What Is The Fed’s Bank Term Funding Program (BTFP)?

UTC by John Caroline · 5 min read
What Is The Fed’s Bank Term Funding Program (BTFP)?
Photo: Depositphotos

Let’s explore the Federal Reserve’s Bank Term Funding Program in order to understand how it supports the flow of credit during economic uncertainties.

On March 12, 2023, the Federal Reserve Board announced the launch of a new lending program called the Bank Term Funding Program (BTFP). While its operational services took effect from the same date,  the BTFP features a design that helps to provide additional funding to eligible depository institutions to ensure that they can meet the needs of their depositors and support American households and businesses.

Under the program, banks can borrow funds from the Federal Reserve for terms ranging from overnight to three years. The program was initially considered in March 2020 in response to the COVID-19 pandemic to support the flow of credit to households and businesses.

The BTFF is relevant because it helps to ensure that banks have access to the liquidity they need to continue lending during times of market stress. By providing term funding at a low cost, the BTFF encourages banks to continue lending, even if they are facing funding pressures in the short-term funding markets. This helps to maintain the flow of credit to households and businesses, which is important for supporting economic growth and stability. Nonetheless, let’s look further into all that the Fed’s Bank Term Funding Program entails.

Bank Term Funding Program Defined

As said earlier, the Bank Term Funding Program (BTFF) is a lending facility created by the Federal Reserve to provide term funding to eligible banks. It aims to support the flow of credit to households and businesses during times of market stress and economic uncertainties like the distressing COVID-19 pandemic.

The program offers loans of up to one year to banks, savings associations, credit unions, and other eligible institutions, using collateral that is eligible for purchase by the Federal Reserve Banks in open market operations, including US Treasuries, US agency securities, and US agency mortgage-backed securities.

The value of the collateral will be determined at par. By offering liquidity against high-quality securities, the BTFP aims to eliminate the need for institutions to sell these assets quickly in times of stress, providing an additional source of funding to support financial stability.

Terms of BTFP

While the Bank Term Funding Program (BTFP) is designed to provide liquidity to US depository institutions, it requires each Federal Reserve bank to make advances to eligible borrowers, taking as collateral certain types of securities.

Other terms of the program noted by the Fed further stated that any US federally insured depository institution, including a bank, savings association, credit union, or US branch or agency of a foreign bank that is eligible for primary credit is eligible to borrow under the BTFP. Eligible collateral includes any collateral eligible for purchase by the Federal Reserve banks in open market operations, provided that such collateral was owned by the borrower as of March 12, 2023.

Also, the advances made under the program will be limited to the value of eligible collateral pledged by the eligible borrower. The rate for term advances will be the one-year overnight index swap rate plus 10 basis points. The rate will be fixed for the term of the advance on the day the advance is made.

Meanwhile, the collateral valuation will be equal to the par value, and the margin will be 100% of the par value. Borrowers may prepay advances (including for purposes of refinancing) at any time without penalty. Advances will be made available to eligible borrowers for a term of up to one year, and there are no fees associated with the program.

Its terms further noted that the Department of the Treasury, using the Exchange Stabilization Fund, will provide $25 billion as credit protection to the Federal Reserve banks in connection with the program. Advances made under the program are made with recourse beyond the pledged collateral to the eligible borrower.

Conclusively on the terms of the program, advances can be requested under the program until at least March 11, 2024.

Who Is Eligible to Participate in the BTFP?

Under the Bank Term Funding Program (BTFP), an “Eligible Borrower” refers to any US federally insured depository institution such as a bank, savings association, or credit union. Additionally, US branches or agencies of foreign banks that qualify for “primary credit” under the Federal Reserve discount window are also considered eligible.

According to the 12 C.F.R. § 201.4(a), an institution can qualify for “primary credit” if it is determined to be in a generally sound financial condition by the Federal Reserve Bank. However, the BTFP does not extend to depository institutions eligible for secondary credit or non-depository institutions.

Eligible borrowers may borrow an unlimited number of times under the BTFP. The borrowing limit is capped at the par value of all eligible collateral that the borrower can pledge to the Federal Reserve.

Conclusion

To sum it all up, the Bank Term Funding Program (BTFP) is a program introduced by the Federal Reserve Board to provide liquidity to US depository institutions. The program allows eligible borrowers, including banks, savings associations, and credit unions, to obtain loans of up to one year in length by pledging certain types of securities as collateral. Eligible collateral includes assets such as US Treasuries, US agency securities, and US agency mortgage-backed securities.

The BTFP is intended to be an additional source of liquidity against high-quality securities, eliminating the need for institutions to quickly sell those securities in times of stress. Hence, the BTFP is a significant tool that the Federal Reserve can use to support the economy during times of financial stress, helping to ensure the stability and resilience of the US financial system.

Share:

FAQ

What is the Bank Term Funding Program?

The Bank Term Funding Program (BTFF) is a lending facility created by the Federal Reserve to provide term funding to eligible banks.

Why did the Federal Reserve establish the Program?

The Federal Reserve established the program to serve as a tool they can use to support the economy during times of financial stress, helping to ensure the stability and resilience of the US financial system.

How is the BTFP different from primary credit?

The Bank Term Funding Program (BTFP) differs from primary credit lending in several ways, which include eligible collateral, margin, term, and rate.

Note that eligible collateral under the BTFP is limited to collateral that is eligible for purchase by the Federal Reserve in open market operations. In contrast, primary credit accepts a wider range of securities and loans. Collateral valuation under the Program is at par value, which is equivalent to the outstanding face amount of the collateral, whereas primary credit values collateral at its fair market value.

Moreso, the margin applied to eligible collateral is different under the two programs. The Program has no haircuts applied to eligible collateral, whereas primary credit applies margins used for securities eligible for the Program, increasing the lendable value at the discount window. The margins for other collateral eligible for the discount window but not eligible for the Program are not affected.

Advances made under the Program may have a term of up to one year, while advances under primary credit may be made for up to 90 days. The rate for term advances under the Program will be the one-year overnight index swap rate plus 10 basis points, and the rate will be fixed for the term of the advance on the day the advance is made. In contrast, with primary credit advances, if the primary credit rate is changed while a term primary credit loan is still outstanding, the new rate applies on and after the effective date of the change.

When and how long will the BTFP be in effect?

The BTFP is open until at least March 11, 2024, being an estimated period of 3 years.

Who is eligible to participate in the BTFP?

Any US federally insured depository institution such as a bank, savings association, or credit union is considered eligible under the Bank Term Funding Program. Also, US branches or agencies of foreign banks that qualify for “primary credit” under the Federal Reserve discount window are also considered eligible.

guides
Understanding Meme Coin Basics May 3rd, 2024

Meme coins' popularity is driven mostly by influencers' activity on social media platforms. In this guide, we will discuss in deta...

Introduction to Meme Coins April 18th, 2024

In this guide, we will introduce you to the concept of meme coins, their origin, evolution, branding, unconventional nature, and c...