What is the Bank Term Funding Program?

The Bank Term Funding Program (BTFP) was an emergency lending facility created by the Federal Reserve on March 12, 2023, in the immediate aftermath of the Silicon Valley Bank (SVB) and Signature Bank failures. It allowed banks, credit unions, and other depository institutions to borrow from the Fed for up to one year, pledging Treasury securities, agency debt, and agency MBS as collateral valued at par (face value) rather than market value.

The par valuation was the program's critical innovation. When interest rates rose sharply in 2022 and 2023, the market value of bonds held by banks fell well below their face value. SVB had approximately $17 billion in unrealized losses on its bond portfolio. Under normal Fed lending facilities (like the discount window), collateral is valued at market prices, meaning banks could only borrow a fraction of their bonds' face value. The BTFP's par valuation meant banks could borrow the full face value of their bonds, effectively neutralizing the unrealized loss problem that had triggered the bank runs.

At its peak, the BTFP had approximately $165 billion in outstanding loans. The program stopped making new loans on March 11, 2024, exactly one year after its creation, and existing loans matured by March 2025. While the Fed described it as an emergency facility, some critics noted that banks used it for arbitrage: borrowing at the BTFP rate and depositing the proceeds at the Fed to earn a higher rate on reserves. The Fed addressed this by adjusting the BTFP rate upward in January 2024 to close the arbitrage window.

The BTFP represented a broader lesson about interest rate risk in the banking system. The rapid rate hiking cycle of 2022-2023 imposed unrealized losses exceeding $600 billion across the US banking system. While most banks could hold their bonds to maturity and eventually recover par value, the SVB episode demonstrated that deposit flight could force fire sales, crystallizing losses. The BTFP bought time for the system to adjust, but the underlying interest rate risk in bank portfolios remained a systemic vulnerability that regulators continued to monitor.