Beginning last week and continuing over this past weekend, there were several key developments from federal regulators (including the Department of Treasury, the Federal Reserve and the FDIC) related to the failure of Silicon Valley Bank (“SVB”), Signature Bank (“Signature”) and broader issues of FDIC deposit insurance protections and current bank liquidity challenges. (Please see our related updated client alert on developments with Silicon Valley Bank, and our updated Client Alert on developments with Signature Bank on March 12, 2023 as well).

Federal Reserve Announces New Bank Term Funding Program (“BTFP”)

On March 12, 2023, the Federal Reserve issued a press release announcing the creation of the new Bank Term Funding Program (“BTFP”) and containing a link to the BTFP Term Sheet.

The BTFP will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors, and to bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy. The BTFP is intended be an additional source of liquidity against high-quality securities, eliminating an financial institution’s need to quickly sell those securities in times of stress, as SVB did days earlier.

With approval of the Treasury Secretary, the Department of the Treasury will make available up to $25 billion from the Exchange Stabilization Fund as a backstop for the BTFP, but the Federal Reserve does not anticipate that it will be necessary to draw on these backstop funds.

According to the BTFP Term Sheet:

1. Program; Borrower Eligibility;: The BTFP will offer loans (defined as “advances” in the BTFP Term Sheet) to banks, savings associations, credit unions, and other eligible depository institutions (“eligible borrowers”) pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as “eligible collateral.”
2. Eligible Collateral; Collateral Valuation: “Eligible collateral” includes any collateral eligible for purchase by the Federal Reserve Banks in open market operations (see 12 CFR § 201.108(b)); provided the collateral was owned by the borrower as of March 12, 2023. The eligible collateral will be valued at par, and margin will be 100% of par value.
3. Advance Size: Advance size of loan is limited to the value of pledged eligible collateral.
4. Rate: Rate for term advances will be the one-year overnight index swap rate + 10 bps (fixed for the term of the advance on the day the advance is made).
5. Advance Term: Advances will be made to available eligible borrowers for a term of up to one year.
6. Fees; Prepayment: No fees and no prepayment penalty for prepaying advances (including for purposes of refinancing).
7. Recourse: Advances will be made with recourse to the eligible borrower beyond the pledged collateral.
8. Program Duration: Advances can be requested under BTFP until at least March 11, 2024.
9. Credit Protection by the Department of the Treasury: The Department of the Treasury would provide $25B (using the Exchange Stabilization Fund) as credit protection to the Federal Reserve Banks in connection with the BTFP.

The Federal Reserve Board also stated that it is carefully monitoring developments in financial markets, but that the capital and liquidity positions of the U.S. banking system are strong and the U.S. financial system is resilient. 

The Federal Reserve Board also reminded depository institutions that they may obtain liquidity against a wide range of collateral through the Fed’s discount window, which remains open and available, and that the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window.

The Federal Reserve Board closed the press release announcing the BTFP stating that it “is closely monitoring conditions across the financial system and is prepared to use its full range of tools to support households and businesses, and will take additional steps as appropriate.”  This may include additional facilities in the future, such as some form of Temporary Liquidity Guarantee Program that was previously deployed in response to the 2008 financial crisis.

First Republic Bank Announces Private Liquidity Injection from J.P. Morgan Chase and Additional Borrowing Capacity from the Federal Reserve

On March 12, 2023, First Republic Bank issued a press release stating that “it has further enhanced and diversified its financial position through access to additional liquidity from the Federal Reserve Bank and JPMorgan Chase & Co.”

• First Republic Bank also stated that the additional borrowing capacity from the Federal Reserve, continued access to funding through the Federal Home Loan Bank, and ability to access additional financing through JPMorgan Chase & Co. increases, diversifies, and further strengthens First Republic’s existing liquidity profile.
• The total available, unused liquidity to fund operations at First Republic Bank is now more than $70 billion.
• This excludes additional liquidity First Republic Bank is eligible to receive under the BTFP announced on March 12, 2023.

We intend to monitor the situation and developments, and update this Client Alert as additional information becomes available. 

How We Can Help: Hunton Andrews Kurth LLP has assembled a cross-disciplinary team consisting of attorneys from our bank regulatory, finance, structured finance and securitization, capital markets, securities, private equity/VC, M&A, employers’ rights, bankruptcy, restructuring and creditors’ rights practices to assist clients with the unfolding situations involving Silicon Valley Bank, Signature Bank and any similarly situated banks.

Joshua McNulty, Peter Weinstock, and Beth Alexander Whitaker also contributed to this article.