Emergency Collateral Upgrades

41 Pages Posted: 27 Nov 2018 Last revised: 21 Feb 2019

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Marco Macchiavelli

Board of Governors of the Federal Reserve System

Date Written: 2018-11-15

Abstract

During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.

Keywords: Financial crisis, Lender of last resort, Collateral, Dealers, Repo

JEL Classification: G24, G01, E58

Suggested Citation

Carlson, Mark A. and Macchiavelli, Marco, Emergency Collateral Upgrades (2018-11-15). FEDS Working Paper No. 2018-078. Available at SSRN: https://ssrn.com/abstract=3286488 or http://dx.doi.org/10.17016/FEDS.2018.078

Mark A. Carlson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3987 (Phone)
(202) 452-2301 (Fax)

Marco Macchiavelli

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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