Repo Market Effects of the Term Securities Lending Facility

Fleming, Michael J.; Hrung, Warren B.; Keane, Frank M.

doi:10.1257/aer.100.2.591

Cited by 67 publications

(22 citation statements)

References 14 publications

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“…Accepting corporate debt as collateral will then reduce the spread by increasing their liquidity/resaleability. Hence, changing the terms of central bank lending a¤ects interest rate spreads via liquidity premia in accordance with empirical evidence on the e¤ects of recently introduced Fed lending facilities (see Fleming et al, 2010, andSarkar andShrader, 2010).…”

Section: Introductionsupporting

confidence: 81%

Optimal central bank lending

Schabert

2015

Journal of Economic Theory

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe analyze optimal monetary policy in a sticky price model where the central bank supplies money outright via asset purchases and lends money temporarily against collateral. The terms of central bank lending a¤ect rationing of money and impact on macroeconomic aggregates. The central bank can set the policy rate and its in ‡ation target in a way that implements the …rst best long-run allocation, which is impossible if money were supplied in a lump-sum way (as commonly assumed). E¢ cient central bank lending further increases gains from macroeconomic stabilization beyond pure interest rate policy. This requires departing from a "Treasuriesonly" regime.JEL classi…cation: E4; E5; E32.

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Section: Introductionsupporting

confidence: 81%

Optimal central bank lending

Schabert

2015

Journal of Economic Theory

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“…Indeed, this evidence is more consistent with Krishnamurthy and Vissing‐Jorgensen (), who argue that Treasuries as a class command a collateral/liquidity premium. Fleming, Hrung, and Keane () investigate the low Treasury repo rate phenomenon in detail and show that the implementation of the Term Securities Lending Facility (TSLF) in March 2008, in which the Federal Reserve lent Treasury securities against non‐Treasury collateral, helped to reduce the repo premium on Treasuries.…”

Section: Repo Terms During the Financial Crisismentioning

confidence: 99%

Sizing Up Repo

Krishnamurthy¹,

Nagel²,

Orlov

2014

The Journal of Finance

345

164

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To understand which short-term debt markets experienced "runs" during the financial crisis, we analyze a novel data set of repurchase agreements (repo), that is, loans between nonbank cash lenders and dealer banks collateralized with securities. Consistent with a run, repo volume backed by private asset-backed securities falls to near zero in the crisis. However, the reduction is only $182 billion, which is small relative to the stock of private asset-backed securities as well as the contraction in asset-backed commercial paper. While the repo contraction is small in aggregate, it disproportionately affected a few dealer banks.

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“…There was also significant intervention by the Federal Reserve in repo markets during this period. As Fleming, Hrung, and Keane (2010) document, on March 11, 2008 the Federal Reserve introduced the Term Securities Lending Facility (TSLF), which allowed dealers to swap less liquid collateral (specifically, agency debt securities, agency mortgage‐backed securities, and other investment grade debt securities) for Treasury collateral. The aim of the TSLF was to narrow the spread between the financing rates on Treasuries versus those on non‐Treasuries so that dealers could more easily finance their positions in non‐Treasury securities.…”

Section: Empirical Analysismentioning

confidence: 99%

The Cost of Short‐Selling Liquid Securities

Banerjee¹,

Graveline

2013

The Journal of Finance

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Standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive. We show that short-sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it. We provide a model-free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short-sellers. Empirically, we find that short-sellers were responsible for a substantial fraction of the liquidity premium for on-the-run Treasuries from November 1995 through July 2009. GIVEN TWO SECURITIES WITH similar cash flows, the more liquid security often trades at a higher price than its less liquid counterpart. This price premium is usually thought to reflect the future benefits that long investors attribute to securities that can be sold quickly and with little price impact (e.g., Amihud and Mendelson (1986)). The more liquid security also frequently costs more to borrow, or trades on special, in financing markets. Previous literature argues that this financing premium is a natural counterpart to the price premium: short-sellers readily pay more to borrow securities that can be sold at a premium (e.g., Duffie (1996), Krishnamurthy (2002)).However, short-sellers themselves may also value a liquid security over and above the higher sale price they receive. When closing out a position, shortsellers are required to deliver the specific security that they initially borrowed and sold short. As such, they naturally prefer to use liquid securities that can be bought back easily. Indeed, short-sellers can pay a net premium for these future liquidity benefits if it costs them more to borrow the liquid security than they expect to recoup from selling it at a higher price. As the following example illustrates, we use this insight to decompose the price premium for a liquid security into the net premiums paid by long investors and short-sellers.EXAMPLE: Suppose that a liquid security trades for $100,000, and an otherwise equivalent but less liquid security costs $99,850. Prices are expected to converge at the end of the period so that the price premium for the liquid security is * Snehal Banerjee is with Northwestern University and Jeremy J. Graveline is with the University of Minnesota. We are grateful for comments from Philip Bond; Joost Driessen; Darrell Duffie; Joseph Engelberg; Michael Fleming; Nicolae Gârleanu; Arvind Krishnamurthy; Francis Longstaff; David Matsa; Lasse Pedersen; Raj Singh; Dimitri Vayanos; Pierre-Olivier Weill; and participants at the NBER AP Meeting (San Francisco, 2010), the Adam Smith Asset Pricing Meeting (Oxford, 2011), the SFS Cavalcade (Ann Arbor, 2011), and the Western Finance Association Meeting (Santa Fe, 2011 In this example, the net premium for a short position in the liquid security is $50. Short-sellers pay $200 more to borrow it but recoup $150 by selling it at the higher price. As a whole, long investors in the liquid security ...

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Repo Market Effects of the Term Securities Lending Facility

Cited by 67 publications

References 14 publications

Optimal central bank lending

Optimal central bank lending

Sizing Up Repo

The Cost of Short‐Selling Liquid Securities

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