Fed’s emergency lending program giving ‘easy money’ to banks to end from today

The Federal Reserve, the US central bank is terminating the bank term funding program (BTFP) on March 11. The program was started a year ago in reaction to the failures of several US regional banks.

The Federal Reserve Board announced that the Bank Term Funding Program (BTFP) will cease making new loans as scheduled on March 11. The program will continue to make loans until that time and is available as an additional source of liquidity for eligible institutions.

During a period of stress last spring, the Bank Term Funding Program helped assure the stability of the banking system and provide support for the economy. After March 11, banks and other depository institutions will continue to have ready access to the discount window to meet liquidity needs.

As the program ends, the interest rate applicable to new BTFP loans has been adjusted such that the rate on new loans extended from now through program expiration will be no lower than the interest rate on reserve balances in effect on the day the loan is made.

This rate adjustment ensures that the BTFP continues to support the goals of the program in the current interest rate environment. This change is effective immediately. All other terms of the program are unchanged.

The BTFP was established under Section 13(3) of the Federal Reserve Act, with the approval of the Treasury Secretary.

The Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help ensure banks can meet the needs of all their depositors.

The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities.

These assets will be valued at par. The BTFP is an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

However, the market doesn’t need to be concerned right away. In addition to having an additional year to get used to the higher interest rates, banks can still borrow money from the Fed through a different channel known as the discount window.

Although it is doubtful that the BTFP’s termination will force banks out of business, it might be the first in a string of blows that spark a new crisis in the months to come.