More than 1,600 financial institutions and their subsidiaries accessed the Federal Reserve’s emergency lending program, created to support the sector during the regional banking crisis two years ago. Notably, Beal Bank USA and First Republic Bank emerged as the largest borrowers under the Bank Term Funding Program (BTFP), with each securing loans exceeding $8 billion at their peak. Data released by the Fed on Wednesday highlights the extensive use of this program, which was launched in March 2023 to enhance liquidity after the collapse of Silicon Valley Bank.
At its height, the BTFP saw banks borrow a total of $168 billion during a single week, ranging from global systemically important financial institutions to smaller community banks. The program was designed to help stabilize the financial system during a period of heightened uncertainty, triggered by the unprecedented failure of Silicon Valley Bank and the subsequent regional banking turmoil. The Fed’s decision to activate the BTFP was based on the “unusual and exigent circumstances” of early 2023, when investors feared a larger banking crisis might unfold.
The BTFP addressed one of the most pressing challenges faced by banks that year: providing financial institutions with access to liquidity for up to one year. The program came at a time when the Federal Reserve had been raising interest rates at a pace unseen since the 1980s, prompting investors to shift their funds into safer, higher-yielding assets such as Treasury bills and money market instruments. As a result, banks experienced a decline in deposits, forcing them to increase rates on products like certificates of deposit and tap into wholesale funding markets.
With the introduction of the BTFP, the fears surrounding deposit withdrawals and unrealized losses on securities were alleviated. While some financial institutions were quick to take advantage of the program, it did not come without its controversies.
In particular, some banks used the loans for arbitrage opportunities. In late January 2024, institutions could borrow funds through the program at an interest rate of approximately 4.90%, or the one-year overnight index swap rate plus 10 basis points. These funds could then be deposited back into the Fed at the higher interest rate of 5.4% on reserve balances, generating a risk-free profit. The BTFP loans also offered generous terms, including the ability to repay early without penalty and use US Treasuries and agency debt as collateral, valued at par.
The program’s use peaked as some lenders sought to capitalize on these favorable terms. However, following a revision to the loan rate by the Fed, the demand for BTFP loans sharply declined. After the rate adjustment, many banks accelerated repayments, with the Fed’s half-percentage point interest rate cut in September making it more advantageous for institutions to repay their loans.
The Fed’s subsequent rate-cutting cycle has led to further loan repayments, culminating in the final BTFP loans due on March 11, 2025. Despite the controversy surrounding its use, the program has been a critical tool in stabilizing the banking sector during a tumultuous period.
Related topic:
EU Slaps Retaliatory Tariffs on U.S. Amid Trade Tensions
Bank of Canada Navigates Economic Turmoil Amid US-Canada Trade Dispute
