Fed’s new « put, » the BTFP
Last night the Fed announced a new type of a « put, » this time on the US BANKING SYSTEM by announcing the creation of the Bank Term Funding Program (BTFP).
From the Fed press release, « The Federal Reserve is prepared to address any liquidity pressures that may arise. » The central bank has stepped into a new and critical role, almost entirely as the backstop for the US banking system.
The SVB collapse in our interconnected digital age has been a rude awakening for authorities and the central bank. On the first sign of bad news, money can move lightning fast and put institutions, industries, and economies at risk. SVB lost USD42 billion of the depositor and investor assets within 24 hours, destabilizing SVB and making it unable to function. Fears raged across « wall street, » and policy-making circles on now quickly negative news about a generally highly regarded institution brought it to its knees and put it under FDIC receivership, shutting the bank down.
In response to this panic, the Fed has decided to be the backstop by announcing last night (6:15 pm EST) that it will make additional funding available to eligible depository institutions to help assure banks can meet the needs of all depositors. This additional funding will be made available through a new Bank Term Funding Program (BTFP), with the facility backstopped by the US Treasury providing USD25 billion from the Exchange Stabilization Fund.
Under the BTFP, US depository institutions can obtain liquidity against collateral such as US Treasuries, mortgage-backed securities, and other instruments. Thus the risk shifts from banks to the Fed as it will be taking on collateral underwater.
The BTFP should put to rest most concerns about any further negative spillover from SVB or any other bank failure. And it will allow the Fed to continue its inflation fight hike rates, but perhaps a bit more cautiously.
Portfolio Implications – The new Fed put, the BTFP, is a game changer, a major step from the Fed. While it is still a bit too early to see how this plays out and while it does create other issues and moves moral hazard to a new level, it should restore some calm in markets.
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