FED RESERVE GROWTH? JPMorgan Believes BTFP Could be Around $2 Trillion

Posted on 03/16/2023

Reserve scarcity in the U.S. banking is creeping up. However, the money supply held by non-bank investors such as asset managers, sovereign wealth funds, pensions, continues to be a source of support for financial assets.

JPMorgan put out a note called “Flows & Liquidity – A Repeat of 2018/2019?” believing that the Federal Reserve’s Bank Term Funding Program (BTFP) is likely to be massive and the max usage could be around US$ 2 trillion. The US$ 2 trillion amount is estimated to be the par amount of vonds held by U.S. banks outside of the five largest U.S. banks. The JPMorgan research team analyzed the uninsured deposits of the six U.S. banks with the highest ratio of uninsured deposits over total deposits. That number came out to be US$ 460 billion. The bigger the usage of the BFTP, essentially it would increase the size of the Federal Reserve, thus creating more liquidity relief for the U.S. banking system.

The Federal Reserve’s Bank Term Funding Program (BTFP) was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR 201.108(b)), such as U.S. Treasuries, U.S. agency securities, and U.S. agency mortgage-backed securities. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. The Federal Reserve Board, pursuant to section 13(3) of the Federal Reserve Act, authorized all twelve Reserve Banks to establish the BTFP to make available additional funding to eligible depository institutions in order to help assure banks have the ability to meet the needs of all their depositors. Section 13(3) is a singular power of the Federal Reserve to permit Federal reserve banks to provide liquidity directly to non-bank, commercial entities. This power is only available in times of crisis, when the Federal Reserve, by a vote of five governors, finds that “exigent and unusual circumstances” exist.

In recent practice, this Section 13(3) authority has been invoked in times such as during the global financial crisis of 2008. The Federal Reserve resorted to statutory authorities that had lain dormant for more than seven decades when, in 2008, it took steps to bolster a financial system on the brink of collapse. Section 13(3) was also used during the COVID-19 pandemic and lockdowns, thus creating a wide range of funding facilities including the Primary Dealer Credit Facility, Commercial Paper Funding Facility, Main Street Lending Program, and other programs. The Federal Reserve had been granted these powers in 1932 through passage of the Emergency Relief and Construction Act, which added Section 13(3) to the Federal Reserve Act.

Keywords: Federal Reserve System.

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