Emergency Liquidity Facilities and the BTFP

When Silicon Valley Bank collapsed in March 2023, the underlying problem at many banks was that their bond holdings had lost value as interest rates rose, but they only needed to sell those bonds if depositors ran. The Federal Reserve's Bank Term Funding Program (BTFP) let banks borrow against those bonds using their original face value, not their depressed market price, removing the incentive to sell into a falling market at all.

This mattered because normal central-bank lending facilities, like the discount window, typically lend against the market value of collateral (with a haircut), which would have forced banks to recognize their bond losses immediately in order to borrow, exactly the outcome that triggers a crisis of confidence. Lending at par sidestepped that entirely.

Worked example. A bank holds $100 million face value of Treasury bonds now worth $85 million at market prices due to higher rates. Through the BTFP, the bank can borrow up to $100 million against those bonds (at the one-year overnight index swap rate plus 10 basis points), rather than the roughly $85 million (less a haircut) it could raise under a standard collateralized facility.

The BTFP was created for a one-year term and closed to new loans in March 2024 once the acute stress had passed, but it set a template regulators may reach for again if unrealized bond losses ever threaten bank solvency at scale.