On the Lookout for a Bank Credit Crunch

The Silicon Valley Bank imploded on Friday, March 10. To avert a widespread bank run, the Fed announced, on Sunday, March 12, that liquidity would be provided by the Bank Term Funding Program (BTFP). The Fed's press release stated that this new liquidity facility will offer loans of up to one year in length to financial intermediaries pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. "The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution's need to quickly sell those securities in times of stress," which is what caused SVB's downfall.

In effect, the Fed Put is back, though it is aimed at backstopping the banks this time, which indirectly supports the stock market. The question is whether that will do the trick to stop a credit crunch and a stock market crash.