US Fed Floats Plan to Help Banks Avoid Future Liquidity Strain

With so much happening in the financial sector currently, the United States Federal Reserve has created a funding program for banks with up to $25 billion made available.

The bank aims to backstop banks and other depository organizations like savings associations and credit unions with the new fund dubbed Bank Term Funding Program (BTFP) as well as prevent future liquidity problems. 

According to the Federal Reserve, this will reinforce the ability of the banks to guarantee deposits. With this, an institution would not need to quickly sell off its securities in times of distress.  Also, it would ensure that money and credit facilities are always available in the economy. Ultimately, banks will be equipped to meet the needs of their customers at all times.

As per a published statement, “To support American businesses and households, the Federal Reserve Board on Sunday announced it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.”

“With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP.”

For the eligibility status, any U.S. federally insured depository organization including banks, or a U.S. branch or agency of a foreign bank that is eligible for primary credit, is equally eligible to borrow from this program.

These eligible banks and depository firms that pledge “U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral” will be given access to loans for up to one year. These assets would therefore be valued at par.

SVB and Signature Bank’s Liquidity Woes

This is happening amidst the settlement of customers affected by the troubles in Silicon Valley Bank (SVB) and Signature Bank. U.S. authorities are seeking strategies to ensure that depositors in both institutions are protected.

Already, Circle the issuer of U.S. dollar-pegged stablecoin USDC has revealed its exposure to SVB with up to $3.3 billion in the defunct bank.

BlockFi has $227M in uninsured funds assigned to an SVB-sponsored money market mutual fund (MMMF). Another U.S.-based cryptocurrency exchange Kraken has decided to cut ties with Signature Bank. Therefore, non-corporate clients of the former will not be allowed to complete dollar deposits or withdrawals using Signature Bank.