SMP: Bank Term Funding Program Discounts the Discount Window

Here is my latest for AIER’s Sound Money Project on the new Bank Term Funding Program Discounts.

The Federal Reserve is tasked with ensuring the stability of the financial system in the United States. Following the failures of Silicon Valley Bank (SVB), Signature Bank, and Silvergate Bank in March, the Fed introduced a new facility called the Bank Term Funding Program (BTFP). The BTFP “offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.” 

The BTFP is set to expire on March 11, 2024, but the Fed may choose to renew it. The BTFP functions similarly to the discount window, through which the Fed offers overnight loans to banks in need of liquidity at a premium rate of interest. To use the discount window, troubled banks must provide collateral valued at market prices (mark-to-market). If the bank fails, the Fed can recover the discount loan by selling the pledged collateral on the market. The discount window is safe for the Fed because of its collateral policy.

Continue reading at Sound Money Project.