Credit Crisis: Fed Reacts [again]
TAF not working, here comes the TSLF
Since the coordinated actions taken in December 2007, the G-10 central banks have continued to work together closely and to consult regularly on liquidity pressures in funding markets. Pressures in some of these markets have recently increased again. We all continue to work together and will take appropriate steps to address those liquidity pressures.
To that end, today the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank are announcing specific measures.
Federal Reserve ActionsThe Federal Reserve announced today an expansion of its securities lending program. Under this new Term Securities Lending Facility (TSLF), the Federal Reserve will lend up to $200 billion of Treasury securities to primary dealers secured for a term of 28 days (rather than overnight, as in the existing program) by a pledge of other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS. The TSLF is intended to promote liquidity in the financing markets for Treasury and other collateral and thus to foster the functioning of financial markets more generally. As is the case with the current securities lending program, securities will be made available through an auction process. Auctions will be held on a weekly basis, beginning on March 27, 2008. The Federal Reserve will consult with primary dealers on technical design features of the TSLF.
In addition, the Federal Open Market Committee has authorized increases in its existing temporary reciprocal currency arrangements (swap lines) with the European Central Bank (ECB) and the Swiss National Bank (SNB). These arrangements will now provide dollars in amounts of up to $30 billion and $6 billion to the ECB and the SNB, respectively, representing increases of $10 billion and $2 billion. The FOMC extended the term of these swap lines through September 30, 2008.
The actions announced today supplement the measures announced by the Federal Reserve on Friday to boost the size of the Term Auction Facility to $100 billion and to undertake a series of term repurchase transactions that will cumulate to $100 billion.
Note this move doesn’t NOT increase liquidity, just like the TAF does NOT increase liquidity.
See H.4.1 releases for details
Add, related:
Concerted central bank action - SERIOUS ACTION!
Paul Krugman: Sterilized intervention, big time
Paul Krugman: Non-standard Ben
Ben Bernanke et al: Monetary Policy Alternatives at the Zero Bound
Redirection of Liquidity, Not Creation of Liquidity
March 11th, 2008 at 11:07 am
[...] to the Fed’s liquidity push. (Alea, MarketBeat, Big Picture, Aleph [...]
March 11th, 2008 at 11:53 am
JCK — im intrigued by all this.
1. Too much news these days creates a brief breeze-effect to the hair remaining just above my forehead.
2. Is your point that this is all just central bank spoofing?
Murphy/Alphaville
March 11th, 2008 at 12:57 pm
Paul:
Spoofing is good way to put it, and it can work for a short while but not forever.
The TAF has failed that much is clear if it hadn’t there would be no need for the TSLF. Too early to make a judgment about the TSLF, not enough details about the pricing and how the auctions will work..etc…but people who will read the FT tomorrow morning will be under the impression that “A group of the world’s largest central banks launched a co-ordinated effort to inject liquidity into money markets” (Norma Cohen) and they are not doing that all, they are swapping treasuries vs dodgy paper. Krugman uses the right word: sterilised intervention and there are precious few examples of that ever working.
The banks need capital, the Fed can do nothing about that. Either some mark to market rules have to be eased or capital ratio will have to be relaxed for awhile.
March 12th, 2008 at 12:06 am
jck: Any idea what the difference is between this and TAF? Seems exactly the same except for $ size of the auction, unless the decrease the haircut on MBS or something I don’t see what the big deal is
March 12th, 2008 at 3:33 am
Gary:
TAF is cash for securities and is for depositary institutions i.e banks not investment banks like bear stearns.
TSLF is treasuries for agency securities or other securities and is for primary dealers,the usual counterparties for open market operations.
I don’t see this as a big deal either, it serves a purpose but it won’t solve the crisis.
But for the U.S it is a kind of philosophical change they usually stick to treasuries on the balance sheet. Every other central bank has been taking private paper for decades or even hundreds of years at the BoEngland.