Social and Behavioral Sciences Commons^™

Lessons Learned: Donald Kohn, Maryann Haggerty

Journal of Financial Crises

Kohn, an economist, is a 40-year veteran of the Federal Reserve System. He served as a member of the Board of Governors, and was vice chair, from 2002-2010, which included the years of the global financial crisis (GFC).

The United Kingdom's Asset Purchase Program (U.K. Gfc), Ariel Smith

Journal of Financial Crises

On March 5, 2009, in the wake of the fallout from the Global Financial Crisis, the Monetary Policy Committee of the Bank of England announced a new, unconventional policy measure: quantitative easing. The MPC determined that simply cutting the Bank Rate in the face of a recession would not be enough to boost spending and increase inflation to meet the Bank’s goal of a 2% CPI-inflation target in the medium term. Rather, over the course of the next year, the Bank purchased £200 billion of assets—primarily gilts—in reverse auctions through a newly created Asset Purchase Program. After just under one …

The European Central Bank's Covered Bond Purchase Programs I And Ii (Ecb Gfc), Ariel Smith

Journal of Financial Crises

In July 2009, the European Central Bank introduced a nonstandard measure to revitalize the European covered bond market, which at the time financed about one-fifth of mortgages in Europe. The market struggled after the collapse of Lehman Brothers as the global financial crisis intensified in 2008. Over the course of the program, which lasted 12 months, European central banks, collectively known as “the Eurosystem,” conducted direct purchases in both primary and secondary markets to a total of €60 billion of covered bonds. The Eurosystem held the purchased covered bonds until maturity and made them eligible for lending to counterparties as …

The European Central Bank's Securities Markets Programme (Ecb Gfc), Ariel Smith

Journal of Financial Crises

The Eurozone struggled during the escalation of the sovereign debt crisis in 2010. In order to aid malfunctioning securities markets, restore liquidity, and enable proper functioning of the monetary policy transmission mechanism, the European Central Bank (ECB) instituted the Securities Markets Programme (SMP) on May 9, 2010. This program enabled Eurosystem central banks to purchase securities from entities in Greece, Ireland, Portugal, Italy, and Spain. The program ended on September 6, 2012, and evaluations of its effectiveness are mixed.

The European Central Bank's Three-Year Long-Term Refinancing Operations (Ecb Gfc), Aidan Lawson

Journal of Financial Crises

The announcement of the three-year Long-Term Refinancing Operations (LTROs) by the European Central Bank (ECB) on December 8, 2011, signaled the beginning of the largest ECB market liquidity programs to date. Continued and increasing liquidity-related pressures in the form of ballooning financial market credit default swap (CDS) spreads, Euro-area volatility, and interbank lending rates prompted a much more forceful ECB response than what had been done previously. The LTROs, using a repurchase (repo) agreement auction mechanism, allowed any Eurozone financial institution to tap essentially unlimited funding at a fixed rate of just 1%. Because the three-year LTROs were so similar …

The Term Asset-Backed Securities Loan Facility (Talf) (U.S. Gfc), June Rhee

Journal of Financial Crises

In the fall of 2008, the securitization market, which was the major provider of credit for consumers and small businesses, came to a near halt. Investors in this market abandoned not only the residential mortgage-backed securities that triggered the financial crisis but also consumer and business asset-backed securities (ABS), which had a long track record of strong performance, and commercial mortgage-backed securities (CMBS). Also, the unprecedented widening of spreads for these securities rendered new issuance uneconomical, and the shutdown of the securitization market threatened to exacerbate the downturn in the economy.

On November 25, 2008, the Federal Reserve (the Fed) …

The Commercial Paper Funding Facility (U.S. Gfc), Rosalind Z. Wiggins

Journal of Financial Crises

In mid-September 2008, prime money market mutual funds (MMMFs) began experiencing run-like redemption requests sparked by one fund that had “broken the buck” because of large exposure to Lehman Brothers commercial paper (CP). As a result, MMMFs, which are significant investors in CP, became reluctant to hold CP. Within a week, outstanding CP had been reduced by roughly $300 billion. The CP market experienced severe shortening of maturities and increased rates, making it difficult for issuers to place new paper. When government efforts to assist the MMMFs did not resolve the stresses in the CP market, the Federal Reserve announced, …

Market Liquidity Programs: Gfc And Before, June Rhee, Greg Feldberg, Ariel Smith, Andrew Metrick

Journal of Financial Crises

The virulence of the Global Financial Crisis of 2007–09 (GFC) was explained in large part by the increased reliance of the global financial system on market-based funding and the lack of preexisting tools to address a disruption in that type of system. This paper surveys market liquidity programs (MLPs), which we define as government interventions in which the key motivation is to stabilize liquidity in a specific wholesale funding market that is under stress. Most of the MLPs surveyed in this paper were launched during and after the GFC, but two pre-GFC MLPs are included. A subsequent survey on MLPs …

Lessons Learned: A Conversation With Paul A. Volcker, Andrew Metrick, Rosalind Z. Wiggins, Kaleb B. Nygaard

Journal of Financial Crises

On March 26, 2019, Andrew Metrick, the Janet Yellen Professor of Finance at the Yale School of Management and Founder and Director of the Yale Program on Financial Stabilitysat down with Paul A. Volcker to discuss his perspectives on the Federal Reserve, central banking autonomy, “too big to fail,” and how his perspectives on these topics have changed over the decades.It turned out to be one of the last interviews given by the former Chairman of the Federal Reserve System who passed away on December 8, 2019, at the age of 92.

The Federal Reserve’S Financial Crisis Response E: The Term Asset-Backed Securities Loan Facility, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Securitization is a process that allows banks and other lenders to package loans and sell them as bonds called asset-backed securities (ABS), removing them from their balance sheets and immediately generating cash for new loans. ABS are an important component of the financing cycle for many types of loans to households and small businesses, including mortgages. In the fall of 2008, financial markets began experiencing disturbances as the effects of the U.S. subprime market meltdown spread. The ABS market froze decreasing the volume of new loans to households and small businesses. The Federal Reserve became very concerned about the potential …

The Federal Reserve’S Financial Crisis Response D: Commercial Paper Market Facilities, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

During the summer of 2007, the U.S. residential mortgage market began to decline sharply negatively impacting the asset-backed commercial paper (ABCP) market, which often relied on mortgages as underlying support. Money Market Mutual Funds (MMMFs), significant investors in commercial paper (CP), quickly retreated from the market, causing a substantial decline in outstanding ABCP. In September 2008, pressures on the markets severely escalated again, when the Reserve Primary Fund MMMF “broke the buck” and prompted run-like redemption requests by many MMMF investors. These disruptions resulted in higher rates and shorter maturities, practically freezing the market for term CP. Concerned about the …

The Federal Reserve’S Financial Crisis Response C: Providing U.S. Dollars To Foreign Central Banks, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

The financial crisis that began in late 2007 with the decline in the United States (U.S.) subprime mortgage markets quickly spread to other markets and eventually disrupted the interbank funding markets in the U.S. as well as overseas. To address the strain in the U.S. dollar (USD) funding markets, the Federal Reserve worked with foreign central banks around the world to provide USD liquidity to affected overseas markets by entering into currency swap agreements. Following the bankruptcy of Lehman Brothers in September 2008, and the resulting further destabilization of the world’s financial systems, the size and utilization of these swaps …

The Federal Reserve’S Financial Crisis Response B: Lending & Credit Programs For Primary Dealers, Rosalind Z. Wiggins, Patricia C. Mosser, Andrew Metrick

Journal of Financial Crises

Beginning in the summer 2007 the Federal Reserve (the Fed) deployed numerous conventional and innovative programs to address the credit crisis occurring in the wholesale lending markets that was beginning to affect the broader financial markets and threaten the economy at large. Two of those programs, the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) were aimed at providing liquidity to primary dealers and required the Fed to rely on its authority under Section 13(3) of the Federal Reserve Act. Section 13(3) is a Depression Era amendment that permits the Fed expanded powers in “unusual and …

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 …

Lessons Learned: Tony Fratto, Mercedes Cardona, Rosalind Z. Wiggins

Journal of Financial Crises

Fratto, who was Deputy Assistant and Deputy Press Secretary to the President during the financial crisis of 2007-2009, gives us his take on the government’s communications efforts and how best to prepare for future crises

Lessons Learned: Jack Gutt, Mercedes Cardona

Journal of Financial Crises

Gutt, who joined the Federal Reserve Bank of New York in 2009 as Vice President, Head of Media Relations and Public Affairs, shares with us his reflections on that period.

Lessons Learned: David Wessel, Ben Henken, Rosalind Z. Wiggins

Journal of Financial Crises

Wessel, an award-winning journalist for The Wall Street Journal, talks about some of the issues faced by the media in covering the crisis, discusses the many challenges policymakers faced when trying to communicate the government’s crisis-fighting strategy, and shares suggestions for improvement.

Lessons Learned: James (Jim) Millstein, Alec Buchholtz, Rosalind Z. Wiggins

Journal of Financial Crises

Millstein, who was the Chief Restructuring Officer, U.S. Department of the Treasury, during the Global Financial Crisis and instrumental in the rescue of American International Group, gives us his take on how best to prepare for future crises

Guarantees And Capital Infusions In Response To Financial Crises C: U.S. 2009 Stress Test, Chase P. Ross, June Rhee, Andrew Metrick

Journal of Financial Crises

When President Obama took office in 2009, the Treasury focused on restarting bank lending and repairing the ability of the banking system as a whole to perform the role of credit intermediation. In order to do so, the Treasury needed to raise public confidence that banks had sufficient buffers to withstand even a very adverse economic scenario, especially given heightened uncertainty surrounding the outlook of the U.S. economy and potential losses in the banking system. The Supervisory Capital Assessment Program (SCAP)—the so-called “stress tests”—sought to rigorously measure the resilience of the largest bank holding companies. Those found to have insufficient …

Guarantees And Capital Infusions In Response To Financial Crises B: U.S. Guarantees During The Global Financial Crisis, June Rhee, Andrew Metrick

Journal of Financial Crises

During 2008-09, the federal government extended multiple guarantee programs in an effort to restore the financial market and contain the panic and crisis in the market. For example, the Treasury provided a temporary guarantee program for the money market funds, the FDIC decided to stand behind certain debts and non-interest-bearing transaction accounts, and the Treasury, the FDIC, and the Federal Reserve agreed to share losses in certain assets belonging to Citigroup. This case reviews these guarantee programs implemented during the global financial crisis by the government and explores the different rationale that shaped certain design features of each program.

Guarantees And Capital Infusions In Response To Financial Crises A: Haircuts And Resolutions, June Rhee, Andrew Metrick

Journal of Financial Crises

After the mortgage market meltdown in mid-2007 and during the financial crisis in 2008, major financial institutions around the world were on the verge of collapsing one after another. Faced with these troubles, the government had to respond quickly to contain the crisis as efficiently as possible. It was, however, limited in resources, time, and experience. To make matters worse, the complexity and opaqueness of the financial market and these institutions greatly affected the government’s ability to design an efficient and consistent method to contain the crisis. Shortly after Lehman Brothers filed for bankruptcy on September 15, 2008, American International …

Lessons Learned: Edwin (Ted) Truman, Yasemin Sim Esmen

Journal of Financial Crises

Insights on fighting financial crises from Ted Truman, an expert in responding to the international dimensions of financial crises. Topics include the initial US response to the Global Financial Crisis of 2008-2009 and the utiltiy of issuing Special Drawing Rights (SDR).

Lessons Learned: Ray Dalio, Andrew Metrick, Rosalind Z. Wiggins, Kaleb B. Nygaard

Journal of Financial Crises

Insights from a discussion with Ray Dalio, Founder, Chairman, and Co-Chief Investment Officer of Bridgewater Associates, one of the largest hedge funds in the world. Topics range from monetary policy to communications strategy when responding to a financial crisis.

Basel Iii G: Shadow Banking And Project Finance, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

The Net Stable Funding Ratio (NSFR), a liquidity standard introduced by Basel III, seeks to promote a better match between the liquidity of a bank’s assets and the manner in which the bank funds those assets. The NSFR requires banks to maintain a minimum amount of funding deemed “stable” by the Basel framework based on the liquidity of the banks’ assets and activities over a one-year timeframe. One of the areas seen as most affected by this development may be bank participation in project finance for infrastructure development. Since the global demand for infrastructure development remains robust, the shadow banking …

Basel Iii F: Callable Commercial Paper, Christian M. Mcnamara, Rosalind Bennett, Andrew Metrick

Journal of Financial Crises

One of the Basel Committee on Banking Supervision’s responses to the global financial crisis of 2007-09 was to introduce the Liquidity Coverage Ratio (LCR), a short-term measure that evaluates whether a bank has enough liquidity to meet expected cash outflows during a 30-day stress scenario. One area in which this incentive has already resulted in changed practices is in the market for commercial paper. Banks often provide backup liquidity facilities to the issuers of commercial paper that the issuers can draw upon to repay a maturing issue of commercial paper if they are unable to sell a new issue to …

Basel Iii E: Synthetic Financing By Prime Brokers, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

Hedge funds rely on “prime brokerage” units within banks to provide leverage. With the enhanced capital requirements and new liquidity standards introduced by Basel III driving up the cost to banks of engaging in such financing, prime brokers have begun to offer an alternative means of providing hedge fund clients with leveraged exposure to securities. Known as synthetic financing, this alternative requires the prime broker to enter into derivatives contracts with the clients. Under the Basel III framework, the ability of banks to hedge and net such derivative positions results in capital and liquidity costs for synthetic financing that are …

Basel Iii D: Swiss Finish To Basel Iii, Christian M. Mcnamara, Natalia Tente, Andrew Metrick

Journal of Financial Crises

After the Basel Committee on Banking Supervision (BCBS) introduced the Basel III framework in 2010, individual countries confronted the question of how best to implement the framework given their unique circumstances. Switzerland, with a banking industry that is both heavily concentrated and very large relative to the size of its overall economy, faced a special challenge. It ultimately adopted what is sometimes referred to as the “Swiss Finish” to Basel III—enhanced requirements applicable to Switzerland’s “too-big-to-fail” banks Credit Suisse and UBS that go beyond the base requirements established by the BCBS. Yet the prominent role played by relatively new contingent …

Basel Iii B: Basel Iii Overview, Christian M. Mcnamara, Michael Wedow, Andrew Metrick

Journal of Financial Crises

In the wake of the financial crisis of 2007-09, the Basel Committee on Banking Supervision (BCBS) faced the critical task of diagnosing what went wrong and then updating regulatory standards aimed at preventing it from occurring again. In seeking to strengthen the microprudential regulation associated with the earlier Basel Accords while also adding a macroprudential overlay, Basel III consists of proposals in three main areas intended to address 1) capital reform, 2) liquidity standards, and 3) systemic risk and interconnectedness. This case considers the causes of the 2007-09 financial crisis and what they suggest about weaknesses in the Basel regime …

Basel Iii A: Regulatory History, Christian M. Mcnamara, Thomas Piontek, Andrew Metrick

Journal of Financial Crises

From the earliest efforts to mandate the amount of capital banks must maintain, regulators have grappled with how best to accomplish this task. Until the 1980s, regulation had been based largely on discretion and judgment. In the wake of two bank failures, the central bank governors of the G10 countries established the Basel Committee on Banking Supervision (BCBS) and in 1988, the BCBS introduced a capital measurement system, Basel I. The system represented a triumph of the fixed numerical approach, however, critics worried that it was too blunt an instrument. In 1999, the BCBS issued Basel II, a proposal to …

Jpmorgan Chase London Whale Z: Background & Overview, Arwin G. Zeissler, Rosalind Bennett, Andrew Metrick

Journal of Financial Crises

In December 2011, the Chief Executive Officer and Chief Financial Officer of JPMorgan Chase (JPM) instructed the bank’s Chief Investment Office to reduce the size of its Synthetic Credit Portfolio (SCP) during 2012, so that JPM could decrease its Risk-Weighted Assets as the bank prepared to adopt the impending Basel III bank capital regulations. However, the SCP traders were also told to minimize the trading costs incurred to reduce Risk-Weighted Assets, while still maintaining the opportunity to profit from unexpected corporate bankruptcies. In an attempt to balance these competing objectives, head SCP derivatives trader Bruno Iksil suggested in January 2012 …