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15 Mar 2023

Econ Digest

Are measures to cope with US bank failures called bank bailouts?


        The US authorities have implemented two unprecedented measures to deal with their bank failures this time around. Two major measures are 1. the Bank Term Funding Program (BTFP), which aims 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 to banks for up to one year, with the loan limit equivalent to the value of assets used as collateral. These assets will be valued at par, or face value of instruments rather than the market price; and 2. Providing protection to all depositors at shuttered banks using the funds from the Federal Deposit Insurance Corporation (FDIC), is an extraordinary step, compared to normal circumstances where only up to USD250,000 per depositor, per insured bank is covered.

        KResearch views that the two measures above are not considered to be bank bailouts because there is no additional capital injection involved, meaning taxpayer funds are not required. However, KResearch believes that the shortcoming of 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, providing full protection to depositors may become a burden to other banks that remain in operation as they will be required to make contributions to the deposit protection fund later on. Although the BTFP measure may be effective to a certain extent, lingering concern regarding several US banks reflects that confidence in the US banking system may not fully recover in the near term. Additionally, the Fed is again under market pressure to weigh problems 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.

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