Document Type

Case Study

Case Series

Broad-Based Emergency Liquidity

JEL Codes

G01, G28


Following the announcement on August 9, 2007, by BNP Paribas that it was suspending redemptions for three of its open-end investment funds that had invested heavily in mortgage-backed securities, liquidity in the American interbank and short-term funding markets tightened considerably. On August 17, the Federal Reserve lowered the cost of borrowing from the discount window. However, usage remained low, due largely to the perception that such borrowing implied weak financials. In December, the Fed launched the Term Auction Facility (TAF), which used single-rate auctions to mitigate this stigma. The TAF offered discount-window credit of 28 days, and later, 84 days. Although the TAF avoided the stigma of the discount window, it relied heavily on the discount window’s infrastructure, and the same banks were eligible for both programs. Foreign banks could access TAF funds via their US branches or subsidiaries and ultimately accounted for about two-thirds of the program’s usage. The TAF provided USD 493 billion at its peak in March 2009 and was one of the Fed’s most-used programs during the Global Financial Crisis of 2007-09. A rich body of literature mostly concludes that the TAF reduced interbank funding stress.

Date Revised