Among measures to counter fallout from the failure of , the Federal Reserve for banks: the . This is an ongoing story related to SVB and other regional banks that we are watching.
The facility will allow banks to take advances from the Fed for up to a year by pledging Treasurys, mortgage-backed bonds and other debt as collateral. By allowing banks to pledge their bonds, they can meet customer withdrawals without having to sell their bonds at a loss, which is what Silicon Valley Bank did last week, sparking a run on the bank.
The biggest draw of this facility is that banks can borrow funds equal to the par value of the collateral they pledge, . This means that the Fed won’t look to the market value of the collateral, which in many cases reflect big unrealized losses due to the jump in interest rates.
That is a boon for banks, who were sitting on some $620 billion in unrealized losses on securities at the end of last year, according to the Federal Deposit Insurance Corp.
The Fed also won’t demand that banks pledge collateral in excess of the advances they are taking, which is typically the case when banks borrow from, say, the Federal Home Loan Bank system.
And if banks can’t repay all the advances in a year’s time? The Treasury Department is providing $25 billion of credit protection to the Fed just in case. “The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds,” the Fed said in its announcement Sunday night.
Read more from WSJ:
Federal Reserve Board announces BTFP
On March 12, 2023, the it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. For release at 6:15 p.m. EDT March 12, 2023
To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.
The Federal Reserve is prepared to address any liquidity pressures that may arise.
The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.
$25 billion from the Exchange Stabilization Fund
With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.
The capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient.
Depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window.
The Board is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.
