Will the Fed’s New Liquidity Facility Restore Confidence?

On Sunday, the Federal Reserve announced a new program to provide liquidity to banks and other depository institutions buffeted by the ongoing crisis. The Bank Term Funding Program offers loans from 90 days to 12 months in duration, with no minimum or maximum borrowing amounts. In exchange for funding, banks and other prospective borrowers can pledge U.S. Treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral.

Operation of the Program

Prospective borrowers can submit a request using a standard email template available on the Bank Term Funding Program website. The interest rate is set at the overnight index swap rate on the day the loan is made, plus ten basis points, and fixed for the life of the loan. As of Monday, the program’s first full day of operations, the rate was 4.83%. In addition, the Federal Reserve will publish weekly reports detailing aggregate program activity, with individual borrower information disclosed a year after the program’s expiration in March 2024.

Background

The new program follows on the heels of the now-shuttered Silicon Valley Bank’s plan to sell $21 billion of available-for-sale securities at a steep discount to compensate for deposit outflows. The bank had expected to recoup some of the losses from the securities sale by raising $2.25 billion in fresh capital. Still, that plan quickly collapsed, sparking a run on the bank, which eventually led to its closure. Shortly after, regulators shut down the crypto-friendly Signature Bank, creating further concerns about the systemic health of the banking system.

Related Facts

• The Bank Term Funding Program aims to bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy.
• The program is designed to accept qualifying assets at par value rather than their current market value, which has been affected by rising interest rates.
• Prospective borrowers can request loans through a standard email template on the Bank Term Funding Program website.
• Interest rates are set at the overnight index swap rate on the day the loan is made, plus ten basis points, and fixed for the life of the loan.

Key Takeaway

The Fed’s new liquidity facility aims to shore up confidence in the banking system and provide a cushion for institutions hit by the ongoing crisis. However, the program’s success will ultimately depend on whether banks and other eligible institutions take advantage of it and whether it can effectively prevent further failures.

Conclusion

While it’s too early to tell whether the Bank Term Funding Program will succeed in restoring confidence in the banking system, it is a crucial step in ensuring the ongoing provision of credit and money to the economy. As a result, the program’s success will be closely watched over the coming weeks and months.