June 3, 2023 / VOLUME NO. 264

Government Program Stigma

In a move to bolster the banking system following the failures of Signature Bank and Silicon Valley Bank, the Federal Reserve established the Bank Term Funding Program on March 12. The new funding mechanism aims to relieve banks struggling with long-term, low-rate securities that are underwater. But many bank CFOs say their bank won’t take advantage of this potential lifeline, according to an annual Piper Sandler & Co. survey of 82 public banks. 

BTFP grants banks and other eligible depository institutions one-year, fixed-rate loans in exchange for pledged collateral, including U.S. Treasuries and U.S. agency mortgage-backed securities but excluding loans. It differs from borrowing from the Fed’s discount window in several important ways, including the term — the discount window grants advances for up to 90 days. It also values collateral at par rather than market value. That’s key, as a number of banks have struggled with the depreciating value of Treasury bonds and similar assets that were purchased in the low-rate environment that preceded the Fed’s rate increases in 2022. 

Banks used billions in BTFP funds this spring, according to the Fed’s weekly H.4.1 data. By the end of March, the agency reported a balance of $62.6 billion. Growth slowed after that, with the Fed reporting $93.3 billion in BTFP loans on its balance sheet in its June 1 release.

While the Fed stated that using BTFP funding would not raise supervisory concerns, calling the program “part of sound liquidity management,” 41% of CFOs in Piper Sandler’s survey said their bank would not use BTFP due to the program’s perceived stigma.

Mark Fitzgibbon, managing director and head of financial services research at the firm, believes that the Troubled Asset Relief Program, or TARP, may linger in some CFO’s memories; the rules of that program changed when it was amended in 2009 to limit compensation to key executives. He believes that skepticism would be lifted if the Fed would state that the goalposts won’t change with BTFP. 

But more importantly, investors would see using the BTFP as a sign of distress. With short sellers targeting regional bank stocks, investors have been jumpy, looking for hints of weakness in a bank’s deposit base. 

Placating shareholders may seem like short-term thinking, trading stock price performance for the longevity of the bank — until you consider that flighty depositors could also get spooked. “If the stigma is a concern for depositors,” says Fitzgibbon, “then that could create more of a panic.”

And that can’t be taken lightly.

• Emily McCormick, vice president of editorial & research for Bank Director

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“I think the [solution] is not to resist technology — to some extent, it’s irresistible. The [solution] is learning to live with a new technology and understanding that the world has changed.”

— Luigi Zingales, University of Chicago Booth School of Business

• Kiah Lau Haslett, managing editor for Bank Director

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