Responses to the Financial Crisis, Treasury Debt, and the Impact on Short-Term Money Marke

Since the fall of 2007, various government programs have been introduced in the United States in response to the financial crisis.  We examine the impact of responses that involved Treasury debt on short-term money markets.  One such program, the Term Securities Liquidity Facility (TSLF) was introduced in March 2008, as money markets became severely impaired.  The TSLF was designed to address dislocations in repurchase (repo) rates by exchanging Treasury securities for poorer quality collateral held by market participants.  A second program, the Supplemental Financial Program (SFP), introduced in the fall of 2008, was designed to help the Federal Reserve drain bank reserves through the issuance of special Treasury debt, with proceeds held in Treasury’s account at the Federal Reserve Bank of New York.  Finally, and more incrementally, other Treasury debt issuance increased as the financial crisis spread to the macro economy, fostering increased expenditures and lower tax receipts.  While the latter two responses were not aimed directly at dislocations in short-term money markets, they did impact the supply of Treasury securities to be financed by money markets (a repo is essentially a collateralized loan).

            This work examines the impact of these three responses on short-term money market rates using daily market data.  The results will increase our understanding of short-term money markets and will help guide the policy response to future crises.  Our study takes advantage of the fungible product generated by each of the separate policy actions—changes in the supply of US Treasury debt. In general, greater amounts of available Treasury collateral should lead to higher repo rates.  Because all Treasury securities are equally suitable as collateral, and because each program had different transmission channels, different initiation periods, and different patterns of changes in supply, each program’s effect can be measured against a common benchmark, the over-night general collateral (GC) repo market.   

            In preliminary work, findings suggest that over a sample that includes a pre-crisis period back to 2006, the TSLF had the largest impact on GC repo rates, while the SFP had the smallest.  Over a more restricted sample period that begins just prior to the introduction of the TSLF, the TSLF still exhibits the largest impact on GC repo rates, while the impact of SFP debt is indistinguishable from general Treasury debt. In current work, differences in balance sheet impacts and transmission mechanisms are being documented and harnessed to the analysis so as to better understand the relative benefits and weakness of each policy instrument, and the relevance of pre-crisis fiscal and market conditions on selection criteria.