Federal Reserve Provides Additional Detail on New Bank Term Funding Program

Relevant Document:
BTFP FAQ

The Federal Reserve has published a frequently asked question guide, updated as of today, Monday, March 13, detailing its newly established Bank Term Funding Program, or BTFP, which will continue until “at least March 11, 2024,” according to the FAQ document.

The BTFP was announced yesterday, Sunday, March 12, following a week of turmoil in the regional banking sector with crypto-focused Silvergate Bank announcing its voluntary liquidation on Wednesday, March 8, and Silicon Valley Bank, or SVB’s placement under a Federal Deposit Insurance receivership, on Friday, March 10. Signature Bank, another bank with a significant focus on crypto assets, was closed and placed into FDIC receivership on Sunday.

Responding to the cascading failures, on Sunday, the Department of the Treasury, the Federal Reserve Board and the FDIC approved actions necessary to make all depositors, both insured and uninsured, whole, invoking the “systematic risk exception” to the FDIC’s statutory least cost test requirements. The least cost requirements would ordinarily impose losses on uninsured deposits should proceeds from the sale of the bank or its assets prove insufficient to pay the FDIC in full. Costs under the proposal will be met by a special assessment on banks, according to the release.

Under the BTFP program, eligible collateral will be valued at par (the outstanding face amount of the collateral). This provision provides significant relief to banks facing significant realized and unrealized losses on their asset portfolio resulting from the Federal Reserve’s current interest rate hiking cycle, allowing banks to avoid “haircuts” applied to collateral borrowing or losses from forced sales triggered by deposit withdrawals.

Exemplifying these potential losses on bank balance sheets, Reorg prepared a list of Silicon Valley Bank’s securities owned as of Dec. 31, 2022. The bank owned $68.2 billion of face amount of agency-issued residential mortgage-backed securities and an additional $14.5 billion of agency-issued CMBS all classified as securities held to maturity and therefore were marked at par on the bank’s balance sheet. As of Dec. 31, 2022, Silicon Valley Bank had estimated an average of 16% to 17% unrealized loss based on market prices as a percentage of cost.

The terms of advances under the BTFP are up to one year, in contrast to the 90-day max for primary credit advances. Advances made under the program will be extended at the one-year overnight index swap, or OIS, rate as of the day the advance is made + 10 bps. The interest rate will be fixed for the term of the advance on the day the advance is made. There is no limit as to amounts that an eligible depository institution can obtain from the program. Advances made under the program are made with recourse beyond the pledged collateral to the eligible borrower.

The BTFP will operate in conjunction with the Federal Reserve’s existing discount window borrowing program with approved depository institutions able to borrow from the window immediately on the same terms for BTFP - at par - rather than the ordinary fair market value margins that would ordinarily apply to otherwise prevailing discount window borrowing program, that is, “primary credit collateral.”

Banks’ ability to utilize the BTFP to sidestep HTM losses will depend on the eligible collateral that they held as of the March 12 program date.

Eligible Collateral

Eligible collateral under the program will be limited to collateral eligible for purchase by the Federal Reserve in open market operations, which is statutorily defined in CFR 201.108(b) as obligations eligible as collateral for advances and includes obligations from the following principal agencies:
 

• Federal Intermediate Credit Bank debentures;
   
• Federal Home Loan Bank notes and bonds;
   
• Federal Land Bank bonds;
   
• Bank for Cooperative debentures;
   
• Federal National Mortgage Association notes, debentures and guaranteed certificates of participation;
   
• Obligations of or fully guaranteed by the Government National Mortgage Association;
   
• Merchant Marine bonds;
   
• Export-Import Bank notes and guaranteed participation certificates;
   
• Farmers Home Administration insured notes;
   
• Notes fully guaranteed as to principal and interest by the Small Business Administration;
   
• Federal Housing Administration debentures;
   
• District of Columbia Armory Board bonds;
   
• Tennessee Valley Authority bonds and notes;
   
• Bonds and notes of local urban renewal or public housing agencies fully supported as to principal and interest by the full faith and credit of the United States;
   
• Commodity Credit Corporation certificates of interest in a price-support loan pool;
   
• Federal Home Loan Mortgage Corporation notes, debentures, and guaranteed certificates of participation;
   
• U.S. Postal Service obligations;
   
• Participation certificates evidencing undivided interests in purchase contracts entered into by the General Services Administration;
   
• Obligations entered into by the Secretary of Health, Education and Welfare under the Public Health Service Act, as amended by the Medical Facilities Construction and Modernization Amendments of 1970; and
   
• Obligations guaranteed by the Overseas Private Investment Corp., pursuant to the provisions of the Foreign Assistance Act of 1961, as amended.
   

The BTFP FAQ specifically refers to section (b) of the obligations eligible as collateral for advances. Municipal securities and other securities that are backed by “anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts,” are listed in a separate section of the rule and thus would appear to be excluded.

First Republic’s share of municipal securities as a percentage of its average balance of investment securities exceeded 50% as of Dec. 31, 2022.
 
First Republic Bank announced that it had secured a $70 billion financing facility through JPMorgan Chase on Sunday to obtain additional liquidity in addition to what the bank is “eligible to receive under the new Bank Term Funding Program announced by the Federal Reserve.”

First Republic’s stock was down 51% today to $39.76 per share at press time.