Federal Reserve Intervention and Systemic Risk during Financial Crises

Abstract

I examine the relation between Federal Reserve emergency actions and aggregate U.S. systemic risk during the Global Financial Crisis (GFC) and the COVID-19 crisis. I divide these actions in to three categories: lender of last resort (LLR), liquidity provision, and open market operations (OMO). Evidence suggests that during the GFC, liquidity provision and OMO was related to reduced systemic risk, while evidence on LLR actions is mixed. Further, I find that Federal Reserve actions were related to increased stability in other G8 financial systems during the GFC, and that after the GFC, facilities that remained operational were no longer related to aggregate systemic risk. I do not find a relation between Federal Reserve actions and systemic risk during the COVID-19 crisis. Together, these findings can inform actions and policy decisions in future financial crises.

Keywords: Systemic Risk, Financial Crisis, Federal Reserve, Regulation

JEL Classification: G01, G20, G21, G28