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Full-Text Articles in Social and Behavioral Sciences

United States: Term Auction Facility, Corey N. Runkel, Anshu Chen Jul 2022

United States: Term Auction Facility, Corey N. Runkel, Anshu Chen

Journal of Financial Crises

Following the announcement on August 9, 2007, by BNP Paribas that it was suspending redemptions for three of its open-end investment funds that had invested heavily in mortgage-backed securities, liquidity in the American interbank and short-term funding markets tightened considerably. On August 17, the Federal Reserve lowered the cost of borrowing from the discount window. However, usage remained low, due largely to the perception that such borrowing implied weak financials. In December, the Fed launched the Term Auction Facility (TAF), which used single-rate auctions to mitigate this stigma. The TAF offered discount-window credit of 28 days, and later, 84 days. …

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United States: Reconstruction Finance Corporation Emergency Lending To Financial Institutions, 1932–1933, Natalie Leonard Jul 2022

United States: Reconstruction Finance Corporation Emergency Lending To Financial Institutions, 1932–1933, Natalie Leonard

Journal of Financial Crises

In the lead-up to the Great Depression, bank credit rapidly expanded and bank capital ratios declined. Banks, suffering from fallen commodity prices, failed at a high rate in the 1920s, and these failures rapidly accelerated in 1930. On January 22, 1932, the Reconstruction Finance Corporation (RFC) was created “to provide emergency financing facilities for financial institutions, to aid in financing agriculture, commerce, and industry, and for other purposes.” The original legislation gave the RFC broad authority to provide collateralized loans to almost any bank or corporation, especially small rural banks that could not access the Federal Reserve’s discount window and …

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United States: New York Clearing House Association,The Panic Of 1907, Corey N. Runkel Jul 2022

United States: New York Clearing House Association,The Panic Of 1907, Corey N. Runkel

Journal of Financial Crises

Signs of financial panic had marked the months leading up to mid-October 1907 when depositors began to run on banks and trust companies across New York City, most notably the Knickerbocker Trust Company, then New York City’s third largest, on October 22. Cash injections from the US Treasury and from leading banker J.P. Morgan failed to reassure depositors and investors. On October 26, the New York Clearinghouse (NYCH), whose membership included most banks in New York, voted to issue clearinghouse loan certificates (CLCs) to help stabilize the financial panic. CLCs were collateralized by securities and could be used among members …

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United States: New York Clearing House Association, The Panic Of 1890, Benjamin Hoffner Jul 2022

United States: New York Clearing House Association, The Panic Of 1890, Benjamin Hoffner

Journal of Financial Crises

Before the advent of the Federal Reserve System, private clearinghouses provided emergency liquidity support to the banking system during panics. The most notable of these institutions, the New York Clearing House Association (NYCH), supported its member banks by issuing clearinghouse loan certificates (CLCs), short-term collateralized loans guaranteed by the NYCH, as an alternative liquidity source during banking panics; member banks used CLCs exclusively for the purpose of temporarily settling payments with other NYCH members. During the Panic of 1890, the NYCH issued $16.65 million of CLCs between November 12 and December 22, 1890. The Loan Committee received requests from and …

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United States: New York Clearing House Association, The Panic Of 1884, Benjamin Hoffner Jul 2022

United States: New York Clearing House Association, The Panic Of 1884, Benjamin Hoffner

Journal of Financial Crises

The New York Clearing House Association (NYCH), whose membership included most banks in New York, acted as a lender of last resort during the National Banking Era (1863–1913). In the Panic of 1884, following idiosyncratic deposit runs that forced three NYCH member banks to close, the NYCH membership unanimously agreed to issue clearinghouse loan certificates (CLCs) that banks could use as a temporary substitute for currency in the payment of interbank clearinghouse balances. The NYCH required the borrowing bank to post sufficient collateral to secure the loan, subject to a minimum 25% haircut (excluding US government bonds secured at par) …

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United States: New York Clearing House Association, The Panic Of 1873, Sean Fulmer Jul 2022

United States: New York Clearing House Association, The Panic Of 1873, Sean Fulmer

Journal of Financial Crises

In the absence of a central bank, the New York Clearing House Association (NYCH), a group of 60 New York City banks, stepped in as a private lender of last resort in response to banking runs during the Panic of 1873. The NYCH issued clearinghouse loan certificates (CLCs) to member banks that could use them as temporary payment substitutes to settle their clearing balances with other member banks. Borrowing banks paid a flat 7% interest rate. If a borrowing bank failed to repay its CLCs, the membership of the NYCH internally split the cost based on each member bank’s share …

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United States: New York Clearing House Association, The Crisis Of 1893, Natalie Leonard Jul 2022

United States: New York Clearing House Association, The Crisis Of 1893, Natalie Leonard

Journal of Financial Crises

The Panic of 1893 was one of the deepest economic depressions before the Great Depression of 1931. As a precautionary measure to stem the fall in reserves caused by country bank withdrawals, the New York Clearing House (NYCH), a private clearinghouse that operated as a de facto lender of last resort for its members, issued clearinghouse loan certificates (CLCs), as had been done in the prior crises of 1873, 1884, and 1890. CLCs functioned as a means of settlement between NYCH member banks and freed up coin and currency at a time of high demand. Member banks were required to …

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United States: New York Clearing House Association: The Crisis Of 1914, Sean Fulmer Jul 2022

United States: New York Clearing House Association: The Crisis Of 1914, Sean Fulmer

Journal of Financial Crises

As World War I began in 1914 and European stock markets shuttered, foreign investors turned to removing gold from the United States, sparking fears of bank runs and suspension of convertibility. At the start of August 1914, the New York Clearing House Association (NYCH) again authorized the issuance of clearinghouse loan certificates (CLCs), which could be used by member banks as temporary interest-paying substitutes for money in the settlement of clearing balances. The membership of the NYCH jointly guaranteed CLCs and committed to accepting CLCs as payment during the Crisis of 1914. Unique to the Crisis of 1914, the US …

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United States: Federal Home Loan Bank Advances, 2007–2009, Natalie Leonard Jul 2022

United States: Federal Home Loan Bank Advances, 2007–2009, Natalie Leonard

Journal of Financial Crises

In response to the Global Financial Crisis (2007–2009), financial institutions exposed to the subprime mortgage market faced a loss of confidence by investors and generalized stress in funding markets, restricting financial institutions access to lending. Stigma at the Federal Reserve (the Fed) discount window precluded these financial institutions from turning to the Fed for funding. However, the Federal Home Loan Banks (FHLBanks), a system of cooperatively owned, government-sponsored wholesale banks, served as a significant source of liquidity for their 8,000 member institutions, including commercial and community banks, insurance companies, and thrifts. Between June 2007 and September 2008, “advances”—over-collateralized loans—increased from …

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United States: Federal Home Loan Bank Advances, 1932–1941, Natalie Leonard Jul 2022

United States: Federal Home Loan Bank Advances, 1932–1941, Natalie Leonard

Journal of Financial Crises

In the years preceding the Great Depression (1929–1933), home prices and outstanding mortgage debt grew substantially. Low interest rates and lax lending standards fueled widespread real estate speculation. House prices and housing construction peaked between 1925 and 1927 and then fell rapidly as the depression deepened, unemployment grew, and household income and wealth fell, making loan repayment difficult. In the early 1930s, Congress enacted legislation creating federal agencies to stabilize the banking system, rejuvenate housing finance, and oversee securities markets. One of those federal agencies was the Federal Home Loan Bank System (FHLB System), chartered in 1932 as a wholesale …

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United States: Aldrich-Vreeland Emergency Currency During The Crisis Of 1914, Sean Fulmer Jul 2022

United States: Aldrich-Vreeland Emergency Currency During The Crisis Of 1914, Sean Fulmer

Journal of Financial Crises

As geopolitical tensions in Europe began to devolve into World War I, international investors began selling stocks and securities on the New York Stock Exchange (NYSE), converting the proceeds into gold. A massive outflow of gold from the United States would have likely sparked a banking panic. To avert this, the Treasury secretary pushed for the closure of the NYSE and authorized banks to issue emergency currency at the start of August 1914 under powers granted by the Aldrich-Vreeland Act of 1908. This move allowed national banks to issue additional bank notes against privately issued assets such as commercial paper, …

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United Kingdom: Extended Collateral Term Repo Facility, Sean Fulmer Jul 2022

United Kingdom: Extended Collateral Term Repo Facility, Sean Fulmer

Journal of Financial Crises

In a precautionary measure as the European debt crisis worsened in 2011, the Bank of England created a contingent liquidity insurance facility, the Extended Collateral Term Repo (ECTR) facility. This facility would swap sterling cash for eligible collateral on a short-term basis and could be implemented by the Bank’s governor, if liquidity pressures emerged. Under the initial framework, banks and building societies submitted their bids as a spread to the Bank Rate, subject to a minimum spread of 125 basis points, and paid the lowest accepted spread. In 2013, the Bank changed the name of the facility to the Contingent …

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United Kingdom: Indexed Long-Term Repo Operations, Sean Fulmer Jul 2022

United Kingdom: Indexed Long-Term Repo Operations, Sean Fulmer

Journal of Financial Crises

Before the Global Financial Crisis of 2007–09, the Bank of England regularly used monthly Long-Term Repo (LTR) operations at a range of maturities to manage its balance sheet. As market liquidity tightened in late 2007, the Bank introduced the Extended Collateral Long-Term Repo (ELTR) program to lend larger amounts of sterling cash against a wider set of collateral at three-month maturities. In June 2010, the Bank replaced the ELTRs with the Indexed Long-Term Repo (ILTR) program to make the wider set of collateral a permanent part of its toolkit. The ILTR operations auctioned liquidity at three- and six-month maturities against …

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United Kingdom: Extended-Collateral Long-Term Repo, Sean Fulmer Jul 2022

United Kingdom: Extended-Collateral Long-Term Repo, Sean Fulmer

Journal of Financial Crises

In response to liquidity crunches in funding markets leading up to the Global Financial Crisis, the Bank of England introduced Extended-Collateral Long-Term Repo (ELTR) operations, which were a modified version of the regularly scheduled three-month open market operations. These operations were conducted by auction and accepted non-sovereign debt securities, including residential mortgage-backed securities, as collateral. The Bank of England routinely changed the frequency and size of the ELTRs in response to financial needs. At the peak, ELTRs occurred weekly with 40 billion British pounds (GBP) available for eligible institutions, and with GBP 180 billion outstanding. In order to drain this …

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United Kingdom: Discount Window Facility, Sean Fulmer Jul 2022

United Kingdom: Discount Window Facility, Sean Fulmer

Journal of Financial Crises

As the strains of the Global Financial Crisis (GFC) spread internationally in 2008, the Bank of England took measures to provide support to the financial sector. The Bank of England decided to split its Standing Facilities, which faced stigma issues, into the Discount Window Facility (DWF) and Operational Standing Facilities (OSFs). While the OSFs served to set rates and absorb technical frictions in the money markets, the DWF offered banks the opportunity to borrow Treasury-issued gilts for a fee (at a penalty rate), against a range of less liquid collateral. Initially, institutions could borrow for up to 30 days, but …

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United Kingdom: Bank Of England Lending During The Panic Of 1866, Sean Fulmer Jul 2022

United Kingdom: Bank Of England Lending During The Panic Of 1866, Sean Fulmer

Journal of Financial Crises

In 1866, the largest discount house in London, Overend-Gurney, teetered on the verge of insolvency as a result of extensive loan losses. It appealed to the Bank of England, then a privately held joint-stock bank with a monopoly over note issuance, but the Bank refused to help Overend-Gurney on the grounds that it was insolvent. When Overend-Gurney suspended payments, a massive bank run spread throughout London, with observers remarking that an “earthquake” had torn through the City. Panicked bankers flooded to the Bank of England’s discount window, where the Bank fulfilled any “legitimate request for assistance.” Fulfillment came in two …

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Thailand: Financial Institutions Development Fund Liquidity Support, Corey N. Runkel Jul 2022

Thailand: Financial Institutions Development Fund Liquidity Support, Corey N. Runkel

Journal of Financial Crises

International investors launched three speculative attacks on the Thai baht in 1996 and 1997 following one high-profile banking failure, constant departures from the Bank of Thailand (BOT), and slumping returns on stocks and real estate. Though the BOT succeeded in the baht’s defense, the BOT’s depleted reserves were unable to fend off domestic troubles that emerged in early 1997. The speculative attacks increased the cost of foreign-denominated debt—which accounted for 18% of all bank lending—and forced up interbank lending yields. The decade-long boom in foreign capital inflows had generally overvalued assets, and banks found themselves in need of outside financing …

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United Kingdom: Bank Of England Lending During The Panic Of 1825, Sean Fulmer Jul 2022

United Kingdom: Bank Of England Lending During The Panic Of 1825, Sean Fulmer

Journal of Financial Crises

Although historians continue to debate what exactly sparked the Panic of 1825, it is clear that by December of that year, a widespread bank run had erupted, and bankers flocked to the discount window of the Bank of England. While not yet the central bank, the Bank had special legal authority over note issuance and banking, which led to its operation as a semipublic bank. The Bank refused to accept any explicit commitment to act as a lender of last resort, despite being perceived as such by the market. The Bank initially restricted lending to protect its reserves. This policy …

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Russia: Lombard And Overnight Loans, 1998, Benjamin Hoffner Jul 2022

Russia: Lombard And Overnight Loans, 1998, Benjamin Hoffner

Journal of Financial Crises

On August 17, 1998, following a wave of speculative attacks on domestic ruble assets, the Russian government announced a default on its ruble debt maturing before the end of 1999, and the Central Bank of Russia (CBR) declared a devaluation of the ruble by widening the fixed exchange rate band. The announcements left Russian banks without their main source of collateral—government treasuries—to obtain funds from the CBR’s liquidity facilities. Russia’s payment system and interbank market froze as banks hoarded liquidity and, in some cases, restricted withdrawals in response to depositor runs. To restore liquidity to commercial banks and unfreeze the …

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Russia: Central Bank Bonds, 1998, Benjamin Hoffner Jul 2022

Russia: Central Bank Bonds, 1998, Benjamin Hoffner

Journal of Financial Crises

Russian financial markets came to a halt on August 17, 1998, after the Russian government and Central Bank of Russia (CBR) issued a joint statement announcing a ruble devaluation and the suspension of payment on ruble-denominated government treasury bonds maturing before 2000—commonly referred to as “GKO-OFZ” bonds. In September, without a functioning treasury market and with many domestic banks unable to make payments, the CBR began issuing its own short-term, zero-coupon bonds (OBRs) as an alternative financing instrument to provide liquidity in the Russian banking system. OBRs held maximum maturities of three months and the CBR set an upper limit …

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Norway: Covered Bond Swap Program, Sean Fulmer Jul 2022

Norway: Covered Bond Swap Program, Sean Fulmer

Journal of Financial Crises

As the Global Financial Crisis spread, liquidity strains appeared in Norwegian money markets, limiting banks from accessing high-quality and long-term financing. In response, on October 24, 2008, the Norwegian government authorized a Norwegian krone (NOK) 350 billion (USD 50 billion) covered bond swap program to be operated by Norges Bank, the central bank, on behalf of the Ministry of Finance. Under this program, Norwegian commercial banks, savings banks, and, later, mortgage companies could exchange certain covered bonds, known in Norwegian as obligasjoner med fortrinnrett (OMFs), for treasury bills. Pricing was determined in an auction. In each auction, Norges Bank set …

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Hungary: Liquidity Scheme, Carey K. Mott, Alec Buchholtz Jul 2022

Hungary: Liquidity Scheme, Carey K. Mott, Alec Buchholtz

Journal of Financial Crises

Amid the global credit crunch in late 2008, foreign investors dumped Hungarian assets, the Hungarian forint (HUF) depreciated, and liquidity deteriorated in the Hungarian banking sector due to the prevalence of short-term, foreign currency-denominated liabilities. On March 10, 2009, the Hungarian government established a scheme to provide up to HUF 1.1 trillion (USD 4.9 billion) in foreign exchange liquidity to domestic credit institutions and subsidiaries of foreign banks. The government used funds provided by the International Monetary Fund (IMF) and European Union (EU) in October 2008, a USD 25.1 billion package to provide Hungary with sufficient foreign exchange reserves to …

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Hong Kong: Temporary Liquidity Measures, 2008, Benjamin Hoffner Jul 2022

Hong Kong: Temporary Liquidity Measures, 2008, Benjamin Hoffner

Journal of Financial Crises

In September 2008, Hong Kong’s interbank market tightened after the Bank of East Asia experienced a deposit run, prompting the Hong Kong Monetary Authority (HKMA) to roll out five novel liquidity measures. The first three of these measures expanded the scope of HKMA’s discount window, offering term loans of up to three months, accepting additional collateral options, and lowering the rate charged. In the last two measures, the HKMA created one facility that allowed banks to request foreign exchange swaps and another that permitted the HKMA to extend collateralized term loans at market rates using its discretion. Although these measures …

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Hong Kong: Private Emergency Loans, 1965, Benjamin Hoffner Jul 2022

Hong Kong: Private Emergency Loans, 1965, Benjamin Hoffner

Journal of Financial Crises

In 1965, new prudential regulations and a real estate downturn triggered deposit runs in the British colony of Hong Kong that impacted local Chinese banks with large exposures to unfinished real estate projects and other illiquid assets. As a result of authorities’ laissez-faire approach to the banking system, Hong Kong had no central bank or any other formal lender-of-last-resort (LOLR) policy when the crisis unfolded. Instead, two private British banks, Hong Kong and Shanghai Banking Corporation (HSBC) and Chartered Bank, provided emergency loans at market rates for commercial banks facing deposit withdrawals. Following each bank run, either HSBC or Chartered …

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Greece: Emergency Liquidity Assistance, Corey N. Runkel Jul 2022

Greece: Emergency Liquidity Assistance, Corey N. Runkel

Journal of Financial Crises

The Global Financial Crisis of 2007-09 triggered a deep recession in Greece, leading investors to withdraw one third of Greek bank deposits between 2008 and 2011. As banks’ nonperforming assets rose and rating agencies downgraded Greek sovereign debt, Greek banks’ capital fell below levels required for Eurosystem refinancing operations. In response, the Bank of Greece (BOG) provided Emergency Liquidity Assistance (ELA) to all Greek banks. ELA was a revolving credit line open to solvent institutions at a premium rate, so long as that support did not interfere with the Eurosystem’s monetary policy. European Central Bank (ECB) rules required the BOG …

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European Central Bank: Term Refinancing Operations, Corey N. Runkel Jul 2022

European Central Bank: Term Refinancing Operations, Corey N. Runkel

Journal of Financial Crises

During the Global Financial Crisis (GFC), the European Central Bank (ECB) expanded the frequency, maturities, size, and set of eligible collateral for several of its standing term refinancing operations (TROs). Changes started in August 2007, when the European interbank market tightened, and the ECB supplemented its monthly longer-term refinancing operations (LTROs) with another three-month-maturity tender each month. Another encounter with market turbulence in March 2008 brought six-month LTROs. The largest expansion came after the collapse of Lehman Brothers in September 2008: the ECB enlarged its set of eligible collateral, added 12-month LTROs, and added special-term refinancing operations (STROs) that matured …

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Canada: Private-Sector Term Purchase And Resale Agreements, Priya Sankar Jul 2022

Canada: Private-Sector Term Purchase And Resale Agreements, Priya Sankar

Journal of Financial Crises

With Canadian banks curtailing their funding in response to the Global Financial Crisis, liquidity dried up in money markets and bond markets. On October 14, 2008, the Bank of Canada (BoC) announced its first Private-Sector Term PRA facility to provide liquidity to large money-market participants, such as asset managers, who were not traditional BoC counterparties and could not access the BoC’s other emergency liquidity facilities (“PRA” is short for purchase and resale agreement, similar to a repo). The program accepted commercial paper, asset-backed commercial paper, and bankers’ acceptances as collateral. It complemented the BoC’s Term PRA for primary dealers (the …

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European Central Bank: Fine-Tuning Operations, Corey N. Runkel Jul 2022

European Central Bank: Fine-Tuning Operations, Corey N. Runkel

Journal of Financial Crises

Credit in the European interbank market tightened in August 2007 as banks sustained losses in mortgage-backed securities markets. On August 9, the European Central Bank (ECB) announced a EUR 95 billion fine-tuning operation (FTO). The Eurosystem continued providing FTOs carrying overnight maturities through the next three business days. Two more bouts of interbank funding stress—in March and September 2008—caused the ECB to deploy more FTOs. The ECB provided liquidity through 12 emergency, overnight FTOs, all but one at least EUR 25 billion in size. All operations, except the first and last, used variable-rate, fixed-allotment auctions. The first and last operations …

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Canada: Term Loan Facility, Priya Sankar Jul 2022

Canada: Term Loan Facility, Priya Sankar

Journal of Financial Crises

As the Global Financial Crisis deepened into late 2008, liquidity continued to deteriorate in Canadian credit markets. Canadian financial institutions curtailed their lending, which increased funding costs and reduced market-wide liquidity. In response, the Bank of Canada (BoC) took extraordinary measures to provide liquidity to financial market participants and improve credit conditions. On November 12, 2008, the BoC established the Term Loan Facility (TLF) to extend credit at a penalty rate for terms of approximately one month. The TLF was available to 14 major banks that were direct participants in Canada’s payments system, the Large Value Transfer System. Participants could …

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Canada: Term Purchase And Resale Agreement Facility, Priya Sankar Jul 2022

Canada: Term Purchase And Resale Agreement Facility, Priya Sankar

Journal of Financial Crises

With Canadian banks curtailing their funding in response to the Global Financial Crisis, liquidity dried up in money markets and bond markets. On October 14, 2008, the Bank of Canada (BoC) announced its first Private-Sector Term PRA facility to provide liquidity to large money-market participants, such as asset managers, who were not traditional BoC counterparties and could not access the BoC’s other emergency liquidity facilities (“PRA” is short for purchase and resale agreement, similar to a repo). The program accepted commercial paper, asset-backed commercial paper, and bankers’ acceptances as collateral. It complemented the BoC’s Term PRA for primary dealers (the …

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