In remarks at an event in Paris, Richard Ostrander, general counsel and head of the Legal Group at the New York Federal Reserve General Counsel and Head of the Legal Group, provided an attorney’s perspective on the Federal Reserve’s Bank Term Funding Program (or the BTFP), which helped stabilize the banking system following the failures of Silicon Valley Bank (or SVB) and Signature Bank.
Over the weekend of March 11 and 12 2023, after several bank failures, the Fed designed the BTFP to support the stability of the broader financial system by providing a source of financing for banks with Treasury, Agency and other eligible holdings whose market value had significantly diminished given interest rate increases.
Market participants were very focused at the time on banks with large, unrealized losses in their holdings of these sorts of securities. The rapid deposit growth of both SVB and Signature in the wake of the pandemic resulted in these banks holding quite large Treasury and Agency positions relative to their overall balance sheet. Where a bank is holding securities on its books as “held to maturity”, changes in market value do not affect book equity or regulatory capital.
Along with the goal of enabling financing up to the face value of these securities, the Fed concluded it would be helpful to the borrowers for the term of the loan to be set at one year. The thinking was that committed financing of these securities would significantly mitigate any concerns market participants had that a bank would need to realize losses on these securities. If a bank decided it did not want the financing for a full year, the BTFP loan could be repaid before maturity without penalty.
Having decided the facility should be set up to lend against the face value of the securities and for up to a year, the next question was, “How could the program be up and running by Monday morning?”
There was not enough time to set up special purpose vehicles as the Fed had done for some of the pandemic programs. The only way to have the program up and running so quickly was to leverage our discount window facilities, so the Fed went to an act authorizing specialized lending in unusual and exigent circumstances.
The US banking sector stabilized thanks, in part, to the BTFP assuring markets that banks with underwater government securities portfolios can use those to generate liquidity on the basis of their par value. It helped avoid a fire sale. As of May 31, the total outstanding amount of advances under the Program was approximately $107 billion, while the collateral pledged to secure the loans was approximately $129 billion.
Three Lessons for banks and supervisors are: contingent liquidity preparedness given the speed and magnitude of recent bank runs; follow-up on supervisory findings by bank leadership; effective challenge in corporate governance as sustained success made it more difficult for bank boards and senior management to recognize weaknesses.