Spain: Banco Popular Restructuring, 2017

On Friday, June 2, and Monday, June 5, 2017, Banco Popular Español, S.A., experienced a depositor run. Emergency liquidity assistance from Spain’s central bank proved insufficient to meet the bank’s liquidity needs. On June 6, Popular informed the European Central Bank that it was likely to fail, triggering the European Union’s Single Resolution Mechanism. That evening, the Single Resolution Board (SRB) initiated a sale of Popular’s business to one of Spain’s largest banks, Santander Group S.A., provided that Santander raise or inject enough capital to meet regulatory requirements and provide liquidity to manage further outflows. The sale involved the write-down or conversion of capital instruments and resulted in EUR 4.2 billion (USD 4.5 billion) in losses for investors in Popular’s common shares, convertible contingent (CoCo) bonds’ being treated as additional Tier 1 (AT1) capital, and subordinated debt’s being treated as Tier 2 capital. Senior debt holders and depositors were protected. Spain’s Fund for Orderly Bank Restructuring executed the transfer to Santander, and the bank opened for business the following morning. Santander raised EUR 7 billion in new equity from private investors in July 2017. The SRB determined Popular’s resolution was in the public interest given its significant lending to small and medium-sized enterprises, payments functions, and market share in Spain and Portugal. The resolution of Popular was the first that SRB executed under the Single Resolution Mechanism and the first-time authorities wrote down CoCos. European courts ultimately dismissed litigation filed by creditors. Policymakers and the press generally considered the privately funded resolution a success, given the SRB’s rapid execution without resorting to official support, Popular’s uninterrupted operations, and the lack of contagion

China: Reserve Requirements, 2015–2016

After China devalued the renminbi against the US dollar in August 2015, Chinese equity markets experienced a significant drop that spilled into international markets. The People’s Bank of China (PBOC) adjusted the reserve requirement ratio (RRR) five times between February 2015 and October 2015: three times before the market turmoil, to allocate credit to preferred sectors, and twice in response to the crisis to release liquidity into the financial system. Throughout this cycle, the central bank applied lower RRRs to rural credit institutions, agricultural lenders, leasing and financing companies, and other sectors in which government policy promoted lending. Although the central bank once favored the RRR as a cost-effective monetary policy tool, its use had declined in recent years as its purpose changed. The RRR cuts injected a substantial amount of liquidity into the financial system. For illustration, the deposits of financial corporations with the PBOC declined by 2.1 trillion yuan (USD 330 billion) between the end of March and the end of December 2015, from 22.7 trillion to 20.6 trillion yuan; other government policies would have also affected bank reserves during this period. Since 2013, the PBOC had a suite of lending facilities designed to provide market-based liquidity, reducing the need for RRR cuts as a liquidity provisioning tool in 2015. Following the China Scare, the PBOC continued to adjust the RRR to allocate credit to preferred sectors of the economy and, increasingly, to implement macroprudential policy

Sweden: Commercial Paper Purchases

In March 2020, governments took measures to curb the spread of the COVID-19 pandemic that significantly impacted corporate revenues. The uncertainty surrounding the pandemic drove investors out of corporate securities and into safe assets, complicating the ability of Swedish nonfinancial corporations to finance their operations. As the volume of commercial paper issuance dropped, the Sveriges Riksbank (Riksbank) announced on March 19, 2020, it would purchase commercial paper and corporate bonds as part of a much larger bond-buying scheme that included Swedish government, municipal, and covered bonds. It authorized the program under Chapter 6, Article 5 of the Sveriges Riksbank Act. The Riksbank said in March that it would limit its purchases of commercial paper to a nominal SEK 4 billion (about USD 0.5 billion), but it raised the limit to SEK 32 billion in May. The program purchased kronor-issued, investment-grade commercial paper on the secondary market with maturities of less than six months. Purchases peaked at SEK 2.3 billion the week of April 3, 2020. After four extensions to its original expiration date of May 31, 2020, the program expired on December 31, 2021

United States: Primary Dealer Credit Facility

In March 2020, the uncertain outlook for the United States in the face of the COVID-19 pandemic prompted extremely high demand for cash and near-cash assets. Amid intense selling pressure from investors, securities dealers were unable to fully absorb the high volume of trade orders into their inventory due to balance sheet capacity and funding constraints. As dealer capacity declined and demand for liquidity continued rising, volatility spread to the critical and normally highly liquid market for US Treasury securities, prompting the Federal Reserve to increase open market operations (March 12) and begin historically large purchases of US Treasuries (March 16). On March 17, the Fed used its Section 13(3) emergency authority to establish the Primary Dealer Credit Facility (PDCF), modeled after a program that the Fed implemented in response to the Global Financial Crisis (GFC) in 2008. The PDCF lent to primary dealers at the primary credit rate for up to 90 days, collateralized by dealers\u27 inventory of securities. Compared to the 2008 PDCF, the 2020 PDCF accepted a narrower range of collateral, offered terms longer than overnight, and did not charge a penalty fee for frequent use. Use of the PDCF peaked at $35.6 billion in loans outstanding the week of April 15, 2020, then gradually decreased. The PDCF expired on March 31, 2021, after two extensions to its operating dates

Sweden: Corporate Bond Purchases

In the spring of 2020, corporate revenues in Sweden felt the direct effects of the coronavirus pandemic and the resulting public health measures. With future cash flows in question, many investors sold corporate debt for safe assets. Sweden\u27s corporate bond market-particularly vulnerable to stress due to its heterogeneity, fragmentation, and lack of transparency-saw diminished liquidity. On March 19, 2020, the Sveriges Riksbank (Riksbank) announced it would purchase commercial paper and corporate bonds as part of a much larger bond-buying scheme, announced three days earlier, that included Swedish government, municipal, and covered bonds. It authorized the program under Chapter 6, Article 5 of the Sveriges Riksbank Act. Commercial paper purchases began soon after this announcement, but corporate bond purchases did not commence until September 2020. Although corporate credit conditions had improved by then, the Riksbank sought to establish a presence on the corporate bond market so it could scale purchases if needed. In June 2020, the Riksbank said it would limit its purchases to a nominal SEK 10 billion (about USD 1.2 billion), but it later raised the limit to SEK 13 billion. The program purchased kronor-issued, investment-grade bonds on the secondary market with maturities of less than five years. Later that year, the Riksbank announced purchases would be further limited to issuers complying with certain carbon emissions standards. Purchases peaked at SEK 445 million the week of February 15, 2021. After an extension to its original expiration date of June 30, 2021, the program formally expired on December 31, 2021. In November 2021, the Riksbank announced it would replace maturing bonds in order to maintain its net holdings, a practice it would review each quarter

China: Reserve Requirements, GFC

In 2008, China experienced several natural disasters that slowed economic growth, and fearing contagion from the Global Financial Crisis (GFC), the central bank cut the reserve requirement ratio (RRR) three times for large financial institutions, to 15.5%, and four times for small and medium-size financial institutions, to 13.5%. This monetary easing, combined with a USD 586 billion fiscal stimulus package, caused explosive credit growth in China. One year after these RRR cuts, the central bank hiked the ratio 12 times, to a historically high 21.5% for large banks in June 2011; however, it maintained a different ratio for rural credit cooperatives that averaged 300 basis points lower than the RRR for large banks. The People’s Bank of China (PBOC) adjusted the reserve requirement ratio 35 times between July 2006 and June 2011. Throughout this cycle, the central bank’s approach to required reserves policy evolved from a relatively simple regime that applied one ratio to all financial institutions into a complex regime that applied different ratios to individual firms based on size, location, and financial and macroprudential criteria. The central bank increasingly favored the RRR as a cost-effective monetary policy and crisis management tool over which it had greater autonomy than its two other major policy tools: interest rate management and central bank bill issuance. The PBOC said the RRR cuts released USD 117 billion of liquidity into the system

United States: Money Market Mutual Fund Liquidity Facility

At the onset of the COVID-19 pandemic in March 2020, prime and tax-exempt money market funds (MMFs) faced increased demands for redemption. Meeting redemptions required MMFs to sell assets into increasingly illiquid markets. Using the emergency authority outlined in Section 13(3) of the Federal Reserve Act, the Board of Governors of the Federal Reserve established the Money Market Mutual Fund Liquidity Facility (MMLF), a facility similar in structure and purpose to a program that the Fed implemented in 2008 amidst the Global Financial Crisis (GFC). The MMLF extended nonrecourse loans to banks and their affiliates for the purchase from some types of MMFs of certain high-quality assets, including government securities, secured and unsecured commercial paper, and short-term municipal debt. Borrowers pledged the purchased assets as collateral for the loans with the Federal Reserve Bank of Boston (FRBB), which administered the MMLF. The MMLF accepted a wider range of collateral than the GFC-era program, which only accepted asset-backed commercial paper. FRBB was also further protected by $10 billion in credit protection from the Treasury Department, unlike the GFC-era program. Use of the MMLF peaked at$53.8 billion in loans outstanding the week of April 9, 2020, then gradually decreased. The MMLF expired on March 31, 2021, after two extensions to its operating dates

Hungary: Liquidity Scheme

Amid the global credit crunch in late 2008, foreign investors dumped Hungarian assets, the Hungarian forint (HUF) depreciated, and liquidity deteriorated in the Hungarian banking sector due to the prevalence of short-term, foreign currency-denominated liabilities. On March 10, 2009, the Hungarian government established a scheme to provide up to HUF 1.1 trillion (USD 4.9 billion) in foreign exchange liquidity to domestic credit institutions and subsidiaries of foreign banks. The government used funds provided by the International Monetary Fund (IMF) and European Union (EU) in October 2008, a USD 25.1 billion package to provide Hungary with sufficient foreign exchange reserves to meet broad external, foreign-currency obligations. Earlier efforts to establish voluntary guarantees and recapitalizations for Hungarian banks using the IMF-EU funds were unsuccessful, and markets remained concerned about the liquidity of Hungary’s banks. By January 2010, the liquidity scheme had lent HUF 690 billion (USD 3 billion) to three domestic banks. Over the next four years, the EC repeatedly reapproved the scheme for six-month extensions, although the facility did not originate any further loans. The scheme was finally allowed to expire on June 30, 2013

India: Reserve Requirements, GFC

As international funding sources dried up during the Global Financial Crisis of 2007–2009 (GFC), businesses in India sought funds from domestic financial institutions, straining banks and lifting short-term lending rates. The liquidity pressure, coupled with sharp asset price corrections and rupee depreciation, restricted credit expansion in India. The Reserve Bank of India (RBI) responded with a suite of liquidity measures, including cuts to its two reserve requirement ratios, the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). The RBI cut the CRR over the course of four months from October 2008 to January 2009, lowering the ratio from 9% to 5%. It cut the SLR once, from 25% to 24%, in November 2008. The RBI’s CRR and SLR cuts applied to most commercial banks and certain cooperatives and regional banks. The RBI did not remunerate CRR reserves, and it did not apply different ratios to different liabilities. The cuts released USD 32.7 billion into India’s financial system. The RBI raised the SLR to its pre-crisis levels in October 2009 and began raising the CRR again in March 2010. The International Monetary Fund said the cuts were “quick,” “fully warranted,” and led to looser credit conditions in India, in combination with other liquidity measures

Reserve Requirements Survey

Banks have a private motive to hold some level of cash and liquid reserves, but the negative externalities of bank runs create a public interest in setting a regulatory level higher than the privately optimal level. We can think of such reserve requirements (RRs) as the original form of liquidity regulation. In this paper, we focus on 14 cases in which central banks adjusted RRs after crises hit, typically to deal with liquidity shortages in the banking system. We observe that RR adjustments have several advantages in a crisis: (1) such changes require little process, and the change for banks can be quick; (2) stigma concerns may be much lower than with emergency lending operations; (3) RRs can be used to fine-tune incentives for holding various types and maturities of assets; and (4) RR easing can complement a central bank’s other liquidity support programs