The FED has a facility which is called the Bank Term Funding Program (the BTFP)
The BTFP is lending facility offered to the banks which allows banks to borrow money from the FED using the Bonds they own as collateral. The loans made are only short-term - lasting less than a year.
The Banks started to use this facility in a big way from March 2023.
There is a chart you can look at which shows the situation very clearly. Simply type “Bank Term Funding Program FRED chart” into a search engine. The chart criteria can be narrowed down to a year.
Why did Banks suddenly need to start using this facility? In short, because the Banks were in distress.
Why were they in distress? Well, because the recent round of FED rate hikes, starting back in Spring 2022, has caused significant, on-going problems for the banks.
In the past, banks bought a lot of US Bonds.
When interest rates rose, the market value of the Bonds held by banks on their books became lower. Their Bonds came to be worth less than they were when interest rates were low. This has meant that the value of their assets has declined. These are known as “unrealized loses” or “paper loses”.
We can say that the rising interest rates put the Banks under considerable financial pressure because they’re sitting on huge unrealised, paper losses as regards their Bond holdings.
It could be argued though that this needn’t be a big problem provided the banks hold the Bonds to term, because when the Bond reaches its maturity date, the Government pays out the amount owed – the par value of the Bond in technical jargon. So, perhaps no big deal.
But, what if the bank needs to raise cash all of a sudden … for whatever reason … maybe if there’s a bank run?
To raise funds, they would have to sell assets which would include the lower valued Bonds. And this would turn the unrealized paper losses into actual losses.
So basically, the banks found themselves in trouble and they’ve been thrown a lifeline by the FED.
I should say that although the BTFP was an emergency measure, I’m not sure it can be classed as a “Bailout” because it’s more of a loan. The money the banks have got has to be paid back.
Anyway, it’s important to bear in mind that last year there were a number of Bank Failures – Silvergate Bank, Silicon Valley Bank and Signature Bank went under. First Republic Bank which also got into trouble was bought up by JP Morgan Chase.
There were concerns that other Banks would go under also.
And because of the bank failures, the situation was such, that any rumours about a bank being in trouble were enough to precipitate a run on that Bank. In the parlance … there were fears about “contagion” – precipitating an even bigger crisis.
The BTFP was therefore used to shore up the banks and prevent contagion.
And, it would seem as if they’ve successfully contained the situation thus far.
Be that as it may, people have been getting their money out of banks and putting it elsewhere … into Money Market Funds.
