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How effective were the Federal Reserve emergency liquidity facilities?: evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

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  • Burcu Duygan-Bump
  • Patrick M. Parkinson
  • Eric S. Rosengren
  • Gustavo A. Suarez
  • Paul S. Willen

Abstract

Following the failure of Lehman Brothers in September 2008, short-term credit markets were severely disrupted. In response, the Federal Reserve implemented new and unconventional facilities to help restore liquidity. Many existing analyses of these interventions are confounded by identification problems because they rely on aggregate data. Two unique micro datasets allow us to exploit both time series and cross-sectional variation to evaluate one of the most unusual of these facilities - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF extended collateralized loans to depository institutions that purchased asset-backed commercial paper (ABCP) from money market funds, helping these funds meet the heavy redemptions that followed Lehman's bankruptcy. The program, which lent $150 billion in its first 10 days of operation, was wound down with no credit losses to the Federal Reserve. Our findings indicate that the facility was effective as measured against its dual objectives: it helped stabilize asset outflows from money market mutual funds, and it improved liquidity in the ABCP market. Using a differences-in-differences approach we show that after the facility was implemented, money market fund outflows decreased more for those funds that held more eligible collateral. Similarly, we show that yields on AMLF-eligible ABCP decreased significantly relative to those on otherwise comparable AMLF-ineligible commercial paper.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Risk and Policy Analysis Unit Working Paper with number QAU10-3.

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Date of creation: 2010
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Handle: RePEc:fip:fedbqu:qau10-3

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Keywords: Bank liquidity ; Global financial crisis ; Federal Reserve Bank of Boston ; Asset-backed financing ; Commercial paper ; Money market funds ; Discount window;

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Cited by:
  1. Patrick E. McCabe, 2010. "The cross section of money market fund risks and financial crises," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-51, Board of Governors of the Federal Reserve System (U.S.).
  2. Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013. "Financial stability monitoring," Staff Reports, Federal Reserve Bank of New York 601, Federal Reserve Bank of New York.
  3. Acharya, Viral V. & Fleming, Michael J. & Hrung, Warren B. & Sarkar, Asani, 2014. "Dealer financial conditions and lender-of-last resort facilities," Staff Reports, Federal Reserve Bank of New York 673, Federal Reserve Bank of New York.
  4. Martina Cecioni & Giuseppe Ferrero & Alessandro Secchi, 2011. "Unconventional Monetary Policy in Theory and in Practice," Questioni di Economia e Finanza (Occasional Papers) 102, Bank of Italy, Economic Research and International Relations Area.
  5. Levintal, Oren, 2013. "The real effects of banking shocks: Evidence from OECD countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 32(C), pages 556-578.
  6. Joe Peek & Eric S. Rosengren, 2013. "The role of banks in the transmission of monetary policy," Public Policy Discussion Paper, Federal Reserve Bank of Boston 13-5, Federal Reserve Bank of Boston.
  7. Linus Wilson & Yan Wu & Stephanie Prejean, 2014. "Are the Bailouts of Wall Street Complements or Substitutes?," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 42(1), pages 21-38, March.
  8. Jonathan Witmer, 2012. "Does the Buck Stop Here? A Comparison of Withdrawals from Money Market Mutual Funds with Floating and Constant Share Prices," Working Papers, Bank of Canada 12-25, Bank of Canada.
  9. Christoph Trebesch & Jeromin Zettelmeyer, 2014. "ECB Interventions in Distressed Sovereign Debt Markets: The Case of Greek Bonds," CESifo Working Paper Series 4731, CESifo Group Munich.
  10. Duca, John V., 2014. "What drives the shadow banking system in the short and long run?," Working Papers, Federal Reserve Bank of Dallas 1401, Federal Reserve Bank of Dallas.
  11. John B. Taylor, 2010. "Commentary: monetary policy after the fall," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, pages 337-348.
  12. Sean Campbell & Daniel Covitz & William Nelson & Karen Pence, 2011. "Securitization markets and central banking: an evaluation of the term asset-backed securities loan facility," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2011-16, Board of Governors of the Federal Reserve System (U.S.).
  13. Huberto M. Ennis, 2012. "Some theoretical considerations regarding net asset values for money market funds," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue 4Q, pages 231-254.
  14. Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2013. "Federal Reserve financial crisis lending programs and bank stock returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(10), pages 3819-3829.
  15. Marcin Kacperczyk & Philipp Schnabl, 2011. "Implicit Guarantees and Risk Taking: Evidence from Money Market Funds," NBER Working Papers 17321, National Bureau of Economic Research, Inc.
  16. Patricia C. Mosser, 2011. "Overview," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 1-2.
  17. Scott Brave & Hesna Genay, 2011. "Federal Reserve policies and financial market conditions during the crisis," Working Paper Series, Federal Reserve Bank of Chicago WP-2011-04, Federal Reserve Bank of Chicago.

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