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The evolution of the Federal Reserve’s Term Auction Facility and FDIC-insured bank utilization

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Listed:
  • Allen, Kyle D.
  • Hein, Scott E.
  • Whitledge, Matthew D.

Abstract

The Term Auction Facility (TAF) was designed by the Federal Reserve during the financial crisis to inject emergency short-term funds into banks, as a supplement to the lender of last resort discount window offerings. We describe how the Federal Reserve altered the design of the Term Auction Facility (TAF) over the course of the financial crisis and examine the utilization of this stand-alone facility. Most specifically we detail the impact of the greatly increased offering amounts in all auctions after October 2008, which resulted in the facility no longer auctioning scarcely available funds. We also document significantly different usage of the facility by FDIC-insured community and non-community banks, consistent with the notion of a two-tiered banking system in the U.S. Community banks were far less likely to use the facility than larger, non-community banks.

Suggested Citation

  • Allen, Kyle D. & Hein, Scott E. & Whitledge, Matthew D., 2017. "The evolution of the Federal Reserve’s Term Auction Facility and FDIC-insured bank utilization," Journal of Financial Stability, Elsevier, vol. 31(C), pages 154-166.
    • Handle: RePEc:eee:finsta:v:31:y:2017:i:c:p:154-166
    DOI: 10.1016/j.jfs.2017.07.005
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    References listed on IDEAS

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    1. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    2. Craig Furfine, 2003. "Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve's New Discount Window," International Finance, Wiley Blackwell, vol. 6(3), pages 329-347, November.
    3. Armantier, Olivier & Ghysels, Eric & Sarkar, Asani & Shrader, Jeffrey, 2015. "Discount window stigma during the 2007–2008 financial crisis," Journal of Financial Economics, Elsevier, vol. 118(2), pages 317-335.
    4. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    5. Frederic S. Mishkin & Eugene N. White, 2014. "Unprecedented Actions: The Federal Reserve’s Response to the Global Financial Crisis in Historical Perspective," NBER Working Papers 20737, National Bureau of Economic Research, Inc.
    6. Charles W. Calomiris & Douglas Holtz-Eakin & R. Glenn Hubbard & Allan H. Meltzer & Hal S. Scott, 2017. "Establishing credible rules for Fed emergency lending," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(3), pages 260-267, August.
    7. Adam Ashcraft & Morten L. Bech & W. Scott Frame, 2010. "The Federal Home Loan Bank System: The Lender of Next-to-Last Resort?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 551-583, June.
    8. Robert DeYoung & William Hunter & Gregory Udell, 2004. "The Past, Present, and Probable Future for Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 85-133, April.
    9. Efraim Benmelech, 2012. "An Empirical Analysis of the Fed's Term Auction Facility," NBER Working Papers 18304, National Bureau of Economic Research, Inc.
    10. repec:bla:intfin:v:6:y:2003:i:3:p:329-47 is not listed on IDEAS
    11. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    12. Richard S. Grossman & Hugh Rockoff, 2015. "Fighting the Last War: economists on the lender of last resort," Departmental Working Papers 201515, Rutgers University, Department of Economics.
    13. Berger, Allen N. & Black, Lamont K. & Bouwman, Christa H.S. & Dlugosz, Jennifer, 2017. "Bank loan supply responses to Federal Reserve emergency liquidity facilities," Journal of Financial Intermediation, Elsevier, vol. 32(C), pages 1-15.
    14. Benjamin M. Blau & Scott E. Hein & Ryan J. Whitby, 2016. "The Financial Impact Of Lender-Of-Last-Resort Borrowing From The Federal Reserve During The Financial Crisis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(2), pages 179-206, June.
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    Cited by:

    1. Hervé Alexandre & Catherine Refait-Alexandre & Larry D. Wall, 2024. "European banks and Fed liquidity facilities during the Global Financial Crisis: Good news for the bad and bad news for the good," Working Papers 2024-12, CRESE.
    2. Allen, Kyle D. & Winters, Drew B., 2020. "Crisis regulations: The unexpected consequences of floating NAV for money market funds," Journal of Banking & Finance, Elsevier, vol. 117(C).
    3. Allen, Kyle D. & Whitledge, Matthew D. & Winters, Drew B., 2022. "Community bank liquidity: Natural disasters as a natural experiment," Journal of Financial Stability, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Federal reserve; Term auction facility; Community bank; Financial crisis; Commercial banks;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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