Unconventional Monetary Policy Tools Michelle Gleeck Patrick Higgins Barry Kelly Cian McDonnell
INTRO Quantitive Easing or Credit Easing
Conventional tools include: 1) Open Market Operations 2) The Discount Rate 3) Reserve Requirements
Why Unconventional? The conventional tools predominantly used have been exhausted, and the federal funds rate is now between 0 and.25%.
Beyond the Fed Funds Rate: The Fed s Policy Toolkit: These tools can be divided into three main groups: 1) Lending to financial institutions involves the provision of short-term liquidity to sound financial institutions. 2) Providing liquidity directly to key credit markets provision of liquidity directly to borrowers and investors in key credit markets. 3) Buying longer-term securities
Term Auction Facility TAF Through the TAF sound institutions can obtain longer term funding on a collateralized basis Single Price Auction of 28-day,84-day loans Eligibility of depository institutions CAMELS Rating, Primary Credit DW standards Terms and Conditions, Eligible Collateral Minimum/Maximum bids, degree of collateralization etc How much is available at each auction? Latest auction: 26 th January, $150bn worth of 84-day credit
TAF Objective - To alleviate liquidity pressures on financial institutions during market disruption.
Term Securities Lending Facility (TSLF) Allows primary dealers to swap illiquid assets for in-demand Treasury securities What is a primary dealer? - Bank or broker that may trade in U.S Govt securities directly with the Fed. - Fed lending up to $200billion of Treasury securities to primary dealers in exchange for less creditworthy collateral. Eligible collateral?
TSLF Subject to haircut? - Percentage that is subtracted from the par value of the assets that are being used as collateral. The size of the haircut reflects the perceived risk associated with holding the assets How are loans allocated? Terms and Conditions How do agents bid? Primary Aim of TSLF - Improve the ability of primary dealers to provide financing to participants in securitization markets.
TSLF Options Programme (TOP) Allows PD s to bid for options on TSLF loans Price of loan fixed; price of option determined by competitive auction. Offering liquidity over periods of heightened collateral market pressures e.g. Quarter end dates Additional $50billion on top of TSLF funds of $200bn Option Fee = Total Price of borrowed securities*stop-out rate*term of loan in days/360days...owed regardless of whether option is exercised.
Primary Dealers Credit Facility (PDCF) An overnight loan facility that provides funding to primary dealers for a range of eligible collateral. Eligible collateral Broad range of collateral eligible Again subject to haircut Rates and Frequency-based fee Rate of loan is primary credit rate Fee charged after certain amount of business day s of use
PDCF How much can be borrowed? Loan equivalent of margin-adjusted collateral pledged Aims of PDCF - Providing liquidity to key players in credit markets $150billion extended at peak use in October 2008
Commercial Paper Funding Facility Created to improve liquidity in the shortterm Supported by the Treasury Operational from Oct 27 2008 - April 30 2009
Purpose of the CPFF To enhance liquidity of CP market by increasing CP funding to issuers and providing assurance to investors. CPFF will improve liquidity through SPV SPV will purchase 3-month unsecured and ABCP directly from issuers. (financed by NY FED). SPV holds CP until maturity, uses proceeds to repay its loan from NY FED
Without short-term funding, institutions - tap credit lines or restrict spending - deepening recession. By eliminating risk that issuers will not be able to repay CP - should encourage investors into CP. Increased investor demand - lower CP rates. Improved CP market will enhance financial intermediaries ability to meet U.S. credit needs.
Terms and Conditions Only U.S. issuers, including U.S. issuers with foreign parent eligible. 10 b.p. facility fee on registration. Must register 2 business days in advance. Max amount - greatest amount of $ CP it had outstanding - Jan 1 - Aug 31 08. (idea is to rollover existing CP) CP rated A1/F1/P1, 3-month maturity.
Price SPV will purchase at? CP discounted by rate equal to a spread over 3month OIS. Spread for unsecured CP -100 b.p. p.a. Credit Surcharge unsecured-100bp p.a. Spread for ABCP - 300 b.p. p.a.
ABCP MM LIQUIDITY FACILITY Program intended to help restore liquidity to the ABCP markets. Runs from Sep 19th 2008 - Apr 30th 2009 Administered by the FRBB
ABCP - short-term investment vehicle - notes generally backed by assets such as trade receivables. MMFs - Link between investor return and business debt. Weak demand for CP, massive outflows from MMFs - forced CP sales in illiquid markets - leading to some losses. Compounding CP market issues was the reallocation of MMFs portfolios toward safer, more liquid Treasury securities. (see graph) MMF outflows slowed after Treasury announced temporary guarantee of MMFs and FED anounced AMLF on SEP 19.
AMLF provides nonrecourse loans at primary credit rate to eligible institutions. Can then use loans to purchase eligible ABCP at amortized cost from MMFs. Credit risk effectively transferred to FED. Institutions can earn profits through borrowing at the discount window and purchasing ABCP. (see graph) MMFs - experiencing redemption can sell its ABCP to banks with no loss. Bank can then make profit by earning the spread between discount window and ABCP. By increasing liquidity AMLF also provides incentives for MMFs to resume purchasing ABCP from issuers.
AMLF Eligibility- U.S. depository institutions, bank holding companies, U.S. branches and agencies of foreign banks. Only U.S. dollar denominated issues from a U.S. issuer and rated First-Tier securities are eligible. (A1,F1,P1 by two NRSRO s). Borrowers must have account with one of FRB s. Nonaccountholders may borrow through correspondant. Credit risk effectively transferred to the FED. No Fee. RATES - Loans made at rate equal to primary credit rate on initiation date that the loan is made. Fixed for term of loan. MATURITY - Non-depository - Max 270 days - Depository - Max 120 days
Price SPV will purchase at? CP discounted by rate equal to a spread over 3month OIS. Spread for unsecured CP -100 b.p. p.a. Credit Surcharge unsecured-100bp p.a. Spread for ABCP - 300 b.p. p.a.
INTEREST ON RESERVES AND EXCESS RESERVES Interest on required and excess reserves is 25 bps Prior rates had been set as the average target federal funds rate Paying interest on required reserve balances eliminates implicit tax
MMIFF MONEY MARKET INVESTOR FUNDING FACILITY. FOR THE PURCHASE OF COMMERCIAL PAPER AND CERTIFICATES OF DEPOSIT THAT WILL MATURE IN GREATER THAN 7 DAYS AND LESS THAT 90 DAYS. INTENDED TO RETURN LIQUITITY TO MONEY MARKETS & FACILITATE THE AVAILABILITY OF SHORT TERM CREDIT.
MMIFF SPECIAL PURPOSE VEHICLES (SPVS) Q: WHY NOT BORROW DIRECTLY FORM THE FED?... A: REGULATED BY THE U.S. SECURITIES AND EXCHANGE COMMISSION. 90% CASH, 10 % ASSET BACKED COMMERCIAL PAPER. RISK OF DEFAULT?
TALF TERM ASSET BACKED SECURITY LENDING FACILITY. ASSIST THE CREDIT MARKETS IN ACCOMODIATING THE CREDIT NEEDS OF CONSUMERS AND SMALL BUSINESSES $200 BILLION, $20 BILLION CREDIT PROTECTION FROM TREASURY DEPT. CONDITIONS: NON-RECOURSE, ONE-YEAR TERM, FULLY SECURED BY ELIGIBLE ABS.
TALF Q: WHO IS THE TALF DESIGNED TO HELP?..A: AUTO LOANS, CREDIT CARD LOANS, SMALL BUSINESS LOANS. WHO CAN BORROW? WHAT ABOUT THE RISK? HAIRCUTS!!!!!
CONCLUSION LATEST FOMC STATEMENT RISK THAT INFLATION COULD PERSIST FOR A TIME BELOW RATES THAT BEST FOSTER ECONOMIC GROWTH AND PRICE STABILITY IN THE LONGER TERM CONTINUED PURCHASE OF AGENCY DEBT AND MBS, LONGER TERMED TREASURY SECURITIES.
The great depression 1929 3.2% UNEMPLOYED 1933 25% UNEMPLOYED SOLVENCY VS LIQUIDITY INFLATION -25% 29-33
CREDIT VS MONETARY 11-1 VOTE FOR PROPOSALS JEFFERY M.LACKER VOTED AGAINST DUE TO PREFERENCE FOR EXPANDING MONETARY BASE BY PURCHASING U.S TREASURY SECURITIES AS OPPOSED TO TARGETED CREDIT PROGRAMS.
Thank You For Your Attention!