The US authorities have used two unprecedented measures to deal with their bank failures this time around. The first measure is the Bank Term Funding Program (BTFP), which is intended to reduce the liquidity risk at banks and depository institutions that “remain in operation”. The merit of the BTFP lies in the fact that it offers loans of up to one year in length to banks, and the loan limit is equivalent to the value of assets used as collateral. These assets will be valued at par, not the market price. The second measure is the protection to all depositors at shuttered banks, an extraordinary step compared to normal circumstances.
We at KResearch are of the view that the two measures above are not considered as bank bailouts because there is no additional capital injection involved, meaning taxpayer funds are not required. However, an issue that warrants close monitoring for the BTFP is whether or not banks that remain in operation and have to cope with bank runs will have a sufficient amount of high-quality bonds to be used as collateral in order to obtain loans from the Fed for reimbursing their depositors. Meanwhile, the full protection to depositors may become a burden to other banks that remain in operation as they will be required to pay contributions to the deposit protection fund later on.
Although the BTFP measure may be affective to a certain extent, lingering concern towards several US banks reflects that confidence in the US banking system may not fully recover over the near term. Additionally, the Fed is being pressured by the market yet again to weigh issues in the banking sector versus its attempt to address related-inflation problems for the assessment of its interest rate outlook. In any case, the Fed is required to make a cautious and prudent decision on its interest rate outlook, given that the risk to the US economic and financial systems has significantly increased. Any error may result in increased risk and broad-based impact to its economic and financial systems.