Fed’s new “put,” the BTFP
Published on 14th March 2023
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.
“Federal Reserve Board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors”
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.
The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in GMG Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contains generic recommendation.
Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purpose.
This document is not the result of a financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.
This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.
The accuracy, completeness or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.
Risk Disclosure: This document is of summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association: www.swissbanking.org/en/home.
Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.
Information Not for Further Dissemination: This document is confidential and should not be reproduced, published, or redistributed without the prior written consent of GMG.