Dealer Financial Conditions and Lender-of-Last Resort Facilities

57 Pages Posted: 20 May 2014  

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Michael J. Fleming

Federal Reserve Bank of New York

Warren B. Hrung

Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Date Written: May 1, 2014

Abstract

We examine the financial conditions of dealers that participated in two of the Federal Reserve’s lender-of-last-resort (LOLR) facilities -- the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF) -- that provided liquidity against a range of assets during 2008-09. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and--in the case of the TSLF -- at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. There also appear to be some interaction effects between financial performance and balance sheet liquidity in explaining dealer behavior. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.

Keywords: lender of last resort, central banking, crises, illiquidity, insolvency, stigma

JEL Classification: G01, G28, E58, D44

Suggested Citation

Acharya, Viral V. and Fleming, Michael J. and Hrung, Warren B. and Sarkar, Asani, Dealer Financial Conditions and Lender-of-Last Resort Facilities (May 1, 2014). FRB of New York Staff Report No. 673. Available at SSRN: https://ssrn.com/abstract=2438852 or http://dx.doi.org/10.2139/ssrn.2438852

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Warren B. Hrung

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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