Central Bank collateral frameworks before and during the crisis The case of the Federal Reserve Central banking, liquidity crises and financial stability lecture Mai 20 th, 2011 Presentation by 1
Goals of the Collateral framework Keep control over the monetary base and the size of the balance sheet Manage the portfolio to minimise risks while providing liquidity Mitigate the impact of collateral eligibility on asset prices: Rate depends on the type of collateral Collateral accepted: government securities and quasigovernment securities (are in ample supply) Size of operations generally smaller than ECB 2
What explains the choice of the collateral framework? Liquidity of the capital markets: very high in normal times in the US Structure of the banking system: highly concentrated in the US Preferences of the central bank: focus on market neutrality Legal constraints: Regulated in the Federal Reserve Act (FRA) 3
Two types of liquidity provision by the Federal Reserve Purpose Conducted by Counterparties Collateral Temporary Open Market Operations Monetary policy implementation FOMC (Federal Open Market Committee) / Federal Reserve bank of New York Currently 20 primary dealers 1 theoretically open to all types of institutions Mainly government securities Primary Credit Facility Lender of last resort Board of governers Around 7,000 banks Wide range possible 1. http://www.newyorkfed.org/markets/pridealers_current.html 4
Eligibility criteria for collateral Type of assets Isuer residence Credit standards Currency Temporary Open Market Operations Treasury securities Government agency securities ABS if guaranteed by an agency Domestic N/A USD Primary Credit Facility Securities by (also local) government, banks, corporate, supranational issuers ABS Consumer loans, Domestic and foreign Mimimum BBB, but AAA for some complex assets Major currencies 5
Some examples of haircuts applied 6
Source: Alexandre Chailloux, Simon Gray and Rebecca McCaughrin (2008): 7
The financial crisis led to changes in the collateral framework Commercial banks need for liquidity increased. at the same time, the quality of their assets decreased Implementation of several collateralized lending frameworks broaden the narrow operational framework Increase number of counterparties Increase types of counterparties Increase types of collateral accepted 8
Evolution of events and lending against collateral Beginning stresses in interbank market Bear Stears is bought by JP Morgan Chase Lehman Brothers collapse Federal Funds rate at 0 0.25% Aug 07 Dec 07 Mar 08 Sep 08 Oct 08 Nov Dec 08 Feb 10 Term Discount Window Program Term Auction Facility (TAF) Primary Dealer Credit Facility Term Securities Lending facility AMLF CPFF MMIFF TALF End of Programs Measures for interbank markets Measures for other markets 9
Term Auction Facilitiy (TAF) Created: December 2007 Only for depository institutions (not primary dealers) Collateral: discount window collateral For 28 or 84 days 10
Primary Dealer Credit Facility Created: March 2008 For primary dealers Standing facility, overnight Collateral: broad range of highly marketable securities Collateral expanded in September 2008 11
Term Securities Lending Facility Created: March 2008 For primary dealers Offered every month, for a month Collateral: US treasuries, agency MBS and investment grad debt securities Collateral expanded in September 2008 12
Facilities to support functioning of individual Markets Asset-backed commercial paper money market mutual fund lending facility (AMLF) Created Sep. 2008 Collateral: first-tier ABCP Commercial paper funding facility (CPFF) Created Oct. 2008, for eligible commercial paper isssuers Collateral: newly issued 3-month commercial papers Money market investor funding facility (MMIFF) Created Oct. 2008, for money market mutual funds etc. Collateral: deposit certificates, bank notes, highly rated CP 13
Term Asset-Backed Securities Lending Facility (TALF) Created: Nov. 2008 For all U.S. persons that own eligible collateral Collateral: recently issued ABS and Commercial mortgage backed securites (CMBS), AAA rated and in USD 3-5 year loan 14
Collateral pledged to Federal Reserve Lending Facilities Source: Cheun, Köppen-Mertes and Weller (2009): 15
Sources Alexandre Chailloux, Simon Gray and Rebecca McCaughrin (2008): Central Bank Collateral Frameworks: Principles and Policies. IMF Working Paper Samuel Cheun, Isabel von Köppen-Mertes and Benedict Weller (2009): The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil. ECB Occasional Paper Series ECB Monthly Bulletin (October 2007): The collateral frameworks of the Federal Reserve System, the Bank of Japan and the Eurosystem. ECB Federal Reserve Discount Window http://www.frbdiscountwindow.org/collateralhome.cfm?hdrid=21&dtlid= Federal Reserve Collateral Guidelines: http://www.frbdiscountwindow.org/frcollguidelines.pdf http://www.newyorkfed.org/markets/pdcf.html 16
Appendix: Current list of primary dealers BNP Paribas Securities Corp. Barclays Capital Inc. Cantor Fitzgerald & Co. Citigroup Global Markets Inc. Credit Suisse Securities (USA) LLC Daiwa Capital Markets America Inc. Deutsche Bank Securities Inc. Goldman, Sachs & Co. HSBC Securities (USA) Inc. Jefferies & Company, Inc. J.P. Morgan Securities LLC Merrill Lynch, Pierce, Fenner & Smith Incorporated MF Global Inc. Mizuho Securities USA Inc. Morgan Stanley & Co. Incorporated Nomura Securities International, Inc. RBC Capital Markets, LLC RBS Securities Inc. SG Americas Securities, LLC UBS Securities LLC. 17 Source: http://www.newyorkfed.org/markets/pridealers_current.html