It is now one of Wall Street’s unspoken but unbreakable rules: with each new banking crisis, the Federal Reserve will quickly launch an emergency bailout program and give it a three to four letter abbreviation, blending it into an alphabet soup blur of previous Fed bailout programs.
The most recent iteration occurred in the spring of 2023 in reaction to a run on federally insured banks that federal officials had permitted to get involved with cryptocurrency and/or to feast on uninsured deposits. On March 12, 2023, the Federal Reserve rapidly began the Bank Term Funding Program (BTFP).
BTFP joined the numerous iterations of the Fed’s COVID-19 bailouts and 2007-2010 bailouts with names such as the Primary Dealer Credit Facility (PDCF), Commercial Paper Funding Facility (CPFF), Money Market Mutual Fund Liquidity Facility (MMLF), Term Asset-Backed Securities Loan Facility (TALF), and so on.
The one massive Fed bailout scheme that did not receive an alphabet soup nickname was the repo loan bailouts that happened in the fourth quarter of 2019. The Fed may have hoped that by not naming the emergency lending scheme, the ugly aspects would be forgotten. That program extended $19.87 trillion in term-adjusted revolving loans to the same Wall Street megabanks that the Fed had bailed out during the 2007-2010 crisis. (See Internal Charts Show Treasury Agency Assigned to Measure Risk in US Markets Sleeps Through 2019 Repo Crisis and Fed’s $19.87 Trillion Bailout.)
Under the 2010 Dodd-Frank financial reform legislation, the Fed is mandated to keep the Senate Banking Committee and the House Financial Services Committee up to date on its emergency lending operations. However, these are bare-bones reports. On Monday, for example, the Fed furnished the Committees with an updated report on the Bank Term Funding Program. The names of the borrowing banks were not supplied, nor were the current or cumulative loan amounts outstanding for each bank, and so on. It was said that as of July 31, 2024, “the total outstanding amount of all advances under the BTFP was $102,065,995,000.”
You’re probably wondering why an emergency Fed program to prevent a bank run in the spring of 2023 still leaves $102 billion due in the summer of the following year. The explanation is that, while the Fed stopped providing new loans under the BTFP on March 11, 2024, the loans it previously provided had periods of up to one year. If, for example, the Fed makes additional loans on Friday, March 8, 2024, the BTFP may still have outstanding balances until March 8, 2025. That would imply that a Fed rescue facility established in March 2023 lasted two years, contradicting the statutory text of the Federal Reserve Act, which requires emergency funding by the Fed to be short-term in nature.
The figure above depicts the Bank Term Funding Program and was built using data available at the St. Louis Fed. (Move your pointer over the chart line here). It reveals that by November 29, 2023, borrowing from the BTFP had stabilized at $113.9 billion, indicating that the bank runs and panic had passed. But then, between November 29, 2023 and January 24, 2024, borrowing from the BTFP emergency facility increased by $53.9 billion to $167.8 billion, representing a 47 percent increase in less than two months.
What happened to increase the threat of bank runs in the fall of 2023? As described in the “Related Articles” section below, credit rating agencies issued many warnings and downgrades to banks in August 2023. Fitch’s downgrading of US debt did not improve matters.
Then, on November 17, the Stanford Institute for Policy Research released a report titled “Fragile: Why More US Banks Are at Risk of a Run.” The study revealed the following troubling findings:
Recent decreases in bank asset values have heightened the vulnerability of the US banking industry to uninsured depositor runs.
The true market value of assets in the US banking system is $2.2 trillion lower than their stated worth.
A large number of institutions are at risk of failure if uninsured depositors stage a bank run.
As the figure above shows, 17 months after the Fed launched its “emergency” BTFP lending program, there is still an outstanding loan of $100.86 billion.
The Fed is completely capable of making loans to individual depository banks through its Discount Window. Since its inception, one of its statutory tasks has been to act as a lender of last resort for depository institutions. However, beginning with the 2008 financial crisis and without congressional authorization, the Fed decided willy-nilly to expand its role to bail out Wall Street trading houses on an ongoing basis, even going so far as to funnel tens of billions of dollars to their trading units in London in 2008, according to a government audit released in 2011.
If this is not the financial structure you want to leave for your children and grandkids, please contact your U.S. Senators immediately and demand the reinstatement of the Glass-Steagall Act, which would permanently separate Wall Street’s casino trading houses from federally insured banks. Source
