The purpose of this exercise is to analyze
and describe conventional and unconventional lending facilities used by the Federal Reserve to support the financial sector during the crisis.
In particular,
among the various facilities used by the Fed, the present exercise focuses on
the Term Auction Facility (TAF). Where it is not differently specified, the
following information was obtained from Fed’s website. The data are also available at the same website, and they are provided here.
(a) Goals of the program and intended beneficiaries.
The TAF is a temporary program managed by the
Fed designed to "address elevated pressures in short-term funding
markets." Under the program the Fed auctions collateralized loans with various
maturities (up to 84 days) to depository institutions that are "in
generally sound financial condition" and "are expected to remain so
over the terms of TAF loans." All depository institutions that are
eligible to borrow under the primary credit program are eligible to participate
in TAF auctions. All TAF loans must be fully collateralized. Eligible
collateral is the same as that accepted for discount window loans and includes
a wide range of financial assets. Each TAF auction is for a fixed amount, with
the rate determined by the auction process (subject to a minimum bid rate).
The program was first instituted in
December 2007 in coordination with simultaneous and similar initiatives
undertaken by the Bank of Canada, the Bank of England, the European Central
Bank and the Swiss National Bank. The final Term Auction Facility auction was
conducted on March 8, 2010.
Purpose
The TAF was a response to problems
associated with the subprime mortgage crisis. Because of widespread concerns
about the condition of many financial institutions, investors became very
reluctant to lend, especially at maturities beyond the very shortest terms.
Hence, the main purpose of this program
was to provide depository institutions with liquidity in an alternative way
with respect to the discount window. Many banks were reluctant to borrow at the
discount window out of fear that their borrowing would become known and would
be erroneously taken as a sign of financial weakness. On the other hand, by
offering loans at rates that are below-market (LIBOR), the TAF discreetly
provides relatively cheap short-term funding to ailing institutions. In other
words, the goal of the TAF was to reduce the incentive for banks to hoard cash,
i.e. to reduce the liquidity premium.
(b) Time series of aggregate borrowing under the facility.
(c) List of the top 10 users of the facility.
Borrower
|
Loan amount ($mn)
|
BANK OF AMERICA NA
|
212,167.00
|
BARCLAYS BK PLC NY BR
|
188,326.00
|
BANK OF SCOTLAND PLC NY BR
|
180,920.00
|
WELLS FARGO BK NA
|
153,953.20
|
WACHOVIA BK NA
|
147,025.00
|
SOCIETE GENERALE NY BR
|
124,377.20
|
DRESDNER BK AG NY BR
|
123,328.20
|
RBS CITIZENS NA
|
117,150.00
|
BAYERISCHE LANDESBANK NY BR
|
108,190.00
|
DEXIA CREDIT LOCAL NY BR
|
105,166.80
|
(d) Analysis of the effectiveness of the program.
When the TAF was dismissed, on March 2010,
the total credit extended to banks added up to $3,818 billion. Also, the Fed points out that all loans made under the facility
were completely refunded together with interest, in compliance with the terms
of the facility.
Now, the Federal Reserve claimed that “by
increasing the access of depository institutions to funding, the TAF has
supported the ability of such institutions to meet the credit needs of their
customers.” So, the program enabled the Federal Reserve to provide term funds
to a broader range of counterparties and against a broader range of collateral
than it could through open market operations. As a result, the TAF helped
promote the distribution of liquidity when unsecured bank funding markets were
under stress.
On the other
hand, as Thornton (2010) observes, “rather than reducing the liquidity premium
in LIBOR rates, the announcement of the TAF increased the risk premium in financial
and other bond rates because market participants interpreted the announcement
by the Fed and other central banks as a sign that the financial crisis was
worse than previously thought”. Thornton provides some empirical evidence, too.
As a
conclusion, the TAF had an ambiguous overall effect as for its ability to
effectively decrease the propensity of institutions to hoard liquidity and
provide short-term funding to the financial system.
(e) Description
of an analogous program at
the ECB.
As reported in
December 12th, 2007 Press Release by the European Central Bank
(ECB), “The Governing Council of the ECB has decided to take joint action with
the Federal Reserve by offering US dollar funding to Eurosystem counterparties.
The Eurosystem
shall conduct two US dollar liquidity-providing operations, in connection with
the US dollar Term Auction Facility, against ECB-eligible collateral for a
maturity of 28 and 35 days. The submission of bids will take place on 17 and 20
December 2007 for settlement on 20 and 27 December 2007, respectively. The US
dollars will be provided by the Federal Reserve to the ECB, up to $20 billion,
by means of a temporary reciprocal currency arrangement (swap line).”
So, the ECB
implemented a program similar to Fed’s TAF by borrowing US dollars through a
foreign-exchange swap line. Foreign-exchange swaps are one of the various
instruments used by the ECB in order to carry out its fine-tuning operations
(i.e. ad hoc actions with the aim of managing the liquidity situation in the
market and steering interest rates, in particular in order to smooth the
effects on interest rates caused by unexpected liquidity fluctuations in the
market). In particular, FX swaps consist of simultaneous spot and forward
transactions in euro against a foreign currency. Basically, the Eurosystem buys
(or sells) euro spot against a foreign currency and, at the same time, sells
(or buys) it back in a forward transaction on a specified repurchase date.
Other references:
Wikipedia - Term Auction Facility
European Central Bank, The Implementation of Monetary Policy in the Euro Area, 2011
