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The US government appears to be solely focused on strengthening public confidence in its banking system.
The United States government has swung into immediate action with the BTFP fund following a series of bank collapses that has caused widespread fears of a potential banking crisis. To this end, the US Federal Reserve Board has announced $25 billion worth of funding aimed at helping banks and other depository firms. At least, the funds will give eligible banks the liquidity they require to cater to their customers’ needs during this difficult period.
Silicon Valley Bank Fails, Sparks Contagion Fears
The action of the government follows after a series of events that happened within the last week. On March 8, Silicon Valley Bank (SVB) announced that it will be selling a significant amount of assets and stocks. Although the bank explained that its decision was aimed at raising additional capital, depositors panicked nonetheless. And at the end, a bank run on SVB eventually led to a historic failure of the bank.
Meanwhile, concerns did not end with the failed institution alone. Rumors also spread that the same factors that caused SVB to fail could spread to other banks and even beyond the banking sector. And it appears that those rumors may have been right to an extent. For instance, stablecoin issuer Circle has since admitted that it had $3.3 billion in SVB. Thus, its USDC stablecoin lost its peg to the US dollar.
US Government Intervenes with BTFP Fund
In a March 12 statement, the Federal Reserve Board explained the reason it created the $25 billion Bank Term Funding Program (BTFP). According to the board, the program will ensure that banks do not have to take from their treasuries but rather borrow from the program which will offer loans of up to one year. Part of the Fed’s statement reads:
“This is an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”
Interestingly, the US government appears to be solely focused on strengthening public confidence in its banking system. On the same day it announced the BTFP program, US Treasury Secretary Janet Yellen also approved actions for the Federal Deposit Insurance Corporation (FDIC) to make SVB depositors whole. On the same day, regulators also shut down New York-based Signature Bank, claiming that the bank posed a systemic risk.