BTFP lending hits record high amid lower rate

Emergency facility extended $8bn at the start of the December, more than previous three months combined

Lending via the Bank Term Funding Program, the emergency lending facility introduced by the US Federal Reserve following the March banking crisis, hit a new record in the first week of December, with just three months to go until the programme is wound down.

As of December 6, the BTFP had $121.7 billion loans outstanding, the most since its inception on March 12. Advances during the first week of the month rose $7.8 billion, more than in the previous three months combined, which saw much more gradual weekly increases.

 

Over the same week the remaining $33.9 billion of ‘other credit extensions’, which include loans to depository institutions from the Federal Deposit Insurance Corporation, was fully paid off, in line with the Fed’s expectation that these loans would be repaid by the end of the year.

The BTFP continues to be the largest federal credit facility, accounting for 95.5% of advances to banks. At $3.7 billion, the Paycheck Protection Program Liquidity Facility made up 2.9% while the discount window accounted for the remainder, with $2 billion. 

Overall lending from federal facilities has more than halved since its March 22 peak, sitting at $127.4 billion as of December 6.

 

What is it?

The Bank Term Funding Program was set up by the Federal Reserve in response to the collapse of Silicon Valley Bank, 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. Whereas the discount window – the Fed’s longest-standing tool to provide liquidity to banks – values collateral mark-to-market, the BTFP uses the collateral’s par value.

Other credit extensions included outstanding loans to depository institutions that were subsequently placed into FDIC receivership. The Fed originally extended these loans via its discount window to SVB, 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 data for this analysis comes from the Federal Reserve’s weekly statistical release on factors affecting reserve balances.

Why it matters

The BTFP is expected to shut down in March 2024, yet the appetite for the programme is only growing. Despite this, an extension seems unlikely. The BTFP was created in accordance with section 13(3) of the Federal Reserve Act, clearly requiring “unusual and exigent circumstances” for such a programme to exist.

Risk Quantum understands that the $7.8 billion rise is unrelated to the paying off of loans to banks now in FDIC receivership, nor does it suggest heightened financial stress at US lenders. Instead, it may be better explained by the attractiveness of the programme’s interest rate, which dropped to 5.1% as of December 6 from 5.23% the previous week, and 5.38% a month earlier. This compares to the current 5.25–5.5% range of the Federal funds rate.

 

Lending from other federal credit facilities has declined rapidly since the March crisis, driven by falls in the discount window and other credit extensions. If lending is to fall further, it will have to come from the BTFP, and it will likely take the ending of the programme to set the return to pre-crisis lending figures in motion. 

How long that takes will depend in large part on the term length of the loans. With a maximum duration of a year, BTFP loans could conceivably stick around until March 2025.

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