The Fed’s Bank Term Funding Program Expires Soon

A bank sitting on a digital circuit board.

Federal Reserve Chairman Jerome Powell has repeatedly assured the American people that the banking system is “sound and resilient” after massive failures reverberated throughout financial markets last year. Since that time, certain situations have challenged this claim – like the failure of First Republic Bank – but the Fed’s next action will truly put the strength of the banking system to the test.

The Fed recently announced that they will allow the Bank Term Funding Program [BTFP] to expire on March 11 as scheduled. After the announcement, many business leaders are wondering: what does the end of this emergency program mean for the banking industry and the safety of corporate cash?

What is the BTFP and why was it necessary?

The BTFP was established in March 2023 following the collapse of Silicon Valley and Signature banks. During this time, interest rates were rising rapidly, so most banks had significant unrealized losses in their debt portfolios – due to the inverse relationship between interest rates and bond prices.

The BTFP offered loans with terms that extended up to one year for struggling banks, savings associations, credit unions, and other depository institutions. These loans were secured with collateral such as Treasuries, agency debt, and mortgage-backed securities, which were rapidly losing market value.

The biggest benefit of the program to banks is it allows them to value the assets they pledged as collateral at par – also known as face value – rather than the current market value. In this way, the BTFP offered banks an alternative to raise funds without selling assets and realizing large losses on their balance sheets.

Has the BTFP prevented bank failures?

The BTFP aimed to prevent the most common cause of historical bank failures – panic-induced bank runs. At first glance, the program appears successful in accomplishing this goal.

A look at historical data indicates that Americans pulled over $330 billion in deposits from U.S. banks during the month of March 2023 as news of banking turmoil spread. This sharp drop in deposits was reminiscent of bank runs of the past. Fortunately, the exodus slowed by April – after the introduction of the BTFP – and deposit levels were relatively flat for the rest of the year.

Along with more stable deposit levels, only three additional banks failed in 2023 after the inception of the BTFP. While any bank failure is troubling for depositors, the number of bank failures was remarkably low compared to other periods of banking turmoil. For comparison, 140 banks failed in 2009 and 157 failed in 2010 during the last severe test of the banking system.

The BTFP appears successful based on relatively stable deposit levels and a low number of bank failures after the program was introduced. However, the precise impact of the BTFP is difficult to measure – especially given the unintended uses of the program.

Unintended Uses of the BTFP Make It Difficult to Measure Success

Loans under the program were issued at a lower rate than banks could earn on excess reserves. This discrepancy allowed banks to borrow from the BTFP and deposit those funds at the Fed for a virtually risk-free profit.

The Fed closed the loophole on January 24 by raising the interest rate on new BTFP loans to ensure it is not below the rate paid for reserve balances. However, the loophole makes it difficult to say how much of the over $165 billion in outstanding loans was necessary for bank liquidity and how much was simply borrowed for profit.

What does the end of the BTFP mean for the banking industry?

With the conclusion of the BTFP on March 11, no new loans will be offered to struggling banks under the program. This could test the resilience of the banking industry, and the liquidity of some banks.

While the BTFP will be ending, the issues that made it necessary will not. In fact, the most recent data from the FDIC reports that banks had $683.9 billion in unrealized losses in the third quarter of 2023 – up 22.5% from the previous quarter.

Without the BTFP, banks will not have an option to borrow against these securities at par value. That leaves the options of selling them or finding an alternative funding source to meet unexpected liquidity needs.

Banks Will Start Repaying BTFP Loans This Month

The $62 billion in loans issued within the first 3 weeks of the BTFP will come due in March. Americans can only hope that the banks that borrowed these funds have used the past year to solve their liquidity issues.

Many questions remain as the end of the BTFP program approaches. Can banks repay what they borrowed? Has a year been enough to solve the issues they faced? How can companies ensure their cash is safe if banking turmoil reemerges? The last question, at least, has a simple answer.

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With the possibility of banking turmoil once again on the horizon, cash managers need to ensure their company’s funds are safe. At the American Deposit Management Co. [ADM], we have the tools and technology to help you achieve the strongest protection available for your cash.

Our deposit management solution provides access to extended government protection from the FDIC or NCUA by spreading cash across our nationwide network of over 400 financial institutions. This ensures that your balance at each bank is under the applicable limit and all your cash is covered. Our solution also offers nationally competitive returns and liquidity to match your schedule – all with one account and one consolidated monthly statement.

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