Term auction facility
Encyclopedia
The Term Auction Facility (TAF) is a temporary program managed by the United States
Federal Reserve designed to "address elevated pressures in short-term funding markets." Under the program the Fed auctions collateralized
loans with terms of 28 and 84 days to depository institutions that are "in generally sound financial condition" and "are expected to remain so over the terms of TAF loans." Eligible collateral is the same as that accepted for discount window
loans and includes a wide range of financial assets. The program was instituted in December 2007 in response to problems associated with the subprime mortgage crisis
and was motivated by a desire to address a widening spread between interest rates on overnight and term (longer than overnight) interbank lending, indicating a retreat from risk-taking by banks. The action was in coordination with simultaneous and similar initiatives undertaken by the Bank of Canada
, the Bank of England
, the European Central Bank
and the Swiss National Bank
.
began distributing funds through a discount window or fine-tuning operation
. By August 9, the ECB lent €95 billion ($112 billion in the days conversion) to EU
banks, and the Fed distributed $12 billion through repo
operations.
, the Federal Reserve and several other central banks opened their short term lending windows
, hoping to alleviate the strain on interbank lending markets. In the Federal Funds
market the Fed, along with the Bank of Canada
, Bank of England
, the European Central Bank
and the Swiss National Bank
, decided to implement a new monetary instrument
the following day. This program, known in the US as the Term Auction Facility, enables the Fed to auction
a set amount of funds to depository institutions, against a wide range of collateral
. Auctions held on December 17 and December 20 released $20 billion each in the form of 28- and 35-day loans, respectively. On the December 17th Auction, bids began at 4.17% and ended with a rate of 4.65%, substantially below the discount rate. The Fed received over $63 billion in bids and released the full $20 billion to 93 different institutions.
As part of an effort to increase dollar liquidity around the world, the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly. On December 11, the ECB held a simultaneous auction, in dollars, and awarded $10 billion at the rate determined by the Fed's auction. To facilitate the provision of U.S.-dollar liquidity by these other central banks, the Fed arranged currency swap
lines with the ECB and the SNB in amounts of $20 billion and $4 billion, respectively.
The Fed is using the TAF as a trial of this type of monetary tool. Depending on its success and usefulness, the Fed may begin to use it as part of a more permanent program. The final Term Auction Facility auction was conducted on March 8, 2010.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Federal Reserve designed to "address elevated pressures in short-term funding markets." Under the program the Fed auctions collateralized
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
loans with terms of 28 and 84 days to depository institutions that are "in generally sound financial condition" and "are expected to remain so over the terms of TAF loans." Eligible collateral is the same as that accepted for discount window
Discount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
loans and includes a wide range of financial assets. The program was instituted in December 2007 in response to problems associated with the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
and was motivated by a desire to address a widening spread between interest rates on overnight and term (longer than overnight) interbank lending, indicating a retreat from risk-taking by banks. The action was in coordination with simultaneous and similar initiatives undertaken by the Bank of Canada
Bank of Canada
The Bank of Canada is Canada's central bank and "lender of last resort". The Bank was created by an Act of Parliament on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada...
, the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
and the Swiss National Bank
Swiss National Bank
The Swiss National Bank is the central bank of Switzerland. It is responsible for Swiss monetary policy and for issuing Swiss franc banknotes.The names of the institution in the four official languages of the country are: ; ; ; ....
.
Credit Crunch
Early in August 2007, the subprime crisis began to spread to sectors outside mortgage and real-estate finance. The ECBEuropean Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
began distributing funds through a discount window or fine-tuning operation
Discount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
. By August 9, the ECB lent €95 billion ($112 billion in the days conversion) to EU
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
banks, and the Fed distributed $12 billion through repo
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
operations.
Creation of Facility
On December 11, 2007, the Fed lowered its discount rate to 4.75%, but due to the lack of borrowing from the discount window in the previous weeks, and a lack of liquidity after the 2007 credit crunchCredit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...
, the Federal Reserve and several other central banks opened their short term lending windows
Discount window
The discount window is an instrument of monetary policy that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions...
, hoping to alleviate the strain on interbank lending markets. In the Federal Funds
Federal funds
In the United States, federal funds are overnight borrowings by banks to maintain their bank reserves at the Federal Reserve. Banks keep reserves at Federal Reserve Banks to meet their reserve requirements and to clear financial transactions...
market the Fed, along with the Bank of Canada
Bank of Canada
The Bank of Canada is Canada's central bank and "lender of last resort". The Bank was created by an Act of Parliament on July 3, 1934 as a privately owned corporation. In 1938, the Bank became a Crown corporation belonging to the Government of Canada...
, Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
, the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
and the Swiss National Bank
Swiss National Bank
The Swiss National Bank is the central bank of Switzerland. It is responsible for Swiss monetary policy and for issuing Swiss franc banknotes.The names of the institution in the four official languages of the country are: ; ; ; ....
, decided to implement a new monetary instrument
Monetary policy
Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment...
the following day. This program, known in the US as the Term Auction Facility, enables the Fed to auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
a set amount of funds to depository institutions, against a wide range of collateral
Collateral (finance)
In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation...
. Auctions held on December 17 and December 20 released $20 billion each in the form of 28- and 35-day loans, respectively. On the December 17th Auction, bids began at 4.17% and ended with a rate of 4.65%, substantially below the discount rate. The Fed received over $63 billion in bids and released the full $20 billion to 93 different institutions.
As part of an effort to increase dollar liquidity around the world, the Fed coordinated with other central banks to lend simultaneously to depository institutions outside of its jurisdiction, which it cannot lend to directly. On December 11, the ECB held a simultaneous auction, in dollars, and awarded $10 billion at the rate determined by the Fed's auction. To facilitate the provision of U.S.-dollar liquidity by these other central banks, the Fed arranged currency swap
Currency swap
A currency swap is a foreign-exchange agreement between two parties to exchange aspects of a loan in one currency for equivalent aspects of an equal in net present value loan in another currency; see foreign exchange derivative. Currency swaps are motivated by comparative advantage...
lines with the ECB and the SNB in amounts of $20 billion and $4 billion, respectively.
The Fed is using the TAF as a trial of this type of monetary tool. Depending on its success and usefulness, the Fed may begin to use it as part of a more permanent program. The final Term Auction Facility auction was conducted on March 8, 2010.