Fed's New Bank Term Funding Progrm - Does That Mean That There Is No Insurance Limit?

Over6T | Mar 13, 2023 | 31 posts since 2012

With today's announcement of the Fed's newly created Bank Term Funding Program it seems that depositors in stressed banks have an unlimited amount of insurance for their deposits. No longer will they have to worry about a $250k cap. Apparently all deposits are secure regardless of the amount, though there are terms that limit the bank's actions.

So, does that mean that the Fed has effectively created a program that usurps the FDIC / NCUA insurance provisions since the Fed will backstop a bank or CU's possible failure? Can I now set aside any concerns about exceeding the FDIC/NCUA limits?

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Answers

IGR | Mar 13, 2023 | 580 posts since 2020

Cute!
So much learning about Finance and Banking Businesses with no chance that newly acquired knowledge improves every day's life.
Short answer is NO!
The explanation is technical and slightly above my paygrade.

The Bank Term Funding Program (BTFP) is a short term credit facility. It will only be useful as a backstop in case of sudden run on the Deposits and only for FI's that were sufficiently capitalized prior to the run. It will not be useful under other Default circumstances or to FI's which have not enough collateral assets to cover the deposits.
The program will work for SVB, but to understand how and why you'd need to understand the nature of current failures which are far from typical Bankruptcy and Default cases.
In short, SVB - well capitalized bank(the structure of capitalization is a matter of Harvard and Yale debate and MBA studies) - was victimized by Depositors, FED, Market and Peers.
So, FBR gives a chance to FI's in specific kind of Liquidity crunch to ignore everyone and come directly to FED's Credit Window for Cash Advance in exchange of 100% of par value of the collateral and favorable spread.
We should all hope it will work.

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