP requires high quality collateral and is backed by ESF funds, minimizing the risk of losses to the Fed.
- Transparency: the Fed is required to disclose participation with a one-year lag. The lagged release is meant to balance desires for transparency with the stigma that could be associated with an immediate release.