Thawing Frozen Capital Markets and Backdoor Bailouts: Evidence from the Fed's Liquidity Programs

Abstract

During the subprime crisis, the Federal Reserve introduced several emergency liquidity programs as supplements to the discount window: TAF, PDCF, and TSLF. Using data on loans to large commercial banks and primary dealers, we find that the programs were used by relatively few institutions and had modest effects on the liquidity of short-term debt markets. Instead, our evidence suggests that the decision to borrow and to prepay loans was more closely related to each firm’s financial health. Our results suggest that healthy banks found the terms of the loans expensive relative to private market funds, while banks closer to insolvency generally did not.

Keywords: Frozen markets, liquidity, bailout, crisis

JEL Classification: G21, G24, G28