ByYadav K. Gopalan , Julie L. Stackhouse
As banks and consumers struggle with the current effects of the recession, events of last fall remain blurred in the eyes of many. The public has struggled to distinguish between the actions of the Federal Reserve as a central bank, the U.S. Treasury as a fiscal authority and the Federal Deposit Insurance Corp. (FDIC) as an insurer of certain bank deposits.
Indeed, the extraordinary risk in financial markets required extensive coordination among the Federal Reserve, the U.S. Treasury and the FDIC, while each continued to operate in a manner that was consistent with its congressional mandate.
One way to differentiate the Fed's role is to recall the mission of the Federal Reserve. Congress formed the Federal Reserve in 1913 to provide the nation with a safer, more flexible and stable monetary and financial system. Maintaining the stability of the financial system and containing systemic risk were a key responsibility for the Federal Reserve during last fall's crisis.
The Federal Reserve carried out its responsibilities in a number of ways last fall. First, it implemented numerous lending programs under the "unusual and exigent circumstances" provision of Section 13(3) of the Federal Reserve Act. These lending programs resulted in many new acronyms, including AMLF, CPFF, TSLF, PDCF, MMIFF and TALF. (See the table for full names and details of Federal Reserve programs.) In addition, the Fed initiated a number of currency swap lines with foreign central banks to provide U.S. dollar liquidity. Finally, following the March 18, 2009, meeting of the Federal Open Market Committee, the Federal Reserve announced that it would purchase up to $1.25 trillion in government agency mortgage-backed securities, $200 billion in agency debt and up to $300 billion in longer-term Treasury securities.
The U.S. Treasury, on the other hand, used its fiscal authority to intervene in the economy. Two programs are notable from the Treasury and the federal government: The Troubled Asset Relief Program (TARP), which made roughly $700 billion available to certain financial institutions, and the federal government's economic stimulus package, which totaled $787 billion. The Treasury was also instrumental in taking the beleaguered government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac into conservatorship. In addition, the Treasury extended temporary insurance coverage to money market mutual funds.
About the same time, the FDIC expanded general deposit insurance coverage to $250,000 per depositor. It also implemented two special term liquidity programs: The Temporary Liquidity Guarantee Program (TLGP) and the Legacy Loans Program (LLP).
Many people have been confused as to how much money the agencies actually extended under both the old and new programs. Some of the public assumed that all of the funds made available for certain programs would be deployed; these people concluded that the Federal Reserve and Treasury had provided support in the range of $15 trillion to $17 trillion dollars. Others asked where the off-balance sheet liabilities were recorded.
However, there is a significant difference between the announced funding limits for the programs and the amount that was actually used.
For example, by adding the upper spending limits of the Fed's programs as announced in press releases, the total amount comes to approximately $4.4 trillion. Yet, the amount actually extended under these programs has been dramatically lower in several cases. (See table.) Moreover, programs such as the Commercial Paper Funding Facility, the Term Auction Facility and the central bank liquidity swaps have decreased in amount outstanding as financial markets have recovered from their very distressed levels of last fall.
Although many have been confused, the roles of the Federal Reserve, the U.S. Treasury and the FDIC, while very different, have complemented one another during the financial crisis. The Federal Reserve has acted strongly to provide stability to avoid a collapse of shaken financial markets. The Treasury has provided funding to begin the recovery. And the FDIC has stabilized the key funding sources for banks.
For more information on the Fed's balance sheet, see the Board of Governors' Credit and Liquidity Programs and the Balance Sheet web page.
|Federal Reserve Programs||Announced Program Limit
|Outstanding as of 07/09/2009|
|Primary, secondary and seasonal credit||NA||$35 billion|
|Term Auction Facility (TAF)
TAF program limit depends upon the maximum that would be outstanding if all non-matured auctions were fully subscribed (originally $900 billion)
|$725 billion||$273.7 billion|
|Collateralized funding provided to Bear Stearns under Section 13(3) of the Federal Reserve Act||$30 billion||$25.9 billion|
|Collateralized funding provided to AIG (aggregate) under Section 13(3) of the Federal Reserve Act
(Includes initial $85 billion loan + Maiden Lane II + Maiden Lane III)
|$125 billion||$78 billion|
|Asset-Backed Commercial Paper Money Market Mutual Fund Lending Facility (AMLF) under Section 13(3) of the Federal Reserve Act||NA||$12.6 billion|
|Money Market Investor Funding Facility (MMIF) under Section 13(3) of the Federal Reserve Act||$540 billion||$0|
|Term Asset-Backed Securities Loan Facility (TALF) under Section 13(3) of the Federal Reserve Act||$1,000 billion||$24.9 billion|
|Term Securities Loan Facility (TSLF) under Section 13(3) of the Federal Reserve Act||$75 billion||$4.3 billion|
|Primary Dealer Credit Facility (PDCF) under Section 13(3) of the Federal Reserve Act||NA||0|
|Central bank swap arrangements under Section 14 of the Federal Reserve Act||Swap line limits vary, depending on specific agreements between the Federal Reserve and the particular central bank||$109.4 billion|
|Repurchase agreements (and reverse repurchase agreements)||NA||$0 ($70.2 billion)|
|Purchase of government agency mortgage backed securities and debt||$1,450 billion||$560.2 billion|
|Purchase of longer term U.S. Treasuries||$300 billion||Approximately $200 billion|