Behind the SCENES: Banks are Tapping the Bank Term Funding Program
Posted on 11/30/2023
In March 2023, the Federal Reserve Board revealed it would make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The Federal Reserve created a new Bank Term Funding Program (BTFP). The program offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. With approval of the Treasury Secretary, the Department of the Treasury made available up to US$ 25 billion from the Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds. These banks’ ability to borrow against the face value of their bond portfolios is good for the banks given the major drop in bond prices from rising interest rates.
According to the Federal Deposit Insurance Corporation (FDIC), unrealized losses on investment securities held by U.S. banks reached US$ 684 billion for the third quarter of 2023. These losses are partially caused by rising mortgage rates that reduce the value of mortgage-backed securities held by these banks.
On July 31, 2023, the Bank Term Funding Program reached US$ $119,127,391,000. As of October 31, 2023, the total outstanding amount of all advances under the BTFP was US$ 120,605,902,000. The Board continues to expect that the BTFP will not result in losses to the Federal Reserve.
Small Run on Bond Funds
The Federal Reserve also realized that bond funds experienced net outflows each day for almost three weeks after the run on Silicon Valley Bank (SVB), and that these outflows were experienced diffusely across the entire segment. The outflows from bond funds may have been an unintended consequence of the exceptional measures taken to strengthen the balance sheet of banks during this time. In aggregate, the Federal Reserve staff calculated the net bond fund outflow was about US$ 15 billion, which is a tiny fraction of the overall bond fund market.
T-Bill Supply
According to the Liberty Street Economics fed blog, “Take-up at the Federal Reserve’s Overnight Reverse Repo Facility (ON RRP) increased from a few billion dollars in January 2021 to around $2.6 trillion at the end of December 2022. In this post, based on a recent Staff Report, we explain how the supply of U.S. Treasury bills (T-bills) affects the decision of money market mutual funds (MMFs) to invest at the facility. We show that MMFs responded to a reduction in T-bill supply by increasing their take-up at the ON RRP, helping to explain the increased overall take-up.
MMFs’ Demand for U.S. Treasury Securities
U.S. MMFs are open-end mutual funds regulated by the Securities and Exchange Commission (SEC) that can only invest in safe and highly liquid money-market instruments denominated in U.S. dollars. Among such instruments, U.S. Treasury securities are especially relevant because of their safety and liquidity. Since MMFs cannot hold securities with a remaining maturity greater than 397 days, T-bills are an especially appealing investment option for them. MMFs’ demand for Treasury securities, moreover, has grown significantly since October 2016, when the Securities and Exchange Commission (SEC) implemented an important reform of the MMF industry; this reform led to an increase in assets under management of more than $1 trillion for government MMFs—a type of MMF that can only hold Treasury securities, agency debt, or repurchase agreements collateralized by these assets.”
LINK: https://libertystreeteconomics.newyorkfed.org/2023/11/treasury-bill-supply-and-on-rrp-investment/
Keywords: Federal Reserve System.
