WASHINGTON, D.C. - You may recall that last year, the American economy, which was already teetering on the brink of a significant setback, survived the collapse of four banks within a few short weeks of each other. The Bank Term Funding Program (BTFP) was widely credited with stopping the bleeding.
Unfortunately, that program ends this week.
If you’re not familiar with it, the program was an emergency lending program created by the Federal Reserve last March that provided emergency liquidity to US banks. The program was established in response to the failures of Signature Bank and Silicon Valley Bank, the largest such collapses since the 2008 financial meltdown. The program provided loans lasting up to one year “to eligible borrowers pledging collateral eligible for purchase by Federal Reserve Banks in open market operations,” the WLT report wrote.
The program is scheduled to sunset on March 11. The Fed has already announced the program will cease making new loans as scheduled.
The fear is that ending the program could create a banking crisis or bank crash since the program provided an additional source of liquidity to financial institutions since the liquidity it provided would no longer exist.
If the program ends, banks that have been relying on the BTFP for liquidity may find themselves in a difficult position, potentially leading to a banking crisis or bank crash. However, the Federal Reserve has stated that the program’s ending is a planned measure and part of its effort to demonstrate support for the banking system.
In other words, as WLT noted, “The Fed just pulled the Bank’s safety net.”
In an official press release, the Fed wrote: "The Federal Reserve Board on Wednesday announced 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 approval of the Treasury Secretary."
As WLT noted, the situation has remained the same since the collapse of four banks last year; the issues have only been covered up by the BTFP program. Moreover, they highlighted that interest rates are now higher than they were in March 2023, putting extra pressure on the system.
The bottom may have already started to drop out. In January, New York Community Bancorp’s stock crashed, with trading halted to stop the bleeding. This happened after the company announced a $264 million loss in the 4th quarter, leading the stock to open on Jan. 31 down 40%. Ironically, New York Community Bank bought Signature Bank last year.
Other banks were teetering as well:
Some think bigger banks are primed for a fall–Citibank among them. Earlier this year, Citigroup slashed 20,000 jobs.
After New York Community Bank’s stock collapse, China’s Evergrande Bank, one of that country’s largest property developers, collapsed. That came after a Hong Kong court ruled it had to be liquidated after they could not restructure $300 billion in debt owed to investors.
Buckle up…we could be in for a rough ride if some of these economists are right.
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