The Federal Reserve on Sunday announced two initiatives designed to bolster market liquidity and promote orderly market functioning. Liquid, well-functioning markets are essential for the promotion of economic growth.
First, the Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create a lending facility to improve the ability of primary dealers to provide financing to participants in securitization markets. This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York....
Primary Dealer Credit FacilityTerms and conditions
...Eligible Collateral
Collateral eligible for pledge under the PDCF includes all collateral eligible for pledge in open market operations, plus investment grade corporate securities, municipal securities, mortgage-backed securities, and asset-backed securities. Collateral that is not priced by the clearing banks will not be eligible for pledge under the PDCF.
Climateer comment: The next tool is outright purchases of debt instruments in the open market. After that, they would need congressional approval [which would be forthcoming] to go into the equity markets. We're seeing history folks.Frequently asked questions
...What are the differences between this and other recent initiatives?
The Term Auction Facility program offers term funding to depository institutions via a bi-weekly auction, for fixed amounts of credit. The Term Securities Lending Facility will be an auction for a fixed amount of lending of Treasury general collateral in exchange for OMO-eligible and AAA/Aaa rated private-label residential mortgage-backed securities. The Primary Dealer Credit Facility now allows eligible primary dealers to borrow at the existing Discount Rate for up to 120 days.
Will the PDCF operations have a reserve impact?
Yes, the credit advanced to the primary dealers under the PDCF will increase the amount of bank reserves.
How will we offset the reserve impact of PDCF loans?
PDCF loans made to primary dealers increase the total supply of reserves in the banking system, in much the same way that Discount Window loans do. To offset this increase, the Federal Reserve Open Market Trading Desk (the “Desk”) will utilize a number of tools, including, but not necessarily limited to, outright sales of Treasury securities, reverse repurchase agreements, redemptions of Treasury securities, and changes in the sizes of conventional RP transactions.
How is this different from discount window lending to depository institutions?
This differs from discount window lending to depository institutions in a number of ways. Currently, the primary credit facility offers overnight as well as term funding for up to 90 calendar days at the primary credit rate secured by discount window collateral to eligible depository institutions. The PDCF, by contrast, is an overnight facility that will be available to primary dealers (rather than depository institutions) for a period of 120 business days. The PDCF is subject to a frequency-of-usage fee, and the loans will be secured by a different basket of securities than those eligible for pledging at the discount window; in particular, only priced securities will be accepted in the PDCF....
