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

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.