[News Terms] US Fed ‘BTFP’... Increasing Liquidity to Block SVB Aftershock

As Part of SVB Crisis Resolution
Collateral Valued at Face Value Instead of Market Price

The U.S. Federal Reserve (Fed) announced on the 12th (local time) that it will protect all deposits and establish a 'new fund (BTFP)' to provide liquidity support to banks in order to manage the Silicon Valley Bank (SVB) crisis.

[Image source=Reuters Yonhap News]

The BTFP (Bank Term Funding Program) is designed to lend funds for one year to banks that pledge U.S. Treasury securities and mortgage-backed securities (MBS) as collateral. This aims to help banks have the capacity to meet depositors' cash withdrawal demands. The purpose is to protect deposits and strengthen the financial system's ability by continuously supplying money and credit to the economy.

The Fed explained, "The BTFP will serve as an additional liquidity supply mechanism for high-quality securities," adding, "Financial institutions will no longer need to quickly sell securities when under stress."

To guarantee the BTFP, the U.S. Treasury plans to make up to $25 billion available from the Exchange Stabilization Fund (ESF). However, the Fed stated that the likelihood of actually needing these funds is low.

A particularly notable aspect of the BTFP is that collateral will be valued at face value rather than market value. This measure is interpreted as a response to concerns that banks would receive less than face value if they sold U.S. Treasuries immediately, given that the prices of U.S. Treasuries held by banks have fallen due to the Fed's aggressive tightening.

This is also intended to prevent a second SVB crisis. Previously, SVB, which focused on loans to IT companies, was engulfed in a bank run as its major customers, tech companies, withdrew deposits rapidly. The increase in funding costs for IT companies due to interest rate hikes drained the bank's liquidity. SVB tried to put out the fire by selling existing assets such as U.S. Treasuries, but bond prices, which move inversely to bond yields, fell due to the Fed's aggressive tightening, resulting in an $1.8 billion loss. Immediately after the loss announcement, depositors made massive cash withdrawals from SVB, which disappeared into history after about 40 years since its establishment in 1982.

The Washington Post described this measure as an "unprecedented intervention," predicting that "it could ignite political controversy over the decision to protect the assets of California's tech companies, venture capitalists, and the wealthy."