The possibility of some U.S. central banks failing (Silvergate, Silicon Valley Bank, or most recently, the closure of Signature Bank), the U.S. Banks and other depository institutions would receive $25 billion in support, according to the Federal Reserve (FED).
This sum of money will make sure that banks have enough liquidity to accommodate consumer withdrawal requests during such tumultuous periods.
The $25 billion Bank Term Financing Program, which offers loans with durations of up to one year to "banks, savings organizations, credit unions, and other qualified depository institutions," was announced in a statement on March 12.
@federalreserve announces Bank Term Funding Program (BTFP) to support American businesses and households, assure banks have ability to meet needs of all their depositors: https://t.co/JIMjkooIDV
— Federal Reserve (@federalreserve) March 12, 2023
Businesses that want to participate in the initiative must pledge U.S. Mortgage-backed securities, Treasury securities, agency debt, and other "qualified assets" may be used as collateral. These assets will be valued at their par value, which is the cost at which they were initially issued.
The Fed continued by saying that this would provide high-quality securities with an extra source of liquidity, eliminating the need for an institution to swiftly sell those securities to meet liquidity requirements during stressful periods.
This choice was made in light of SVB Bank's March 8 announcement that it needed to sell a significant portion of its assets and shares in order to raise additional capital, which alarmed many depositors and raised concerns about a "bank run." Subsequently, SVB had to close, which resulted in the depeg of a number of important stablecoins on the market, typically USDC issued by Circle when Circle was also a company stuck with money on SVB.
The start of the initiative coincided with the Federal Reserve's announcement that Treasury Secretary Janey Yellen had approved measures allowing the FDIC to appropriately safeguard depositors' interests. Regulators had shut down Signature Bank at the same time due to systemic risk.
These steps will maintain financial stability, lessen financial system stress, and moderate any negative effects on firms, individuals, taxpayers, and the overall economy.
The bitcoin market restarted in the green immediately following the Fed's decision. After climbing over 9% in the previous day, Bitcoin recovered to the $22,000 level.
