Market Liquidity Programs: GFC and Before

MLPs have a key motivation to stabilize liquidity in a specific wholesale funding market that is under stress. The wholesale funding markets include CP, repos, asset-backed securities (ABS), MBS, certain bond markets, and (under some conditions) stock markets. MLPs have used a variety of techniques that central bankers would typically consider nonstandard and often relied on individual institutions as intermediaries or market-makers to pass on liquidity. MLPs can promote price discovery in frozen markets, provide temporary funding to tide markets over until buyers regain confidence, and head off cascading asset fire sales and liquidity runs.

Differences in legal authority can affect the methods through which central banks reach illiquid markets. At the time of the GFC, the ECB, Bank of Japan, and Bank of England faced few constraints limiting their MLPs. They lent to a broad range of private actors and made outright purchases on the open market.^FNAfter the crisis, the Financial Services Act 2012 clarified the Bank of England’s responsibility for crisis management but required the Bank to seek cooperation from Her Majesty’s Treasury if a liquidity program could put public funds at risk.

In contrast, the Federal Reserve is not allowed to extend loans to nonbanks in normal times, and its power to purchase market instruments is limited. Therefore, for many MLPs during the GFC, the Federal Reserve relied on its emergency lending power to lend to nonbanks, in some cases enabling those organizations to purchase assets on the open market.^FNAfter postcrisis reforms, the Federal Reserve retains the ability to conduct market-wide liquidity programs, but it now must obtain the Treasury secretary’s approval before establishing such a program and is required to report to Congress on usage. For example, in the AMLF, the Federal Reserve lent cash to primary dealers so that they could purchase ABCP from MMFs, and in the CPFF, it lent cash to primary dealers to purchase CP directly.

These legal limitations may have affected the Federal Reserve’s ability to reach illiquid markets quickly. In part because the Federal Reserve’s indirect asset purchase programs were more complex than the direct asset-purchase programs implemented by other central banks, in some cases (for example, the MMIFF, TALF, PPIP), they took more than one month to get off the ground. Certainly, response time is an element of effectiveness. Ultimately, however, the methods themselves do not seem to not have had much influence on the effectiveness of each MLP.

As discussed above, central banks sometimes dealt with stigma by using auctions instead of standing facilities. TAF first succeeded in utilizing the auction format (Armantier and Sporn 2013). TSLF was an extension of the System Open Market Account Securities Lending Program, and thus it seemed natural to be in the auction format. Other Federal Reserve and Bank of England programs, such as PPIP, APP, and CBSMS, were also conducted as auctions (Cecchetti and Disyatat 2010). Still, some MLPs were run as standing facilities and used other features to deal with stigma

Sometimes, the size of the program was large or even unlimited relative to the size of the market where liquidity was under pressure. Several specified no size limits, including the Bank of Japan’s Special Funds-Supplying Operations, the ECB’s Three-Year Long-Term Refinancing Operations (Three-Year LTRO), and the Bank of England’s Commercial Paper Facility (CPF) and Secured Commercial Paper Facility (SCPF). The Bank of England stated that the lack of limits was meant to ensure that the program would remain active as long as necessary until normal market conditions returned.

Targeted programs could be smaller and still achieve their purpose. For example, two programs—the Bank of Japan’s Outright Purchases of CP and the Bank of England’s CBSMS—sought to support price discovery by making sure that transactions took place. The frequency of the purchases was more important than the size. The Bank of England noted in a market notice that CBSMS was intended “to provide a back-stop offer to purchase modest amounts of a wide range of investment-grade sterling UK corporate bonds …, initially by facilitating market-making by banks and dealers.” (Bank of England 2009)

Programs sometimes had specified end dates, but those were often extended. In extending the durations of programs, central banks typically noted that market conditions had yet to normalize or that other conditions still existed that continued to destabilize the market. Denmark extended its Loan Bill Scheme to align its expiry date with those of other temporary credit facilities.

On the other hand, the Bank of England launched the CPF and SCPF with unspecified end dates. The Bank designed the facilities to last as long as abnormal conditions in corporate credit markets continued to impair the financing of real economic activity.

The private sector was sometimes consulted on the details of a program in advance.

The Bank of England, before launching CPF and CBSMS, invited detailed comments on various components of the programs from all interested parties, including eligible institutions, intermediaries, and infrastructure providers. Before launching SCPF, it published a consultative paper on the proposal, which was an extension to its Asset Purchase Facility (APF). Determining the appropriate extent of such consultation is a delicate balancing act: too little consultation carries the risk that a program will not meet any actual market needs; too much consultation can allow front-running, market manipulation, and other subverting of social goals for private ones.

Participation of private institutions ensured accuracy and effectiveness of certain MLPs and resulted in interesting structures of those MLPs.

The Federal Reserve’s MLPs made extensive use of private partners. For example, the TALF program used agents—primary dealers or other designated agents that handled certain administrative activities between the Federal Reserve Bank of New York (FRBNY) and borrowers. Bank of New York Mellon Corporation, the program custodian, was responsible for holding collateral, collecting and distributing payments and administrative fees, verifying the data provided by the TALF agents, and validating the pricing and ratings submitted for pledged securities. Collateral monitors, selected by the FRBNY, provided data and modeling services used in risk assessments and validated collateral pricing and ratings.

PPIP set up funds that were managed with full autonomy by prescreened private sector fund managers, which would buy legacy securities put up for sale by participating financial institutions. 

For the MMIFF program, industry representatives were involved in several decisions made in the program design, including: (1) choosing JPMorgan Chase & Company to be the sponsor of the conduit special purpose vehicles (SPVs), (2) deciding to establish five SPVs, and (3) choosing the 50 institutional issuers whose debt would be eligible for purchase. The issuers were chosen primarily because they were among the largest issuers of highly rated short-term liabilities held by MMFs. The Federal Reserve also sought to achieve geographical diversification in each SPV.

Some US facilities implemented a loss- and profit-sharing arrangement with the private investors participating in the program. For example, in TALF, private investors shared returns on the purchased ABCP pro rata with the Federal Reserve. In view of the long term-to-maturity of the loans, and wide variety of spreads for newly issued ABS and credit quality across the ABS market, it was desirable to have private investors’ scrutiny. This involvement also avoided undercutting market mechanisms for allocating credit to borrowers by relying on private structuring and pricing of new securitizations (Ashcraft, Malz, and Pozsar 2012).
Moreover, relying on private investors in newly issued ABS and commercial mortgage-backed securities (CMBS) also provided benchmark pricing to the market. Even a small number of transactions informed market participants about where securitization liabilities would tend to price. This reduced market and funding liquidity risk by diminishing uncertainty about the funding cost of the underlying loans and the feasibility of a securitization exit, easing a key constraint on willingness to lend to creditworthy borrowers. Additionally, with a first-loss position, investors had skin in the game, incentivizing them to screen collateral for credit quality (Ashcraft, Malz, and Pozsar 2012).
A similar arrangement was available in AMLF.
In MMIFF, issuers selling assets to an SPV shared the risk of those assets. When issuers sold assets to the SPV, they received 90% of the purchase price in cash and the rest in ABCP issued by the SPV. And since the ABCP was subordinated to the FRBNY’s recourse loan, the issuers were the first to absorb losses to the SPV. In addition, the yield on ABCP was at least 25 basis points less than the yield on the eligible asset sold, providing additional spread to the SPV. These complexities in the loss-sharing arrangement, however, may have contributed to delay in operation of the program and lack of usage. 
In the PPIP Legacy Securities program, fund managers (private investors) were required to invest at least $20 million of their firms’ funds in their own Public-Private Investment Funds. This was done to ensure that they had “skin in the game” (SIGTARP 2009). These fund managers were also prepared to forfeit this equity should their investment decisions yield results that wiped it out (US Treasury 2009).
Further loss-sharing was also achieved through haircuts discussed below (SIGTARP 2009).

Liquidity was provided to a troubled funding market either through loans and purchases, including indirect purchases, of assets. Central banks either participated directly in the market or indirectly supplied liquidity to the key market participants against a pledge of collateral (WGLA 2017).

The US Single-Tranche Repo, TSLF, and PDCF; the two Denmark facilities; the ECB’s Three-Year LTRO; and Japan’s Special Funds-Supplying Operations were all conducted as loans. Most of these were extensions of existing discount window or open market operations, so it was natural that they took the form of loans.
Other US facilities took the form of loans to purchase eligible assets due to the Federal Reserve’s limited authority to directly purchase assets. For example, TALF provided term credit against newly issued ABS rather than outright purchases. This created an incentive for participants to establish sound collateral for the securities, since they took the first risk of loss (Cecchetti and Disyatat 2010).

Under AMLF, the Federal Reserve loaned funds to an intermediary such as a depository institution or a broker-dealer so that entity could purchase eligible ABCP from eligible MMFs. PPIP also did not initiate outright government asset purchases but made nonrecourse loans.

In contrast, the Bank of England, ECB, and Bank of Japan either did not have any legal restrictions on their direct participation in the funding markets and, in some cases, were explicitly authorized to make outright purchases of market products and had a history of doing so. Therefore, they were able to directly purchase key financial products from the market.

Domanski, Moessner, and Nelson (2014) observe that the different ways to promote liquidity seem to have been influenced by the legal authority and framework of each central bank. They also observe that there does not appear to be any reason apart from legal restrictions why the extension of credit was in the form of a loan. The loan versus purchase decision does not seem to have made a noticeable difference on the effectiveness of MLPs. Moreover, from the perspective of risk, the loans were virtually the same as if the Federal Reserve had bought the paper directly (Domanski, Moessner, and Nelson 2014).

Some MLPs were limited to institutions the government was already familiar with. This was especially true for US MLPs during the GFC. As the Federal Reserve was less experienced with the markets, participating private institutions’ expertise assisted the Federal Reserve to launch more effective and efficient MLPs. Moreover, allowing the private investors to share the returns and loss from the program incentivized the investors to be diligent in their investments.
The TSLF, PDCF, and CPFF utilized primary dealers to reach the markets. Primary dealers had established relationships with the FRBNY and were active in the markets so were well suited to intermediate between the target markets and the Federal Reserve. In the AMLF, to facilitate quick implementation of the program, the Federal Reserve relied on institutions with which it had existing relationships (depository institutions and broker-dealers) to act as intermediaries and be the actual borrowers under the program.

The loan amount or the purchase price in MLPs generally incorporated a haircut on the value of underlying collateral or purchased assets. Haircuts helped mitigate the risks the central bank was taking on illiquid assets. Haircuts also helped address moral-hazard concerns: they were seen as important to encourage private-sector actors to monitor their own risks.
Unlike most of the Federal Reserve’s financial crisis programs, the AMLF program applied no haircuts to purchased ABCP. The Federal Reserve required AMLF participants to purchase ABCP from MMFs at the MMF’s amortized cost. This was done to prevent ABCP from transacting at depressed values. The Federal Reserve feared further market instability if another fund had to “break the buck”. Without a haircut, to minimize the risk that it undertook, the Federal Reserve limited collateral to high-quality ABCP and tightened the requirements as the program progressed.
CPFF also did not impose any haircuts. The Federal Reserve instead lent against highly rated CP at a rate lower than the market rate at the time but higher than the rate at normal times. Further detail on interest rates for CPFF is discussed below.

Recourse or Nonrecourse 

Loans were either recourse or nonrecourse, and nonrecourse loans generally were accompanied by a private loss-sharing arrangement. The advantage of recourse loans is that repayment is backed by the financial resources of the borrower. Recourse loans are typically further backed by collateral, which offers a secondary source of repayment (Domanski, Moessner, and Nelson 2014).
The Federal Reserve’s earlier two MLPs—the TSLF and PDCF—were designed as recourse loans. Subsequent Federal Reserve programs—the AMLF, CPFF, MMIFF, TALF, and PPIP—used nonrecourse loans. Various programs in the United Kingdom, euro area, Denmark, and Japan also used nonrecourse. The Federal Reserve chose nonrecourse loans in some cases because it was lending to new counterparties whose financial condition could not be readily assessed. In other cases, the Federal Reserve found it would be counterproductive to expose counterparties to the risk of a decline in the collateral’s value. In this case, from the Federal Reserve’s point of view, providing a nonrecourse loan was economically the same as purchasing the underlying collateral (Domanski, Moessner, and Nelson 2014).
In some cases, the Federal Reserve used private loss-sharing arrangements to mitigate the risk it took in collateralized nonrecourse loans. For example, in the AMLF, TALF, and PPIP, borrowers and investors shared returns and losses on the collateral purchased with the borrowed funds and posted as collateral with the Federal Reserve. In the MMIFF, the FRBNY funded 90% of the cost of collateral through loans; eligible money market investors funded the rest by purchasing subordinated ABCP issued by SPVs. 
The Federal Reserve didn’t implement any private loss-sharing arrangement in the CPFF. Under that program, the FRBNY lent cash to a new private company, the CPFF LLC, that would then purchase CP. As noted, Section 13(3) of the Federal Reserve Act allows the Federal Reserve to lend to nonbanks in “unusual and exigent circumstances.” The Federal Reserve also must determine that such loans have been “secured to [its] satisfaction.” The Federal Reserve’s legal advisors made that determination, noting several risk mitigants, including: (1) it would purchase only highly rated CP; (2) the loans to the LLC would be secured by the purchased CP, plus any accumulated fees and earnings; and (3) the purchases were at a discount to face value. 

Terms

The terms of loans under certain MLPs matched the terms of underlying collateral. AMLF and CPFF provided loans that mirrored the maturity and term of ABCP or CP collateral that was purchased with and secured the loans. On the other hand, MMIFF provided overnight loans, although the FRBNY was committed to continuing to fund the purchased collateral assets until their maturity.

For TALF, the term of loans provided under the program was originally one year. However, it was extended to three to five years as an industry group pointed out that there was at least two years of mismatch between the terms of TALF loans and the underlying assets backing the loans. The mismatch meant that the nonrecourse financing would expire before the underlying debt securities were paid back, leaving the investors to assume the full risk for the last two years of the investment. For that reason, the Federal Reserve extended the terms of TALF loans.

Liquidity facilities, in general, were designed so that accessing them would be optimal for some institutions when markets were dysfunctional but would become suboptimal when normal functioning of the markets returned (Cecchetti and Disyatat 2010). This balancing act was critical in setting the interest rate of an MLP loan. For example, the CPFF program charged a fixed spread over the three-month market rate, which was expected to become unattractive in normal times.

Additionally, interest rates in MLPs were a security feature: the accumulation of interest was expected to absorb losses and provide additional protection for central banks (GAO 2011). In launching Outright Purchases of CP, Bank of Japan Governor Masaaki Shirakawa stated that the bid rate would be “more favorable than the market interest rates when the market is malfunctioning”; since losses on any purchased CP come at a cost to the taxpayers, a penalty rate would ensure that taxpayers were compensated for taking on the credit risk (Shirakawa 2009).

High rates also ensured that MLPs were functional only during stress times. For example, for the Bank of England’s CPF, the Asset Purchase Facility offered to buy up to three-month CP at spreads that were significantly below market rates at the time but that were significantly above those expected to prevail in normal conditions. Initially, this would help to drive market spreads down and provide a backstop. This was set up to be self-liquidating as normal market conditions returned (Fisher 2010).

As with interest rates, setting fees is a balancing act. For a program to be effective and ensure widespread use, the fee should be high enough to minimize moral hazard but not too high as to deter participation. The fees also should be sufficient to cover central banks’ costs of managing each MLP (Plenderleith 2012).

In the US, TSLF, PDCF, CPFF, and TALF imposed fees on participating institutions. For example, PDCF imposed a frequency-based fee: additional fees were charged dealers who accessed the facility on more than 45 business days.Fees also may reflect the riskiness of the collateral. In TSLF auctions, the Federal Reserve charged a minimum fee of 10 basis points for Schedule 1 collateral (Treasuries and other relatively safe assets traditionally accepted in open market operations) and 25 basis points for Schedule 2 collateral (which encompassed riskier collateral, ultimately any investment-grade security). CPFF charged an additional credit enhancement fee for unsecured CP. TALF charged a higher administrative fee for loans secured by CMBS (20 basis points) compared to nonmortgage asset-backed securities (10 basis points). However, Plenderleith’s report on the Bank of England’s emergency liquidity assistance states that fees were not designed to manage the risks to the central bank or to the public—those risks should have been adequately covered by collateral and haircuts (Plenderleith 2012).

Eligible collateral or assets were defined depending on the problems in the target market an MLP was attempting to address and often included unconventional assets that the central bank would not take in normal times. As the AMLF program was intended to assist MMFs in the CP market, the ABCP it accepted for collateral had to be purchased from an MMF, among other restrictions. TALF aimed to renew issuance of consumer and small-business ABS and thus included only newly issued non-mortgage-backed ABS, newly issued CMBS, and legacy CMBS.

In Denmark, to facilitate the interbank lending market, the central bank launched two facilities: the Loan Bill Scheme and the Excess-Capital Temporary Credit Facility. The loan bill program allowed the Danmarks Nationalbank to lend to a banking institution in exchange for loan bills issued by another banking institution. A 2009 report from Danmarks Nationalbank stated its disappointment in the efficacy of the loan bill program in supporting the interbank lending market. The report noted that the program underestimated the degree of loss of confidence among financial institutions and assumed that the banking institutions wanted to lend to each other (Danmarks Nationalbank 2009). Hence, the central bank introduced the excess-capital facility, extending unsecured credit lines to banks on the basis of the institutions’ excess capital adequacy. This facility was also underutilized.     

Criteria for eligible collateral evolved with changes in the need of the market as troubles deepened. The Federal Reserve expanded eligible collateral as market conditions worsened after Lehman Brothers failed. TSLF broadened the eligible set of collateral to all investment-grade debt securities, and PDCF included assets to closely match the types of instruments that could be pledged in the triparty repurchase agreement systems of the two major clearing banks. In the ECB, the first round of Securities Market Program (SMP) included government bonds from the secondary markets of Greece, Ireland, and Portugal, but the second round was expanded to Italy and Spain, responding to problems in those markets.

Safeguards against collateral risks also determined the eligibility of an asset. In most programs, assets had to satisfy certain credit-rating requirements. Also, programs often explicitly excluded certain assets. The ECB’s Three-Year LTRO and the UK’s SCPF excluded syndicated loans; Japan’s Special Funds-Supplying Operations excluded CP issued by real estate investment corporations; and most UK programs excluded ABCP.
Other external limitations shaped the criteria for eligible collateral for MMIFF. Eligible participants for MMIFF were limited to 2a-7 funds.^FNMoney market funds are a type of mutual fund registered under the Investment Company Act of 1940 and regulated under Rule 2a-7 of the Act. Money market funds pay dividends that reflect prevailing short-term interest rates, are redeemable on demand, and, unlike other investment companies, seek to maintain a stable net asset value, typically $1.00. Because 2a-7 funds could only purchase and hold highly rated debt instruments, the Federal Reserve and FRBNY designed MMIFF terms and conditions to help ensure that the subordinated notes issued by each SPV would receive the highest rating from two or more major rating agencies (GAO 2011).

The Federal Reserve designed the eligible collateral structure for the Single-Tranche Repo program to alleviate strains in agency MBS by removing the stigma associated with MBS at the time. For conventional repo operations, the Federal Reserve accepts propositions from dealers in three collateral tranches. In the first tranche, dealers may pledge only Treasury securities. In the second tranche, dealers can also pledge federal agency debt. In the third tranche, they can also pledge MBS issued or fully guaranteed by federal agencies. With the Single-Tranche Repo program, dealers could combine MBS, federal agency debt, or Treasury securities in the single tranche.  This feature would appear to be a fix for a stigma problem that carries no additional moral hazard risk: an unusual example of a free lunch in this policy space.

Downgrade of Collateral

Some MLPs included features to protect the central bank if a rating agency downgraded the collateral.
For example, under MMIFF, collateral downgrades would prevent the SPV from providing any further loans to the issuer of that collateral until all assets issued by that issuer and held by the SPV had matured. If there was a default, the SPV would not only stop providing further loans to the issuer but would also cease repayment on outstanding ABCP from the issuer. In TALF, if there was a collateral downgrade, TALF loans were not affected, but the downgraded collateral could no longer be used to back any new TALF loans. 

In CPF, if purchased CP was downgraded below the minimum credit ratings set out by the Bank of England, the issuer of that CP would be unable to access the facility again until it again met the required minimum credit ratings.

The Federal Reserve and the Bank of England established special purpose vehicles separate from the central bank’s balance sheet for some MLPs.

The Federal Reserve created SPVs to purchase specific instruments and lent money to them using its emergency authority. The SPVs in turn purchased assets from the troubled institutions. These assets served as collateral for the Federal Reserve’s loans to the SPVs.

The CPFF established CPFF LLC to directly purchase newly issued ABCP and unsecured CP with the loans it received from FRBNY for that purpose. The FRBNY’s loans were secured by CPFF LLC’s assets including the CP that it purchased, fees that it collected and any uninvested fees, earnings, and proceeds from investments. This structure was chosen because the Federal Reserve would be dealing in a security that it did not normally handle and, with many types of entities, that it did not normally lend to. Similarly, for the operation of TALF, FRBNY created an SPV, TALF LLC, to manage any collateral surrendered by TALF borrowers to FRBNY.
The MMIFF similarly was created with SPVs. However, unlike other Federal Reserve programs with SPVs, these were set up to be managed by the private sector in collaboration with FRBNY. FRBNY worked with JPMorgan to set up the MMIFF SPVs. The deployment of multiple SPVs was intended, in part, to better ensure that MMIFF could continue to provide funding in the event that one of its SPVs was required to cease purchases. It was also thought that privately sponsored SPVs would appeal to the MMFs (GAO 2011). Utilizing an SPV generally required additional structuring and administrative work. Therefore, the MMIFF needed a full month to become operational after it was announced. By comparison, the AMLF was announced on a Friday and was operating the next Monday. In the AMLF, the Federal Reserve Bank of Boston made loans to depository institutions to purchase certain ABCP from MMFs. It could be set up more quickly because it used existing discount window processes and documentation for its infrastructure.

The Bank of England also used an SPV for the CPF program but not due to any limits in its legal authority. CPF was launched under the APF, which was a £50 billion facility to purchase high-quality financial assets and ultimately to improve liquidity in credit markets. All transactions under APF were undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited, that borrowed from the central bank to pay for its purchases.

In the US, UK, and ECB, central banks often prevented MLPs from interfering with the exercise of monetary policy by actively sterilizing their impact the money supply. In SMP, the ECB conducted special operations to reabsorb the liquidity injected through the SMP. The following four methods were used to sterilize the impact of MLPs on reserves during the GFC. The first was lending high-quality securities, typically Treasuries, to private financial institutions in return for distressed securities (e.g., the Bank of England’s SLS and the Federal Reserve’s TSLF). The second was issuing Treasury debt to finance the MLP activity (e.g., the Bank of England’s early implementation of its Asset Purchase Facility and the Federal Reserve’s currency swap program in 2008).^FNThe currency swap programs will be covered in a future survey. The third was selling a comparable amount of Treasuries from the central bank’s portfolio to offset the MLP’s injection of dollars into the market (e.g., PDCF). The fourth was paying interest on reserves, so the central bank was able to offset expansionary effects of MLPs by paying banks to increase their reserves with the central bank (e.g., the Federal Reserve beginning in October 2008).

In the wake of Lehman’s failure, central banks became less concerned about sterilizing MLPs, partly because these programs could complement their increasingly expansionary monetary policy stances. In the US, the startup of the CPFF and other MLPs led to a sharp growth in the Federal Reserve’s balance sheet beginning in late September 2008 (Dudley 2009). The Bank of England briefly sterilized its purchases of CP before subsuming the program in the much larger asset purchase under its quantitative easing program.

Central banks did not disclose the lists of institutions participating in the MLPs but often disclosed aggregate transaction information with a lag.  

To mitigate stigma, the Federal Reserve, like the Bank of England, had historically not released the names of borrowers from the window. The Dodd‐Frank Wall Street Reform and Consumer Protection Act of 2010 now requires the Federal Reserve to disclose details of discount window loans with a two‐year lag; this is thought to be sufficient to limit the stigma associated with the use of the discount window. 

More concerning, however, is the new reporting requirement to the US Congress for any future use of the Federal Reserve’s emergency lending authority under Section 13(3) of the Federal Reserve Act. Within seven days of establishment of any 13(3) program, the Board must now report detailed transaction-level information to Congress on any lending activity conducted under those programs.

Aggregated transaction data were often disclosed weekly in the United States. Certain disclosures had the intention of improving information availability and supporting effective market functioning. For example, in the PPIP, after each legacy CMBS subscription, the FRBNY published the list of submitted legacy CMBS that had been accepted as collateral or rejected, either on the basis of the explicit terms and conditions for legacy CMBS or the FRBNY’s risk assessment.

In addition, the UK’s CBSMS regularly posted traded prices on its wire service and its website. CPF and SCPF published the weekly aggregate amount of CP and securities purchased. The Bank of England explained that such transparency was intended to reduce uncertainty in the market value of corporate bonds and to reduce the risk aversion that contributed to market illiquidity.

In some cases, governments tweaked capital or liquidity requirements to encourage institutions to use MLPs.

In the AMLF program, because the Federal Reserve protected borrowers from credit or market risk in holding ABCP, the Federal Reserve assessed no regulatory capital charge with respect to those holdings. The CP received a 0% risk weight for calculating risk-based capital and was excluded from average total consolidated assets for calculating regulatory leverage ratios. On the other hand, the regulatory capital requirements for securities financed by a TALF loan were the same as those for securities that were not financed by a TALF loan. We were unable to identify a clear reason behind these different treatments. 

With regard to liquidity requirements, in the Danish Loan Bill Scheme and Excess-Capital Temporary Credit Facility, the buying institution could count the loan bill and credit lines toward its statutory liquidity until one month before the expiry of each respective facility.

To improve the ability of an MLP to reach the intended markets, central banks at times exempted or limited existing legal restrictions.

After the Penn Central bankruptcy in 1970, the Federal Reserve was concerned that the discount-window adjustment alone would provide insufficient incentive to banks to support the CP market. For that reason, the Federal Reserve suspended its interest-rate ceilings under Regulation Q. This allowed banks to pay more for large-denomination certificates of deposit and other time deposits.

In launching the AMLF program, the Federal Reserve exempted participating banks from Section 23A of the Federal Reserve Act. Section 23A limits a bank’s “covered transactions” with any single affiliate of the bank to 10% of the bank’s equity, and all such transactions to 20%. The exemption facilitated banks’ purchase of ABCP from affiliated MMFs.

In announcing the TALF program, the government made it clear that the executive compensation restrictions that Congress had mandated for companies receiving taxpayer support under the Troubled Assets Relief Program (TARP) would not be applied to TALF sponsors, underwriters, and borrowers. This was to encourage participation in the program. In comparison, in the PPIP, it was not made clear whether PPIP participants would be exempt from the executive compensation restrictions.

The GFC showed how a crisis in one country can easily spill over to another. Global financial institutions had increasingly invested and funded themselves in multiple currencies and national financial markets. International coordination was necessary to address liquidity strains that crossed international boundaries. Central banks found they needed to develop new ways to coordinate their liquidity assistance programs. Furthermore, responding to the crisis demanded an understanding of the differences in national legal and institutional frameworks (WGLA 2017).

Foreign, mostly European banks played a significant role in US shadow-banking markets prior to the crisis—borrowing short-term in US money markets and then investing in long-term US securitized assets. One estimate is that foreign banks sponsored about 60% of the $1.2 trillion US ABCP market (Acharya, Afonso, and Kovner 2013); they had also issued half a trillion dollars in dollar-based unsecured financial CP (Adrian, Kimbrough, and Marchioni 2011). When commercial-paper markets froze in mid-2007, European banks faced a severe dollar shortage. The Federal Reserve coordinated with the European, Swiss, and other central banks to establish currency swap lines through which the Federal Reserve could provide dollars to central banks, which could then lend to their banks on dollar-based collateral.

US affiliates of foreign banks were also among the biggest direct users of US market liquidity programs throughout 2008. For example, they accounted for more than half of the usage of the TSLF and about three-quarters of the usage of the Single-Tranche Repo and the CPFF.