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

Abstract

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. 1 Repo rates can be of various terms and are backed by various types of collateral. The over-night Treasury GC repo rate represents the rate on the shortest term for the safest and most liquid type of collateral. As such, this rate is a benchmark for other repo rates. Terms of use: Documents in EconStor may 2Treasury securities as part of its Large Scale Asset Purchase (LSAP) program. While the SFP, OMOs, and programs such as TARP were not aimed directly at dislocations in short-term money markets, they did impact the supply of Treasury securities available to be financed by money markets.In general, greater amounts of available Treasury collateral should lead to higher Treasury repo rates, however while all Treasury collateral can be used as high quality repo collateral, it does not necessarily follow that it will be. Our findings strongly support the idea that the propensity for any given Treasury obligation to support repo market activity differs systematically by source.All Treasury securities are of equal quality as collateral, and yet each program we study had different transmission channels, different initiation periods, and different patterns of changes in supply, so that each program's relative impact on the over-night Treasury GC repo market can be identified. Thus this paper contributes to the collective understanding of short-term money markets and hereby seeks to inform policy responses to future crises.In addition to studying the effects of Treasury collateral supply on collateralized funding rates, this study is related to other work on short-term money markets as well as to other studies examining the impact of various programs which were introduced over the course of 2007-2009 to address the multiple dislocations in financial markets. 2 One unique aspect of our study is that we examine both monetary and fiscal policy responses 2 For a sample of such studies, see Gagnon et. al.

The Supply and Demand for Safe Assets

“…In contrast, during crises the private assets that can be successfully used as collateral to back borrowing decline. Then government bonds can replace private assets that do not sustain borrowing anymore, constituting positive wealth and breaking Ricardian Equivalence since financing with bonds becomes superior to taxes, consistent with the evidence of Hrung and Seligman (2011). Even if government bonds are not net wealth normally, Ricardian Equivalence breaks down exactly during times in which bonds may be needed, during a crisis.…”

“…In fact, during the recent financial crisis, the Term Securities Lending Facility (TSLF) allowed banks to borrow U.S. Treasuries while posting privately-created near-riskless bonds that had become impaired during the crisis as collateral. Hrung and Seligman (2011) argue that the TSLF was "uniquely effective relative to other policies" in dealing with the recent crisis. This is consistent with Gourinchas and Jeanne (2012) who argue that "macroeconomic shortages of safe assets can create financial instability.…”

The Supply and Demand for Safe Assets

“…In contrast, during crises the private assets that can be successfully used as collateral to back borrowing declines. Then government bonds can replace private assets that do not sustain borrowing anymore, constituting positive wealth and breaking Ricardian equivalence since financing with bonds become superior to taxes, consistent with the evidence of Hrung and Seligman (2011). Even if government bonds are not net wealth normally, Ricardian Equivalence breaks down exactly during times in which bonds may be needed, during a crisis.…”

A Regional Repo Market Initiative for Global Financial Stability

“…While the credit intermediation increasingly relies on collateral, this under-provisioning of necessary ingredients makes EM Asia more reliant on the outsourcing of its financial system. The importance of collateral as safe assets has been previously noted in the singular success of the TSLF (Term Securities Lending Facility) after the recent crisis (Hrung & Seligman, 2011). The stabilizing effects of the TSLF symbolize the importance of safe assets against the backdrop of nonbank secured funding markets which are now called as shadow banks.…”

“…Local and regional financial networks need to be developed further and secured for a more efficient international credit allocation. It remains the task for future studies to compare various collateral pools for better credit intermediation and other favorable effects on the real economy (Hrung & Seligman, 2011).…”