Fed to allow emergency bank lending program to expire on March 11

The Federal Reserve on Wednesday said a funding lifeline created for banks last year after…

Reuters

By Pete Schroeder and Michael S. Derby

The Federal Reserve on Wednesday said a funding lifeline created for banks last year after the collapse of Silicon Valley Bank threatened to spark a wider financial crisis would close as scheduled in March.

The Fed also raised the interest rate on new loans from the Bank Term Funding Program (BTFP) for the remainder of its life, effectively ending what had become a popular and profitable arbitrage opportunity for U.S. lenders, which analysts said should deter fresh borrowing.

The sun-setting of the program on March 11 had been signaled by Fed officials as fear in the banking system abated.

The BTFP “was really designed in that emergency situation,” Michael Barr, the Fed’s vice chair for supervision, said earlier this month, referring to the banking sector panic triggered by SVB’s rapid collapse. “It was designed for that emergency to say, We want to make sure that banks and creditors of banks and depositors (in) banks understand that banks have the liquidity they need.”

The Fed launched the BTFP amid a historic run on deposits and other market stress after Silicon Valley Bank and Signature Bank failed in lightning-fast fashion, tapping emergency lending powers the central bank can roll out – with the approval of the Treasury secretary – under “unusual and exigent circumstances.”

While the Fed said it would continue making new loans until the program concluded, it said that as of Thursday it was raising the interest rate banks would pay for any new Fed lending…