American Institute for Economic Research: Bank Term Funding Program Discounts the Discount Window
The banking crisis of 2023 flared up, died down, and flared up again. Is it over yet? Probably not. This time around, central bankers added a new tool to help out struggling banks. It’s called the Bank Term Funding Program (BTFP).
The BTFP is designed to allow banks to trade in assets such as U.S. Treasury bonds. These assets may be at a loss for the bank if they were bought before interest rates rose.
The BTFP will pay for the assets at par.
Essentially, this moves the holding risk of the asset from a troubled bank to taxpayers via the Federal Reserve. While the program has a one-year expiration date, the Fed could renew it.
In other words, a Treasury bond with a par value of $100, bought by a bank at $100, may now be valued at $80. A bank could sell this bond to the Fed via the BTFP and get the full $100. When the bond matures, the Fed would be made whole.
But other assets are included in the BTFP. That includes mortgage-backed securities. A declining real estate market could leave taxpayers on the hook for billions in assets.
Like many of the central bank’s programs, it was designed to support American businesses and households. But it may simply be an expensive way to plug a leak in the banking system. Judging by the second flareup in the banking system a month later, it may not be enough.
