Fed using new facility to provide Liquidity

“US banks quietly borrow $50bn from Fed via new credit facility”.


On the front page of Tuesday’s Financial Times, Gillian Tett ran an intriguing story about a new facility being used by the Fed to inject large amounts of extra liquidity into the US Banking system. The normal method of the Fed lending cash to US banks is through the Discount Window. This is an emergency lending facility used by banks that face a short-term liquidity shortage. This might be due to a sudden and unexpected increase in their lending activity or some other problem such as technology breakdowns. It is also associated with supporting banks that are in financial difficulties a bit like Northern Rock in the UK. This can make banks rather reluctant to use the discount window in case word leaks out and the bank is seen as a bank that is in financial trouble. It seems that in response to this situation the Fed has unveiled a new lending facility called “Term Auction Facility” or TAF. Under these operations US banks have been able to secure substantial loans without having to offer the normal very secure collateral such as “high quality” government bonds. There seems little doubt the banks have become increasingly reliant on this faculty to meet their liquidity needs. The FT article quotes Michael Feroli, an economist at JP Morgan, as saying that “some Fed officials have expressed an interest in keeping and possibly expanding the TAF”. So it looks like this is a new credit facility that might be in use for some time.