A Sign of Normalization
During the recent financial turmoil, the Federal Reserve created several emergency credit facilities to address the extreme demands for liquidity. Several of these facilities involved lending to institutions outside the set of those permitted by the Federal Reserve Act in normal circumstances. To extend credit to them, the Fed needed to invoke its authority under section 13(3) of the Act, which allows it to expand the types of permissible borrowers under exigent and emergency conditions.
Four of the Federal Reserve’s new credit facilities were allowed to expire on February 1. These include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). As financial market functioning improved, private sources of liquidity became sufficient and the demand for credit via the special facilities diminished. It is important to note that credit extended through these facilities required good collateral backing. Moreover, to limit the use of the facilities, the terms of lending were set to be less attractive than private sources. In this sense, the facilities mimicked the features of the Fed’s Discount Window—a facility available to qualified depositories in normal times.
The Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF) were created following the collapse of Bear Stearns and its subsequent sale to JP Morgan in March 2008. These two facilities gave primary dealers greater access to credit as credit conditions worsened and their private sources of liquidity dried up. Toward the end of 2009 and into the beginning of this year, spreads on most forms of credit abated, and financial markets are now functioning in an orderly way.
In September 2009, the collapse of Lehman Brothers spurred the formation of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF). Both of these programs were designed to help assure the viability of the commercial paper market. As the commercial paper market normalized, private sources became sufficient to sustain liquidity demands.