The encyclopedia · Finance & Accounting · Financial decision · 2008
The Fed eased the collateral crunch by lending Treasuries at a single price
The TSLF auctioned Treasury securities, pledged in exchange for hard-to-finance collateral, in a uniform-price auction rather than minting cash.
Federal Reserve Board · Federal Reserve Bank of New York · primary dealers
the move
In early 2008 primary dealers held mortgage-backed and other securities that had become near-impossible to finance, because the market was demanding Treasury collateral as the safe asset. The Federal Reserve's response was not to inject cash but to lend the asset the market wanted.
The Term Securities Lending Facility, announced in March 2008, let primary dealers borrow US Treasury securities from the SOMA portfolio for 28 days against eligible collateral — tri-party repo collateral, investment-grade private-label MBS, commercial MBS, agency CMOs and other asset-backed securities.
The TSLF was run as a single-price auction: dealers submitted fee-rate bids and all accepted bids were awarded at the lowest accepted fee rate, with dealer awards capped at 20% of the offering and Schedule 2 collateral carrying a higher minimum bid rate.
Because the loans are collateral swaps rather than cash injections, the facility did not change overnight bank reserves. It eased the shortage of the safe asset that the repo market was demanding, letting dealers fund their portfolios and markets resume normal financing.
why it works
- The shortage was of Treasury collateral, not of cash, so lending the safe asset was the precise fix.
- A single-price auction let dealers bid their true need without a winner's curse, allocating scarce Treasuries to those who valued them most.
- Collateralising with securities rather than cash meant no new reserves were created, so it quantified as a liquidity facility, not money creation.
- The TSLF was the Fed's first use of a uniform-price auction as a crisis lending tool to non-bank dealers.
what transfers
Sometimes a market is short the wrong asset, not short liquidity: lend the safe asset the market actually needs, rather than printing money, and the private market can unjam itself.
what came after
The TSLF ran through the crisis, was expanded to accept more collateral in September 2008, and is credited with relieving the general-collateral financing squeeze. Its design became a reference for how a central bank can address a collateral shortage rather than a cash shortage.
references
- Term Securities Lending Facility: Program Terms and Conditions
- Statement Regarding System Open Market Account Activity (TSLF announcement)
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