Term Securities Lending Facility

Term Securities Lending Facility
U.S. Government · Public domain · source
Name	Term Securities Lending Facility
Established	2008
Type	lending facility
Operator	Federal Reserve System
Location	Washington, D.C.
Status	inactive (after 2010 auctions wound down)

Term Securities Lending Facility The Term Securities Lending Facility was an emergency market intervention created in 2008 by the Federal Reserve System to supply United States Treasury securities to primary dealers in exchange for other collateral. It aimed to alleviate dysfunction in the United States Treasury market, stabilize funding for investment banks and broker-dealers, and complement actions by the Board of Governors of the Federal Reserve System and Federal Reserve Bank of New York during the Global Financial Crisis of 2007–2008 and its aftermath.

Overview

The facility operated as a time-limited program administered by the Federal Reserve Bank of New York under direction from the Board of Governors of the Federal Reserve System and coordinated with officials such as Ben Bernanke and staff managing the Open market operations. By allowing primary dealers associated with firms like Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns to swap less liquid collateral for cash-equivalent United States Treasury securities, the program intended to reduce pressures observed in repo and securities lending markets that had amplified strains seen at institutions such as Merrill Lynch and AIG.

Purpose and Rationale

The rationale drew on historical precedents including liquidity provision in the Great Depression and policy responses during the Savings and Loan crisis. Policymakers sought to restore normal functioning in core markets such as the repurchase agreement market, the certificate of deposit and commercial paper markets, and to support financial stability mandates overseen by actors like the Treasury Department, Federal Deposit Insurance Corporation, and international counterparts including the Bank of England and the European Central Bank. The design reflected lessons from events like the 1998 Long-Term Capital Management failure and the market dislocations following the September 11 attacks.

Facility Design and Operations

The facility conducted term auctions where approved primary dealers could exchange agency mortgage-backed securities from issuers such as Fannie Mae, Freddie Mac, and Ginnie Mae—and other eligible collateral—for Treasury coupons via a temporary loan. Operations were structured with terms typically ranging from 28 to 84 days, with specific mechanics similar to term repurchase operations and the Primary Dealer Credit Facility framework. The Federal Reserve Bank of New York set allotments, accepted bids, and published results alongside routine announcements akin to FOMC communications.

Eligible Participants and Collateral

Participants were primary dealers registered with the Federal Reserve Bank of New York—a group that has included firms such as J.P. Morgan Securities, Citigroup Global Markets, Barclays Capital, and Deutsche Bank Securities. Eligible collateral categories encompassed agency mortgage-backed securitys issued or guaranteed by Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, certain agency debt and other high-grade instruments qualified under program rules. Eligibility criteria referenced regulatory classifications used by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.

Terms, Pricing, and Risk Management

Auctions set lending fees that reflected scarcity and counterparty risk; pricing was influenced by benchmarks such as yields on United States Treasury securities and spreads in the agency MBS market. Risk controls included concentration limits, haircuts calibrated against market volatility, and collateral eligibility screening similar to practices at the Bank for International Settlements and in Basel Committee on Banking Supervision guidance. The program’s credit exposures were governed by indemnities and foreign currency considerations coordinated with entities like the International Monetary Fund in broader crisis cooperation.

Historical Implementation and Usage

Announced in late 2008, the facility ran a sequence of auctions through 2009 and into 2010 as conditions warranted, concurrent with interventions such as the Troubled Asset Relief Program, the Term Auction Facility, and extraordinary purchases under quantitative easing (2008–2014). Usage peaked when market participants sought liquidity after events like the Lehman Brothers bankruptcy and the collapse of Bear Stearns; activity later declined as market functioning normalized and as programs such as the Temporary Liquidity Guarantee Program came into effect. Oversight and data reporting involved congressional scrutiny from committees including the United States House Committee on Financial Services and the United States Senate Committee on Banking, Housing, and Urban Affairs.

Policy Impact and Criticisms

Proponents argued the facility helped unfreeze the repo market and supported intermediation by dealers tied to capital markets activity, complementing stabilization efforts by the Treasury Department and international central banks such as the Bank of Canada and the Swiss National Bank. Critics, including some members of Congress and commentators linked to Austrian School and Chicago School perspectives, raised concerns about moral hazard, preferential treatment of large dealers, and the opacity of emergency lending compared with ordinary monetary policy operations. Debates also referenced analyses by researchers at institutions like the Brookings Institution, the American Enterprise Institute, and International Monetary Fund staff about cost, distributional effects, and precedent for future crisis interventions.

Category:Federal Reserve System programs