New Liquidity Provisions
What
-A new liquidity provision has just been announced by a consortium of central banks including the Fed, the BoC, the BoE, the ECB, and the SNB.
-The provision is called the Term Securities Lending Facility (TSLF) in the U.S. and Term Purchase and Resale Agreement (Term PRA) in Canada, and will expand the securities lending program of the various central banks in an effort to promote liquidity.
Motivation
-the BoC and Fed both say that the new measures have been taken because "Pressures in some of these [funding] markets have recently increased again." There is growing concern that the liquidity problems of late 2007 have returned.
U.S.
-In the U.S., the Fed will lend up to $200B of Treasury securities at a go to primary dealers for 28 days (instead of overnight as in the existing program) against collateral in the form of federal agency debt, federal agency RMBS, or non-agency AAA/AAa-rated private RMBS. The auctions will be held weekly, beginning on March 27. Rates will be determined by an auction process.
-This is a massive amount of money, and comes on the heels of an upping in the amount available at TAF auctions.
http://www.federalreserve.gov/newsevents/press/monetary/20080311a.htm
Canada
-In Canada, the BoC will lend up to $2B on Mar 20th and another $2B on Apr 3rd, both with 28 day terms. The list of eligible securities includes those issued by the GoC, agencies, provinces, and BAs/BDNs with remaining term to maturity <=180 days. As far as we can tell, the program is somewhat different than the one in the U.S. insofar of instead of injecting government securities into the dealers, it injects actual cash. In this respect, it resembles the TAF. Recall that the BoC is not conducting TAF auctions in Canada any longer, so this is the only game in town in Canada. The size of the Canadian auctions is also much less than that in the U.S., even on a per capita basis (just 1/10th per capita). However, the Canadian version will arguably be more effective on a per dollar basis since it provides actual cash instead of simply government bonds.
-The BoC has left open the window to further injections if deemed necessary, and will presumably do so until the need has abated.
http://www.bankofcanada.ca/en/notices_fmd/2008/not110308.html
TSLF vs TAF
-As we understand it, the TSLF in the U.S. represents an exchange of potentially illiquid securities for the liquidity of government bonds. By contrast, the TAF provides actual cash. In Canada, there is no TAF program any longer, and this one appears to be quite similar in nature to the TAF approach. Another difference between what has been announced today and the traditional TAF is that only primary dealers are eligibile to participate in these new facilities, whereas the TAF included all depository institutions.
Implications
-Although this action is an acknowledgement that liquidity conditions have recently worsened, these actions simultaneously suggest that central banks are beginning to wake up to the fact that their monetary policy easing is having only limited traction and that they are rapidly running out of bullets. Other measures, such as the steps taken today, are needed instead. In the U.S., this supports our view that the next Fed decision will yield only a 50bp rate cut, not the 75bp that is priced into the market. Central banks are returning to the mentality that other implements must be used in concert with the traditional approach.
What
-A new liquidity provision has just been announced by a consortium of central banks including the Fed, the BoC, the BoE, the ECB, and the SNB.
-The provision is called the Term Securities Lending Facility (TSLF) in the U.S. and Term Purchase and Resale Agreement (Term PRA) in Canada, and will expand the securities lending program of the various central banks in an effort to promote liquidity.
Motivation
-the BoC and Fed both say that the new measures have been taken because "Pressures in some of these [funding] markets have recently increased again." There is growing concern that the liquidity problems of late 2007 have returned.
U.S.
-In the U.S., the Fed will lend up to $200B of Treasury securities at a go to primary dealers for 28 days (instead of overnight as in the existing program) against collateral in the form of federal agency debt, federal agency RMBS, or non-agency AAA/AAa-rated private RMBS. The auctions will be held weekly, beginning on March 27. Rates will be determined by an auction process.
-This is a massive amount of money, and comes on the heels of an upping in the amount available at TAF auctions.
http://www.federalreserve.gov/newsevents/press/monetary/20080311a.htm
Canada
-In Canada, the BoC will lend up to $2B on Mar 20th and another $2B on Apr 3rd, both with 28 day terms. The list of eligible securities includes those issued by the GoC, agencies, provinces, and BAs/BDNs with remaining term to maturity <=180 days. As far as we can tell, the program is somewhat different than the one in the U.S. insofar of instead of injecting government securities into the dealers, it injects actual cash. In this respect, it resembles the TAF. Recall that the BoC is not conducting TAF auctions in Canada any longer, so this is the only game in town in Canada. The size of the Canadian auctions is also much less than that in the U.S., even on a per capita basis (just 1/10th per capita). However, the Canadian version will arguably be more effective on a per dollar basis since it provides actual cash instead of simply government bonds.
-The BoC has left open the window to further injections if deemed necessary, and will presumably do so until the need has abated.
http://www.bankofcanada.ca/en/notices_fmd/2008/not110308.html
TSLF vs TAF
-As we understand it, the TSLF in the U.S. represents an exchange of potentially illiquid securities for the liquidity of government bonds. By contrast, the TAF provides actual cash. In Canada, there is no TAF program any longer, and this one appears to be quite similar in nature to the TAF approach. Another difference between what has been announced today and the traditional TAF is that only primary dealers are eligibile to participate in these new facilities, whereas the TAF included all depository institutions.
Implications
-Although this action is an acknowledgement that liquidity conditions have recently worsened, these actions simultaneously suggest that central banks are beginning to wake up to the fact that their monetary policy easing is having only limited traction and that they are rapidly running out of bullets. Other measures, such as the steps taken today, are needed instead. In the U.S., this supports our view that the next Fed decision will yield only a 50bp rate cut, not the 75bp that is priced into the market. Central banks are returning to the mentality that other implements must be used in concert with the traditional approach.
Comment