11/11/2023 0 Comments What is rss podcastIt was created in March 2023, after the failures of Silicon Valley Bank and Signature Bank, to lend to other banks that had big unrealized losses on their holdings of government bonds and were, therefore, at risk of large-scale withdrawals of deposits. The Bank Term Funding Program (BTFP) is a lender of last resort facility. The banks pledge collateral – bonds, loans or other assets – so the central bank isn’t at risk of losing money. A lender of last resort – a central bank like the Federal Reserve – provides loans to banks so they can meet depositor demands. If the bank cannot borrow money, it may be forced to call its loans or sell other assets quickly, sometimes at a loss, to raise cash. This can happen if depositors lose confidence in the bank’s ability to meet all withdrawal demands so every depositor tries to be at the head of the line – a run on the bank, a phenomenon explained by economists Douglas Diamond and Philip Dybvig for which they shared a Nobel Prize in 2022. However, if depositors withdraw a lot of money at once, the bank may not have enough cash on hand to satisfy them. ![]() Banks are required by law to maintain a portion of deposits in cash so that they can meet customer demands for withdrawal. In normal times, when most depositors are content to leave their money in the bank, this works well. What is a lender of last resort?īanks, in general, take deposits from their customers (who often can take their money out whenever they want) and put the money into loans or securities (often longer-term commitments that sometimes cannot be easily sold). It joined other regulators in lifting the $250,000 per account deposit insurance for customers of those two banks, described in more detail in “ How does deposit insurance work?” This explainer describes other steps the Fed took. ![]() In March 2023, the Federal Reserve responded quickly to the failures of Silicon Valley Bank (SVB) and Signature Bank.
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