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

Posted on 03/13/2023

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.

Recent Failed Bank List – FDIC

Bank Name City State Cert Acquiring Institution Closing Date Fund
Signature Bank New York NY 57053 Signature Bridge Bank, N.A. March 12, 2023 10540
Silicon Valley Bank Santa Clara CA 24735 Deposit Insurance National Bank of Santa Clara March 10, 2023 10539
Almena State Bank Almena KS 15426 Equity Bank October 23, 2020 10538
First City Bank of Florida Fort Walton Beach FL 16748 United Fidelity Bank, fsb October 16, 2020 10537
The First State Bank Barboursville WV 14361 MVB Bank, Inc. April 3, 2020 10536
Ericson State Bank Ericson NE 18265 Farmers and Merchants Bank February 14, 2020 10535
City National Bank of New Jersey Newark NJ 21111 Industrial Bank November 1, 2019 10534
Resolute Bank Maumee OH 58317 Buckeye State Bank October 25, 2019 10533
Louisa Community Bank Louisa KY 58112 Kentucky Farmers Bank Corporation October 25, 2019 10532
The Enloe State Bank Cooper TX 10716 Legend Bank, N. A. May 31, 2019 10531
Washington Federal Bank for Savings Chicago IL 30570 Royal Savings Bank December 15, 2017 10530
The Farmers and Merchants State Bank of Argonia Argonia KS 17719 Conway Bank October 13, 2017 10529
Fayette County Bank Saint Elmo IL 1802 United Fidelity Bank, fsb May 26, 2017 10528
Guaranty Bank, (d/b/a BestBank in Georgia & Michigan) Milwaukee WI 30003 First-Citizens Bank & Trust Company May 5, 2017 10527
First NBC Bank New Orleans LA 58302 Whitney Bank April 28, 2017 10526
Proficio Bank Cottonwood Heights UT 35495 Cache Valley Bank March 3, 2017 10525
Seaway Bank and Trust Company Chicago IL 19328 State Bank of Texas January 27, 2017 10524
Harvest Community Bank Pennsville NJ 34951 First-Citizens Bank & Trust Company January 13, 2017 10523
Allied Bank Mulberry AR 91 Today’s Bank September 23, 2016 10522
The Woodbury Banking Company Woodbury GA 11297 United Bank August 19, 2016 10521
First CornerStone Bank King of Prussia PA 35312 First-Citizens Bank & Trust Company May 6, 2016 10520
Trust Company Bank Memphis TN 9956 The Bank of Fayette County April 29, 2016 10519
North Milwaukee State Bank Milwaukee WI 20364 First-Citizens Bank & Trust Company March 11, 2016 10518
Hometown National Bank Longview WA 35156 Twin City Bank October 2, 2015 10517

Source: FDIC.

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

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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