Will we see a fresh banking crisis?

The Bank Term Funding Program (BTFP), introduced by the Federal Reserve in March 2023 to provide emergency liquidity to U.S. depository institutions, officially ended on March 11, 2024. This initiative was a direct response to the collapse of Signature Bank and Silicon Valley Bank, the largest banking failures since the 2008 financial crisis. 

BTFP offered one-year loans to banks, savings associations, credit unions, and other eligible institutions, using Treasury securities, agency debt, mortgage-backed securities (MBS), and similar assets as collateral. Loans were issued at a fixed rate, calculated as the Overnight Index Swap rate plus 10 basis points. Crucially, collateral was valued at par, not market value, to address the unrealized losses banks faced due to rising interest rates. 

The banking turmoil arose as rapidly increasing interest rates, aimed at curbing inflation, devalued Treasury securities on the secondary market. While safe if held to maturity, these securities were sold at a loss to meet liquidity demands from depositors. The resulting liquidity crunch and social media-driven panic forced the FDIC and the Federal Reserve to intervene. 

Federal deposit insurance only covered $250,000 per depositor per institution, leaving many depositors at risk. The BTFP was designed to ensure liquidity by accepting these depreciated securities as collateral at nominal value, preventing further panic and systemic collapse. 

With the program’s closure, banks can no longer access liquidity through BTFP, despite many still holding unrealized losses on their balance sheets. Recent Treasury yields remain near their recent highs, reflecting continued pressure on bond prices. This means the unrealized losses on bank-held Treasuries are still unresolved. 

The end of BTFP raises concerns about the U.S. financial system’s ability to withstand future shocks. Should another liquidity crunch occur, the absence of this safety net could lead to further bank failures and a potential new wave of panic. 

Will we see a fresh banking crisis?