by Mish Shedlock, Mish Talk:
I was asked about the Bank Term Funding Program (BTFP) to provide Liquidity to Depository Institutions. Let’s check it out.
What is the BTFP?
The St. Louis Fed says the Bank Term Funding Program Provides Liquidity to Depository Institutions
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On March 12, the Federal Reserve launched the Bank Term Funding Program (BTFP), a lending program for eligible depository institutions—banks, savings banks and credit unions—experiencing liquidity issues. The goals of the BTFP are to bolster institutions’ capacity to safeguard deposits and ensure the ongoing provision of credit to communities and the broader economy.
Use of the BTFP reduces the need for an institution to quickly sell securities, perhaps at a loss, in times of stress.
The Fed started the BTFP program in the wake of the collapse of Silicon Valley Bank.
Small regional banks overleveraged in long term treasuries and were clobbered by paper losses and then bank runs.
In response, the Fed agreed to shield the banks from losses by offering swaps at par value, ignoring the losses.
BTFP Terms
- Eligible Collateral—Direct obligations of certain U.S. government agencies, including the U.S. Department of the Treasury, government-sponsored enterprises such as Fannie Mae and Freddie Mac, and the Federal Home Loan Banks. In addition, mortgage-backed securities issued and/or fully guaranteed by Ginnie Mae, Fannie Mae and Freddie Mac are eligible.
- Loan Terms—Institutions may borrow up to the value of eligible collateral pledged. Collateral is valued at par, i.e., with no haircuts. Loans can be prepaid at any time without penalty. The rate is fixed for the life of the loan (up to one year) and is calculated by adding 10 basis points to the overnight index swap rate. The rate is published daily on the Discount Window website. Advances will be available until March 11, 2024, or longer if the program is extended.
How is Collateral Valued?
The collateral valuation will be par value or equal to the outstanding face amount. Margin will be 100% of par value. There will be no haircuts applied.
