The encyclopedia · Finance & Accounting · Financial decision · 2008–2010
The Fed lent Treasuries, not cash, to unfreeze the collateral market.
In March 2008 the Fed began auctioning $200bn of Treasury securities to dealers for 28-day terms against mortgage collateral, easing the funding freeze.
Federal Reserve System
The solution
As mortgage losses spread in early 2008, banks and dealers found Treasuries — the safest, most usable collateral — increasingly hard to obtain, and funding markets seized up. On 11 March 2008 the Federal Reserve announced the Term Securities Lending Facility (TSLF).
Under the TSLF the Fed lent up to $200 billion of Treasury securities to primary dealers for 28-day terms (versus overnight under the old program) in competitive single-price auctions, accepting agency debt, agency mortgage-backed securities and AAA-rated private-label MBS as collateral.
Weekly auctions began 27 March 2008; the facility ran until 1 February 2010. The design let dealers turn mortgage collateral into Treasury collateral, relieving the financing squeeze in Treasury and repo markets without the Fed buying private assets.
Why it worked
- Dealers needed Treasuries as collateral, not just cash.
- A 28-day term bridged the funding dates that made overnight lending useless.
- Auction pricing kept the facility market-based and self-limiting.
What can be applied
In a freeze, the bottleneck is often one specific asset class; instead of flooding cash (which may not reach the pinch point), lend the scarce collateral directly against the frozen collateral.
Aftermath
The TSLF was extended with an options program (TOP) in 2008 and wound down as markets normalised, expiring on 1 February 2010; it became a template for using securities lending, not just cash lending, as a crisis tool.
Sources
- Federal Reserve and other central banks announce specific measures designed to address liquidity pressures in funding markets
- Term Securities Lending Facility
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