BTFP becomes top source of Fed funding

Emergency lending programme accounts for over 54% of loans extended to US dealers by the central bank

The US Federal Reserve’s Bank Term Funding Program (BTFP) became the largest federal credit facility in the second half of September after loans extended to depository institutions placed into Federal Deposit Insurance Corporation (FDIC) receivership dropped significantly.

Fed data shows that between September 13 and September 20, loans to banks classified as other credit extensions (OCEs) plummeted $48.4 billion or 36.3% to $85 billion, their lowest level since March. Over the same week, BTFP advances remained mostly flat at $107.6 billion, while credit lines extended through the central bank’s discount window rose 14% to $3.1 billion.

 

The shift lifted the BTFP share of total loans from 43.3% to 53.5%, making it the largest source of credit for the first time since its inception in the wake of the Silicon Valley Bank (SVB) and Signature Bank collapses. OCEs made up 42.3% of total loans, with the Fed’s discount window accounting for 1.5%.

The latest available data for the week ending September 27 confirmed the trend, with BTFP advances accounting for 54.4% of the total, following another 3.7% drop in OCEs.

On aggregate, the Fed’s credit facilities extended $198.1 billion to banks as of September 27, down 1.5% on the week prior.

 

What is it?

Other credit extensions include outstanding loans to depository institutions that were subsequently placed into FDIC receivership. The Fed originally extended these loans via its discount window to SBV, Signature and First Republic Bank, and in one instance via the BTFP. The loans were secured by pledged collateral and supported by an FDIC guarantee of repayment. The Fed expects all the loans to be repaid in full before the end of 2023.

The Bank Term Funding Program was set up by the Federal Reserve in response to SVB’s collapse, to provide liquidity to banks, savings associations, credit unions and other eligible depository institutions.

The BTFP provides funding for up to one year in exchange for eligible collateral owned by the borrower as of March 12, 2023. This includes US Treasuries and US agency securities, including mortgage-backed securities.

The data for this analysis comes from the Federal Reserve’s weekly statistical release on factors affecting reserve balances.

Why it matters

Loans under the OCEs umbrella rose from nil on March 8 to $142.8 billion the following week, and $180.1 billion by March 23, as the 2023 banking crisis was in full swing. Since then, those lines of fundings have gradually eased off, bar a spike in early May after First Republic Bank was placed into receivership, which meant loans extended through the Fed’s discount window and the BTFP were shifted to the OCEs pen.

The stark drop in mid-September is thus a departure from the previously observed trend. The cause behind the fall is not clear, but it likely stems from the repayment of a chunk of the outstanding loans. The Federal Reserve did not respond to a request for comment in time for publication.

The BTFP, unlike the discount window, remains a substantial source of funds for US banks six months after the onset of the March crisis. The programme is set to cease for new advances on March 11, 2024, with details of those who drew upon the facility to be made public a year later.

The overall drop in Fed advances will be good news for the banks offloading them, as the high rates on loans make them unappealing for long-term use.

 

Update, October 3, 2023: A statement published by the US Treasury on September 15 identifies JP Morgan - which purchased First Republic Bank on May 1, 2023 - as the source of a repayment of $49.4 billion.   

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