The Federal Reserve Single-Tranche Term Repurchase Agreements (U.S. GFC)

Journal of Financial Crises: Vol. 2 : Iss. 3, 131-151. Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol2/iss3/5

Yale Program on Financial Stability Working Paper

21 Pages Posted: 26 Oct 2020

See all articles by Aidan Lawson

Aidan Lawson

Yale University - Yale Program on Financial Stability

Date Written: October 10, 2020

Abstract

As mortgage defaults and foreclosures continued to climb, the severe strains that started to plague credit markets in the middle of 2007 worsened further. Losses on housing-related securities and derivative instruments continued to climb, causing substantial damage to the balance sheets of large financial institutions that had levered up on these same securities. As their positions worsened, banks found it increasingly difficult to attract funding that wasn’t priced at exorbitantly high rates or for very short terms. Term funding markets, specifically those that centered on agency mortgage-backed securities (MBS), quickly dried up as fears of illiquidity and even insolvency spread. To remedy these concerns, the Federal Reserve announced a program called the Single-Tranche Term Repurchase Agreements, which auctioned off repurchase agreements (repos) to primary Dealers every week. This provided a critical source of funding to these institutions, which, at the time, could not access other avenues of funding, such as the discount window. The repos were short term, priced at market rates, and matured 28 days after the settlement date. Of the 20 institutions categorized as primary dealers at the beginning of 2008, 19 participated in the program, which had auctions running from March 7, 2008, to December 31, 2008. Usage peaked at, but never exceeded, $80 billion per month, though the Fed said in its initial press release that the program’s size could have gone up to $100 billion. While the program was smaller compared to other market liquidity initiatives, ST OMO operated at capacity for most of its duration, and spreads between agency MBS repo and Treasury repo rates fell dramatically toward the end of the issuance window.

Keywords: ST OMO, market liquidity programs, market liquidity, interbank lending, credit markets, repurchase agreements, repos

JEL Classification: G01,G28

Suggested Citation

Lawson, Aidan, The Federal Reserve Single-Tranche Term Repurchase Agreements (U.S. GFC) (October 10, 2020). Journal of Financial Crises: Vol. 2 : Iss. 3, 131-151. Available at: https://elischolar.library.yale.edu/journal-of-financial-crises/vol2/iss3/5, Yale Program on Financial Stability Working Paper, Available at SSRN: https://ssrn.com/abstract=3717237

Aidan Lawson (Contact Author)

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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