Bank Term Funding Program: The Fed’s Solution to Liquidity

Scott Wood -

How can you solve a problem like liquidity? In today’s world, that’s a tricky question. Luckily, the Federal Reserve has a solution that might just interest your credit union. It’s called the Bank Term Funding Program (BTFP), and it’s a relatively new lending program available to U.S. depository institutions who are eligible for primary credit at the Federal Reserve.

About BTFP

The program provides an additional source of liquidity for eligible depositories by allowing them to use the full value of those securities that the Federal Reserve deems eligible to purchase in open market operations. This includes most bonds credit unions typically buy, such as treasuries, agencies, agency mortgage-backed securities (Fannie Mae, Freddie Mac, Ginnie Mae) and fully guaranteed SBA pools. Certificates of deposit are not eligible collateral for the program.

Eligible collateral is valued at par value, which is equivalent to the current face value of the bonds. In addition, the Fed will not apply any haircuts to the value of the bond, meaning credit unions can borrow 100 percent of the current face/par value of the security. This is one of the biggest advantages of using the BTFP versus other options.

Advances are limited to the amount of collateral pledged for the program and additional collateral will be required for securities whose principal balance amortizes. This helps to ensure that adequate collateral is available for the full amount of the advance. Securities used as collateral under the program must have been owned by your institution on or before March 12, 2023.

The interest rate for BTFP borrowing is fixed and is established at the time of the advance. The rate remains fixed for the term of the loan and is based on the 1-year overnight index swap rate (OIS) plus 10 basis points. Your rate is determined on the day the advance is made and the rate is published each day at www.frbdiscountwindow.org. Since the inception of the program, the BTFP borrowing rate has been consistently lower than the rate for primary credit and other advances at the Fed.

Advances under the program can be taken out for any term up to a year and there are no penalties to pay off some or all the loan early. Interest is payable when the loan matures or when the loan is paid off. Because there are no prepayment penalties, should the borrowing rate fall below the rate you initially borrowed at, your credit union can pay the loan off early and take out a new loan at the lower rate.

The BTFP is currently scheduled to end on March 11, 2024, but like many of these programs, it could be extended. The Fed will not release details on who borrowed using the program until one year after the program ends.

Getting Started

Your credit union can get started with the BTFP in just a few steps, all of which you can find instructions and information for on the Guide for Using the Federal Reserve’s Bank Term Funding Program page on our website.

  1. Complete the required paperwork with your regional Federal Reserve Bank. The aforementioned webpage will help you find specific details on the different regional Fed branches and instructions for completing the appropriate forms.

  2. If you don’t have an account with the Fed and would like Vizo Financial to act as correspondent for you for advances and payments, you will need to fill out the Letter of Agreement to Correspondent Credit and Payment Agreement found on the Fed’s website. Vizo Financial will also sign this form so you can begin to utilize the BTFP program.

  3. Collateral can be delivered directly to the Federal Reserve Bank or we can pledge collateral to the Fed that is currently safekept with us. Pledging collateral that is currently in safekeeping at Vizo Financial is generally an easier and more efficient process.

  4. Finally, in order to take an advance, you will need to send an email to the Fed using the BTFP standard template email, which should be followed up with a call to your local Fed Bank letting them know your intentions to borrow.

BTFP Recap

Just to recap, there are many reasons to consider using the Bank Term Funding Program for liquidity. You can borrow 100 percent of eligible collateral with no haircut, the borrowing rate is very competitive compared to other sources of funding, and the loan can be prepaid at any point in time should your liquidity needs change or should the rate drop. Remember, there are no fees or penalties for prepaying all or part of the loan.

Don’t forget to check out Vizo Financial’s Guide for Using the Federal Reserve’s Bank Term Funding Program page for detailed information on signing up and using the BTFP.

If you have any questions about the program, please contact us at liquidity@vfccu.org. We’ll be delighted to help!

Finally, if you're looking for more liquidity options for your credit union, be sure to attend my upcoming webinar, Building a Liquidity Lineup That Works for You, on June 22 at 2:00 p.m. I'll be sharing an outlook on liquidity for the near future, potential liquidity options, the costs of those liquidity options and best practices and considerations for building your liquidity lineup. Register now!

Scott Wood is Vizo Financial’s portfolio strategist. He is a NASD-registered representative, responsible for assisting the investment and liquidity needs of member credit unions.