CRS Compares Federal Reserve's Bank Term Funding Program with Discount Window
Commentary by Steven Lofchie
The Congressional Research Service ("CRS") compared the existing Federal Reserve Bank ("FRB") discount window with the new FRB's Bank Term Funding Program ("BTFP") being used in response to the failures of Silicon Valley Bank and Signature Bank.
As previously covered, CRS stated that the BTFP provides certain banks with loans that have "more favorable terms" than those currently offered through the FRB’s discount window. These include up to one year maturity, and "only collateral that is eligible for purchase by the Fed in open market operation" with collateral valuation set at par value. CRS contrasted these terms with the discount window which has a maturity of no more than 90 days, can be backed by a wider range of securities and loans and which bases collateral valuation on market value rather than on par value. CRS said that as of March 29, 2023, loans from the BTFP total $64.4 billion as compared to the discount window at $88.2 billion (which had peaked on March 15, 2023 at $152.9 billion).
CRS explained that the BTFP was designed to offer additional liquidity in order to help banks meet the needs of their depositors and stabilize the banking system. CRS said it is not the first time the FRB has created programs in response to a financial crisis. The report noted that the Term Auction Facility was created to help the banking system in 2007 to auction reserves to banks utilizing the lending authority for the discount window. Other current stabilizing efforts reviewed by CRS included lending approximately $180 billion to "bridge banks" to help resolve their obligations. CRS said that the amount at issue in the current stabilization effort is lower than during previous times of crises.
CRS described policy issues that have arisen from the creation of the BTFP, related to:
- Moral Hazard. The collateral valuation of BTFP at par decreases the incentives for banks to manage their own interest rate risks if the Fed will loan them money regardless of the market value of the collateralized securities.
- Exchange Stabilization Fund ("ESF") The use of ESF funding for banking stabilization may run afoul of its intended purpose.
- Inflation. BTFP increases the Fed's balance sheet which may further increase "inflationary pressures" when the Fed has already been raising interest rates.
- Transparency. The one-year lag of required disclosure reporting is "meant to balance desires for transparency with the stigma that could be associated with an immediate release."
Commentary
Because the collateral posted by the banks is valued at par, which will generally be higher than market value given the sharp rise in inflation and interest rates, the Federal Reserve Board is effectively lending on a partially unsecured basis.
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