The decisive action will mitigate emerging liquidity and solvency risks, contain pressure on the banking system, and protect depositors.

By Arthur S. Long, Pia Naib, and Deric Behar

On March 12, 2023, the Board of Governors of the Federal Reserve System (Federal Reserve) took a unanimous emergency step to protect the safety and soundness of the financial system from contagion risk following the second largest bank insolvency in US history. The move aims to “reduce stress across the financial system, support financial stability and minimize any impact on businesses, households, taxpayers, and the broader economy.”

Specifically, the Federal Reserve authorized all 12 Reserve Banks to establish a Bank Term Funding Program (BTFP). According to the accompanying term sheet, the BTFP will allow:

  • any US federally insured depository institution (including a bank, savings association, or credit union) or US branch or agency of a foreign bank that is eligible for primary credit;
  • to request an advance from the Federal Reserve;
  • for up to a year;
  • at favorable market terms (one-year overnight index swap rate plus 10 basis points, as of the day the advance is made, fixed for the term of the advance) and without fees;
  • if backed by eligible collateral (including US Treasury bonds, high-quality agency securities, and US agency mortgage-backed securities) that was owned by the borrower as of March 12, 2023;
  • up to the par value (the outstanding face amount) of the eligible collateral; and
  • without haircuts applied to eligible collateral (i.e., collateral valuation will not reflect the liquidity, credit, and interest rate risk of the assets).

Rather than being compelled to sell their securities holdings in the open market to meet depositor demand, banks will be able to quickly borrow funds from the Federal Reserve at par value of the collateral they pledge. In other words, borrowers will not have to factor in unrealized losses in calculating the value of the pledged collateral. Banks have incurred heavy paper losses on their securities holdings over the past year due to the increase in interest rates (approximately US $620 Billion at year-end 2022, according to Federal Deposit Insurance Corporation Chairman Martin Gruenberg). The facility therefore aims to stabilize depositor confidence, and prevent any further fire sales of assets and cascading bank runs.

As a backstop to the BTFP, the Department of the Treasury has agreed to provide up to US $25 billion in credit protection from the Exchange Stabilization Fund in the event of borrower default (although the Federal Reserve states that use of these funds is not likely).

The Federal Reserve also published a related FAQ about the BTFP, with a few notable elucidations:

  • There is no limit on the total amount of BTFP extensions of credit that an individual eligible depository institution may obtain, subject to the terms noted above.
  • Depository institutions that are eligible for secondary credit, and non‐depository institutions, will not be eligible to participate in the BTFP.
  • A depository institution need not maintain a master account at a Federal Reserve Bank to request a loan under the BTFP, but it must (at minimum) have a correspondent relationship with an institution that does have a master account, so that BTFP advances can be credited and repaid. 
  • A depository institution seeking an advance under the BTFP must provide any Operating Circular No 10 (Lending) documentation that a Federal Reserve Bank requires, as well as any other relevant documentation, immediately upon request.
  • Federal Reserve advances under the BTFP are made with recourse beyond the pledged collateral to the eligible borrower.


The BTFP aims to protect deposits and stabilize the financial system, and to that end, the Federal Reserve noted that it is “prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”

According to the Federal Reserve, advances can be requested under the BTFP from March 12, 2023, until at least March 11, 2024.

Latham & Watkins will continue to monitor developments in this area.