Thread by @macro_dose

The Federal Reserve have announced a new system created to protect banks from collapse in response to SVB and Signature Bank.

They've called it the Bank Term Funding Programme

Let's get this explained simply 👇

A large part of the reason SVB collapsed was because it bought a massive amount of low interest US T-Bills that plummeted in value after interest rate hikes and inflation rendered their return absolutely terrible.

When SVB was forced to raise liquidity they had to sell these bonds at massive losses, accruing heavy losses from those that they sold

The Fed have now created a system by which banks can borrow from the Fed at the one-year overnight index swap (OIS) rate + 0.10% if they can offer collateral

The OIS is usually close to the Fed Funds Rate.

So essentially, banks can borrow emergency liquidity at FFR +0.1%

Collateral will be either mortgage backed securities or US treasury bonds that the bank offers up to the Fed

This aims to stop banks from being forced to sell assets at massive losses because of short term liquidity needs like SVB were

This is very favourable for banks and may make it significantly easier for banks to avoid liquidity crises

Even better for banks, the collateral that banks offer will be taken at par value.

This means that the fed will ignore the price fluctuations in the bonds that have occurred and let banks borrow against them as if they have just been issued

Again, very favourable

To summarise:

1. Banks can now borrow much more easily from the Fed and use illiquid assets as collateral without having to sell them

2. They can do this at a favourable interest rate

3. The Fed will ignore declines in market value of the collateral so banks can borrow more

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#FederalReserve #SiliconValleyBank