The Federal Reserve Bank of New York today released The Term Securities Lending Facility: Origin, Design and Effects, the latest article in its series Current Issues in Economics and Finance.
Authors Michael J. Fleming, Warren B. Hrung and Frank M. Keane offer a detailed look at the Term Securities Lending Facility (TSLF), introduced by the Federal Reserve in March 2008 to address unprecedented liquidity pressures in the funding markets and improve the operation of the broader financial markets.
The authors explain that the TSLF, which uses an auction format, increases the ability of primary dealers to finance their positions in the private market. The facility enables the dealers to pledge securities temporarily as collateral for Treasuries, which are relatively easy to finance. As a result, the dealers have less need to sell assets into illiquid markets and lenders are less likely to experience a loss of confidence.
Fleming, Hrung and Keane discuss the market conditions leading up to the launch of the TSLF, the features that distinguish it from other Fed liquidity facilities and the structure and operation of the program. They also review the first ten auctions, conducted in spring 2008, for early evidence of the facility’s effectiveness.
The study concludes that the TSLF contributes to an enhanced functioning of a broad set of collateralized funding markets by more effectively balancing supply and demand in the markets for Treasury and non-Treasury collateral. The lower financing spreads observed between Treasury and non-Treasury collateral markets after the facility was introduced suggest that the TSLF was effective in improving market liquidity. Much of the initial success of the TSLF can be attributed to the first auction, on March 27, 2008, which drew a large amount of participation.
Michael J. Fleming is an assistant vice president, Warren B. Hrung a financial specialist, and Frank M. Keane an officer at the Federal Reserve Bank of New York.