The End of the Fed's Bank Term Funding Facility: Assessing Confidence in the Financial System

The End of the Fed's Bank Term Funding Facility: Assessing Confidence in the Financial System

The Fed's Silicon Valley Bank solution is gone. Should we worry?

Almost a year ago SVB imploded. One of the subsequent calming solutions came through the Bank Term Funding Facility. It had a one year shelf life, and will soon be gone. It's actually been abused recently, which required a change of terms. But taking it away is not without risks. A softer exit might have been better, but we see the logic of taking the cake away.

 

The BTFF's demise can be construed as a sign of Fed confidence in the system

The Federal Reserve has changed the rate charged on the Bank Term Funding Facility (BTFF), and for good reason. Previously the reference rate was 1yr term SOFR (+10bp fee). Term rates incorporate the future, and as the market is discounting rate cuts, the 1yr term SOFR rate trades some 50bp through the overnight SOFR rate. The Fed’s action confirms that there were players in the market taking advantage of the arbitrage by borrowing on the BTFF and lending back at a higher in-arrears rate. The Fed has now floored the reference rate to the interest on excess reserves (IOER), which is currently at 5.4%.

That takes away the arbitrage. Which makes eminent sense. But what about the Fed’s decision to end the facility on its one year anniversary?

Originally it was set out as a facility that would be available for a year, book ended by the Silicon Valley Bank (SVB) demise on 10 March 2023 and the one year tenor for the facility to conclude on 11 March 2024. But the Fed always had the choice to extend it. The decision not to extend it could be construed as a sign of confidence. No doubt the Fed has done its due diligence on the players that have accessed the facility, and has concluded that the need for an extension is not there.

This is good, as it points to a Fed that is not concerned about the players that have used the facility. In other words they can take it. Moreover, and by implication, the Fed does not envisage a threat of a similar ilk hitting the system down the line. And if something does hit, the Fed points to the discount window as the place to get hands on emergency liquidity. It had been noted that some of the smaller players were not used to discount window access in March last year, with some getting into difficulty that they did not need to get into.

The alternative BTFF, the story went, was an all-embracing rescue programme for some institutions that addressed the deep discount attached to many hold-to-maturity portfolios, by instantaneously liquefying them at par.

 

 

The End of the Fed's Bank Term Funding Facility: Assessing Confidence in the Financial System

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