Primary Dealer Credit Facility

Primary Dealer Credit Facility
Facility name	Primary Dealer Credit Facility
Established	March 2008
Established by	Federal Reserve
Location	United States
Purpose	Provide liquidity to primary dealers

Primary Dealer Credit Facility is a temporary loan facility established by the Federal Reserve in March 2008 to provide liquidity to primary dealers such as Goldman Sachs, Morgan Stanley, and Lehman Brothers. The facility was created in response to the 2007-2008 financial crisis, which saw a significant decline in the value of mortgage-backed securities held by investment banks like Bear Stearns and Merrill Lynch. The Federal Reserve worked closely with the United States Department of the Treasury and the Securities and Exchange Commission to establish the facility, which was designed to provide short-term loans to primary dealers at a federal funds rate set by the Federal Open Market Committee. The facility was also supported by the Bank of England, the European Central Bank, and the Bank of Japan, which provided similar facilities to their respective primary dealers.

Background and establishment

The Primary Dealer Credit Facility was established on March 16, 2008, in response to the growing credit crisis and the subsequent bear market in the United States stock market. The facility was designed to provide liquidity to primary dealers such as J.P. Morgan Chase, Citigroup, and Bank of America, which were facing significant losses due to their exposure to subprime mortgage-backed securities. The Federal Reserve worked closely with the New York Federal Reserve Bank and the Federal Reserve Bank of New York to establish the facility, which was initially set to expire on April 30, 2008, but was later extended to January 30, 2009. The facility was also supported by the International Monetary Fund, the World Bank, and the Financial Stability Board, which provided guidance and oversight to the Federal Reserve.

Purpose and mechanics

The Primary Dealer Credit Facility was designed to provide short-term loans to primary dealers at a federal funds rate set by the Federal Open Market Committee. The facility allowed primary dealers to borrow funds from the Federal Reserve for a period of up to 28 days, using a variety of collateral including Treasury securities, agency securities, and mortgage-backed securities. The facility was designed to provide liquidity to primary dealers and to support the functioning of the financial markets, including the New York Stock Exchange and the NASDAQ. The Federal Reserve worked closely with the Securities Industry and Financial Markets Association and the Investment Company Institute to ensure that the facility was operating effectively and efficiently. The facility was also supported by the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation, which provided oversight and guidance to the Federal Reserve.

Eligibility and terms

The Primary Dealer Credit Facility was available to all primary dealers that were registered with the Securities and Exchange Commission and were in good standing with the Federal Reserve. The facility was also available to foreign banks that were operating in the United States and were registered with the Federal Reserve. The terms of the facility were set by the Federal Reserve and included a federal funds rate of 2.5% and a reserve requirement of 10%. The facility also required primary dealers to provide collateral in the form of Treasury securities, agency securities, or mortgage-backed securities. The Federal Reserve worked closely with the Office of the Comptroller of the Currency and the Office of Thrift Supervision to ensure that the facility was operating in accordance with all relevant banking regulations and securities laws, including the Gramm-Leach-Bliley Act and the Sarbanes-Oxley Act.

Usage and impact

The Primary Dealer Credit Facility was used extensively by primary dealers during the 2007-2008 financial crisis, with total borrowings reaching a peak of $155 billion in September 2008. The facility provided critical liquidity to primary dealers such as Goldman Sachs and Morgan Stanley, which were facing significant losses due to their exposure to subprime mortgage-backed securities. The facility also helped to support the functioning of the financial markets, including the New York Stock Exchange and the NASDAQ, and helped to prevent a complete collapse of the financial system. The Federal Reserve worked closely with the United States Department of the Treasury and the Securities and Exchange Commission to ensure that the facility was operating effectively and efficiently, and to prevent any potential systemic risk to the financial system. The facility was also supported by the Federal Housing Finance Agency and the National Credit Union Administration, which provided guidance and oversight to the Federal Reserve.

Criticism and controversy

The Primary Dealer Credit Facility was subject to criticism and controversy, with some arguing that it was a bailout of Wall Street banks and that it did not do enough to address the underlying causes of the financial crisis. Others argued that the facility was necessary to prevent a complete collapse of the financial system and that it helped to support the functioning of the financial markets. The facility was also criticized for its lack of transparency and accountability, with some arguing that the Federal Reserve did not provide enough information about the facility and its operations. The Federal Reserve worked closely with the Congressional Oversight Panel and the Special Inspector General for the Troubled Asset Relief Program to address these concerns and to provide greater transparency and accountability. The facility was also subject to scrutiny from the Government Accountability Office and the Federal Reserve Inspector General, which provided oversight and guidance to the Federal Reserve.

Program termination and legacy

The Primary Dealer Credit Facility was terminated on February 1, 2010, as the financial crisis began to subside and the financial markets began to recover. The facility was replaced by the Term Asset-Backed Securities Loan Facility, which provided longer-term loans to primary dealers and other financial institutions. The Primary Dealer Credit Facility played an important role in supporting the functioning of the financial markets during the 2007-2008 financial crisis, and its legacy continues to be felt today. The Federal Reserve has continued to use similar facilities to provide liquidity to primary dealers and other financial institutions, including the Commercial Paper Funding Facility and the Term Deposit Facility. The Federal Reserve has also worked closely with the Financial Stability Oversight Council and the Office of Financial Research to ensure that the financial system is more resilient and better able to withstand future financial crises.

Category:Financial facilities