Social and Behavioral Sciences Commons^™

Fire Sales, The Lolr, And Bank Runs With Continuous Asset Liquidity, Ulrich Bindseil, Edoardo Lanari

Journal of Financial Crises

Banks’ asset fire sales and recourse to central bank credit are modeled with continuous asset liquidity, allowing us to derive the liability structure of a bank. Both asset sales liquidity and the central bank collateral framework are modeled as power functions within the unit interval. Funding stability is captured as a strategic bank run game in pure strategies between depositors. Fire sale liquidity and the central bank collateral framework determine jointly the ability of the banking system to deliver maturity transformation without endangering financial stability. The model also explains why banks tend to use the least liquid eligible collateral with …

United States: Primary Market Corporate Credit Facility And Secondary Market Corporate Credit Facility, Natalie Leonard

Journal of Financial Crises

The COVID-19 pandemic reached a critical stage in early 2020 causing severe distress and disruption in financial markets, and the United States government declared a federal state of emergency in the second week of March. As institutional investors including mutual funds, pension funds, and insurance companies withdrew from corporate bond markets and funding options for large US businesses dried up, the Federal Reserve became concerned that solvent businesses might have difficulty financing their operations. On March 23, the Federal Reserve Board invoked Section 13(3) of the Federal Reserve Act, creating two novel emergency lending facilities to support the corporate bond …

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 …

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 …

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 …

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 …

Broad-Based Emergency Liquidity Programs, Rosalind Z. Wiggins, Sean Fulmer, Greg Feldberg, Andrew Metrick

Journal of Financial Crises

In this paper, we analyze broad-based emergency liquidity (BBEL) programs. Our main purpose is to assist policymakers who are considering establishing a BBEL program in designing the most effective program possible as efficiently as possible. Our insights are derived from 33 case studies the Yale Program on Financial Stability produced and existing literature on the topic.

Liquidity provision is a long-established mandate of central banks and was a function that private entities performed even before the establishment of central banks. We survey a sampling of cases from the 19th through 21st centuries, drawn from 10 countries and regions, to distill …

Term Securities Lending Facility (Tslf) (U.S. Gfc), Manuel Leon Hoyos

Journal of Financial Crises

The 2007–09 financial crisis reached a critical stage in March 2008. Amid falling house prices and downgrades of mortgage-related securities, financial markets became severely disrupted. The Federal Reserve—the US central bank—became increasingly concerned about the inability of the 20 primary dealers, including the five largest US investment banks, to fund themselves in short-term funding markets, such as the repurchase agreement market, then estimated at $10 trillion. In response, the Fed created several emergency lending facilities to restore market liquidity that required the Fed to invoke Section 13(3) of the Federal Reserve Act. The Term Securities Lending Facility authorized the Federal …

The Federal Reserve’S Financial Crisis Response A: Lending & Credit Programs For Depository Institutions, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Beginning in summer 2007, the Federal Reserve (the Fed) was called upon to address a severe disruption in the interbank lending markets sparked by a downturn in the subprime mortgage market. As these developments began to impact the ability of banks to raise adequate funding, the Fed encouraged them to utilize the Discount Window (DW), its standing facility for lending to depository institutions, and repeatedly decreased the lending rate to make the facility more accessible. Despite the Fed’s efforts, for a number of reasons, including historical perceptions of stigma, banks were reluctant to utilize the DW. In December 2007, the …

The Comparative Advantage Of The U.S. Shadow Banking System And The U.S. Dollar, Junji Tokunaga

PERI Working Papers

In the 2000’s prior to the Global Financial Crisis (GFC) of 2008, European banks borrowed short-term dollar funds on liabilities side, in part, from the U.S., and then lent part of it back to invest in long-term dollar assets in the U.S. on assets side. What facilitated European banks to expand their USD-denominated balance sheets across the Atlantic in the 2000’s, despite the creation of the euro in 1999? Compared to the amount of studies on why European banks expanded their balance sheets, few studies have indeed been done to analyze what determined the currency denomination of European banks’ balance …

2013-5 Reassessing The Thesis Of The Monetary History, David Laidler

Economic Policy Research Institute. EPRI Working Papers

No abstract provided.

2012-4 Two Crises, Two Ideas And One Question, David Laidler

Economic Policy Research Institute. EPRI Working Papers

No abstract provided.

2007-3 Financial Stability, Monetarism And The Wicksell Connection, David Laidler

Economic Policy Research Institute. EPRI Working Papers

No abstract provided.