Monday, March 11, 2024, Banks may get a deadly dose of reality; the Federal Reserve will cease the Bank Term Funding Program (BTFP) which will stop making new loans.
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.
When the BTFP stops, banks will not longer be able to borrow from the Fed based upon value-at-maturity of US Treasuries and other assets they hold. So if the banks cannot borrow from the fed to meet their cash needs, how will they get the cash?
Put simply, the game of musical chairs for banks will see the music stop tomorrow. Which Bank(s) will find themselves without a chair, and thus lose?
