Fed Modifies Crisis Liquidity Facilities

June 25 - The Fed announced today that it would extend and modify many of its liquidity programs.  These changes followed upon the two day meeting of the Federal Open Market Committee (FOMC). 

The changes reflect improvements in some markets, redesign of specific facilities, but on the whole continuing fragility in most parts of the financial system.

The TALF (Term Asset-Backed Securities Loan Facility) will be left in place to run until the end of the year. The TALF is the most non-conventional facility of all, to support with considerable resources markets far afield of the Fed's usual domain and involving assets that never before had any relation to the Fed balance sheet (the auto, student loans, credit card, business equipment and commercial mortgage markets).

Depository institutions - The Fed is reducing the amount of fixed term loans auctioned to depository institutions (banks) through the TAF (the Term Auction Facility), slightly at first.  The TAF was the first special facility created in the crisis (essentially the discount window redesigned to provide credit through a more anonymous auction process.) Demand for TAF facilities has declined in recent auctions, partly a sign of improvement in the underlying marketplace.

Foreign currency swap arrangements -With the crisis being global, , foreign currency swaps have been crucial to ensure the smooth functioning of the world financial system.  Today, the Fed announced extension of its dollar swaps with 13 central banks and foreign currency swap arrangements with the major European central banks.

Primary dealers - The Fed also decided to suspend and/or shift the auction schedule for the Term Securities Lending Facility (TSLF), the facility providing basic Treasury securities liquidity to primary dealers which was established when Bear Sterns was on the verge of collapsing.  A related facility, the Primary Dealer Credit Facility (PDCF) however was extended to provide a liquidity back stop to primary dealers if needed, even though no credit is currently outstanding through the facility.    

Money market funds - In probably a positive sign, the  Fed did not extend authorization for the Money Market Investor Funding Facility (MMIFF), which expires on October 20, 2009.  The MMIFF was established to specifically address a panic in the money market mutual funds market when Lehman Brothers failed and the oldest fund "broke the buck" (ie, went below $1). 

The other facilities were extended through February 1, 2010, some with program modifications (the AMLF, or Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility; the CPFF, or Commercial Paper Funding Facility).