U.S. Quasi-Sovereign Wealth Fund Known as the Exchange Stabilization Fund to Provide Backstop for Bank Term Funding Program

To prevent uninsured depositors from losing their money, the U.S. Department of Treasury is using its slush fund to backstop and provide funding to Silicon Valley Bank and Signature Bank. Silicon Valley Bank catered to venture capital-backed startups, wineries, U.S. tech companies, among others. Signature Bank grew its exposure to the cryptocurrency industry.

On March 12, 2023, the Federal Reserve Board 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. The Federal Reserve is seeking to bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy. The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.?These assets will be valued at par.?Par value is static, unlike market value, which fluctuates with credit ratings, time to maturity, and interest rate fluctuations.

As a sort of bailout measure in disguise, the BTFP will be an additional source of liquidity against securities, eliminating an institution’s need to quickly sell those securities in times of stress. U.S. central bankers are creating a lending facility to keep U.S. banks and others from having to sell securities at a loss in order to meet withdrawal demands.

With approval of the U.S. Treasury Secretary, the Department of the Treasury will make available up to US$ 25 billion from the U.S. Exchange Stabilization Fund as a backstop for the BTFP. The Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds. The U.S. Treasury has used the Exchange Stabilization Fund during the past two economic and financial crises to help stabilize domestic financial markets in support of a stable international monetary system. Treasury used the Exchange Stabilization Fund in coordination with the Federal Reserve to help stabilize financial markets in 2007-2008. The Exchange Stabilization Fund ’s assets principally include U.S. dollars, foreign currencies, and Special Drawing Rights (SDRs), an international reserve asset created by the IMF. The fund’s assets also include COVID-19 investments and receivables. The Federal Reserve Bank of New York (FRBNY) acts as the fiscal agent for the fund, as permitted by the Federal Reserve Act of 1913 (Federal Reserve Act).

After receiving a recommendation from the boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, Treasury Secretary Janet Yellen, after consultation with US. President Joe Biden, approved actions to enable the FDIC to complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured. The Federal Reserve believes these actions will reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.

The actions to protect Silicon Valley Bank depositors will not extend to its shareholders and certain unsecured debtholders, the regulators said, while senior management has been removed. Any losses to the Federal Deposit Insurance Fund, which will pay out uninsured depositors, will be recovered by a special assessment on banks, a current aspect of federal law. The Federal Reserve Board claims that Silicon Valley Bank depositors will have access to all of their money starting March 13, 2023 and that no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer. The Federal Reserve also announced a similar systemic risk exception for Signature Bank, New York, New York, which was closed on March 12, 2023 by its state chartering authority. All depositors of Signature Bank will be made whole, according to the Federal Reserve.?

Political Connections

Interestingly, Barney Frank has been a member of the Board of Signature Bank since June 2015. Barney Frank served as a U.S. Congressman representing the 4th District of Massachusetts from 1981-2013 and also was the Chairman of the House Financial Services Committee from 2007 to 2011. As Chair of the House Financial Services Committee, Frank was instrumental in crafting the short-term US$ 550 billion rescue plan in response to the U.S. 2008-2009 financial crisis. Greg Becker, the CEO of Silicon Valley Bank, was a director of the Federal Reserve Bank of San Francisco from 2019 until Silicon Valley Bank’s failure.

Depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available, according to the Federal Reserve. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window.

Bank Term Funding Program

Program: To provide liquidity to U.S. depository institutions, each Federal Reserve Bank would make advances to eligible borrowers, taking as collateral certain types of securities.

Borrower Eligibility: Any U.S. federally insured depository institution (including a bank, savings association, or credit union) or U.S. branch or agency of a foreign bank that is eligible for primary credit (see 12 CFR 201.4(a)) is eligible to borrow under the Program.

Eligible Collateral: Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR 201.108(b)), provided that such collateral was owned by the borrower as of March 12, 2023.

Advance Size: Advances will be limited to the value of eligible collateral pledged by the eligible borrower.

Rate: The rate for term advances will be the one-year overnight index swap rate plus 10 basis points; the rate will be fixed for the term of the advance on the day the advance is made.

Collateral Valuation: The collateral valuation will be par value. Margin will be 100% of par value.

Prepayment: Borrowers may prepay advances (including for purposes of refinancing) at any time without penalty.

Advance Term: Advances will be made available to eligible borrowers for a term of up to one year.

Fees: There are no fees associated with the Program.

Credit Protection by the Department of the Treasury: The Department of the Treasury, using the Exchange Stabilization Fund, would provide $25 billion as credit protection to the Federal Reserve Banks in connection with the Program.

Recourse: Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower.

Program Duration: Advances can be requested under the Program until at least March 11, 2024.

Source: Federal Reserve

Keywords: U.S. Department of the Treasury Exchange Stabilization Fund (Exchange Stabilization Fund). Federal Reserve System.

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