Greece: Emergency Liquidity Assistance

The Global Financial Crisis of 2007-09 triggered a deep recession in Greece, leading investors to withdraw one third of Greek bank deposits between 2008 and 2011. As banks’ nonperforming assets rose and rating agencies downgraded Greek sovereign debt, Greek banks’ capital fell below levels required for Eurosystem refinancing operations. In response, the Bank of Greece (BOG) provided Emergency Liquidity Assistance (ELA) to all Greek banks. ELA was a revolving credit line open to solvent institutions at a premium rate, so long as that support did not interfere with the Eurosystem’s monetary policy. European Central Bank (ECB) rules required the BOG to bear all credit risk for ELA. The Greek case was the first ELA to be administered to an entire financial system. From August 2011 to February 2019, the BOG provided ELA at a 100-150 basis-point premium over the ECB’s refinancing rate. ELA outstanding peaked at EUR 124 billion (USD 162 billion) in May 2012, and again at EUR 90 billion in May 2015. In total, banks paid EUR 4.5 billion in premia above Eurosystem interest rates. ELA ended when Greek banks were once again accepted as counterparties in Eurosystem refinancing operations. A small body of research agrees that ELA significantly improved the liquidity of Greek banks

Thailand: Financial Institutions Development Fund Liquidity Support

International investors launched three speculative attacks on the Thai baht in 1996 and 1997 following one high-profile banking failure, constant departures from the Bank of Thailand (BOT), and slumping returns on stocks and real estate. Though the BOT succeeded in the baht’s defense, the BOT’s depleted reserves were unable to fend off domestic troubles that emerged in early 1997. The speculative attacks increased the cost of foreign-denominated debt—which accounted for 18% of all bank lending—and forced up interbank lending yields. The decade-long boom in foreign capital inflows had generally overvalued assets, and banks found themselves in need of outside financing to meet short-term obligations. The Financial Institutions Development Fund (FIDF), created in 1985 by the BOT to support troubled institutions, quietly provided more than THB 400 billion (USD 17 billion) to nonbank finance companies between March 1997 and July 1997. Ultimately, this support did not contain the problem, and by August the BOT had temporarily suspended 58 finance companies. Crisis support ended in January 1998, after the BOT permanently closed 56 of the 58 suspended finance companies and converted FIDF loans to four commercial banks into equity. The liquidity support to finance companies peaked at more than THB 434 billion outstanding in August 1997. The FIDF lost at least THB 244 billion from the liquidity support to finance companies and an unknown amount from the support of commercial banks. That burden, about 15% of GDP, ultimately fell to the BOT and FIDF, which expects to repay FIDF bonds by 2030

Jamaica Financial Sector Adjustment Company (FINSAC)—Loan Recovery and Asset Disposal Units

In the late 1980s and early 1990s, the Jamaican financial sector’s share of GDP more than doubled following an aggressive market liberalization undertaken without corresponding increases in regulation or supervision. When one of the largest financial-industrial conglomerates failed in 1995, the government created an asset management company with special powers to resolve the institution. In 1997, after another significant failure, the government established the Financial Sector Adjustment Company (FINSAC). FINSAC carried a broader mandate to both recapitalize and restructure troubled financial institutions and to take over and manage their nonperforming assets (NPAs). The organization possessed no special powers to compel the targets of its interventions. Instead, FINSAC negotiated with troubled institutions on a voluntary basis. Most agreements saw FINSAC purchase shares in financial institutions to provide capital and to obtain veto power over management decisions; some arrangements simply saw FINSAC purchase NPAs. Within FINSAC, two units managed a combined portfolio of NPAs equivalent to at least J$89 billion ($2.36 billion). The two units had recovered or sold most of this portfolio by December 2001 but recouped only 35% of the NPL portfolio’s face value

Thailand: Bond Stabilization Fund

Early in the COVID-19 crisis, non-financial businesses grew concerned that they would be unable to roll over their maturing bonds. To calm corporate debt markets, the Bank of Thailand (BOT) announced the Bond Stabilization Fund (BSF) on March 22, 2020. The BSF planned to purchase newly issued commercial paper from viable companies that could not roll over their maturing bonds. However, the program was not used. The BOT, seeking to avoid public criticism for directly supporting large corporations, imposed restrictions that made the program less attractive to borrowers. The main deterrent to participation was the requirement that borrowers must have already secured at least 50% of their funding needs from other sources. The BSF also charged a penalty rate that increased as its involvement increased. Last, participants could not, for the duration of the bond, buy back their stock, repay other debts early, pay bonuses, or distribute dividends. The BSF stopped accepting applications from participants at the end of 2022

European Central Bank: Term Refinancing Operations

During the Global Financial Crisis (GFC), the European Central Bank (ECB) expanded the frequency, maturities, size, and set of eligible collateral for several of its standing term refinancing operations (TROs). Changes started in August 2007, when the European interbank market tightened, and the ECB supplemented its monthly longer-term refinancing operations (LTROs) with another three-month-maturity tender each month. Another encounter with market turbulence in March 2008 brought six-month LTROs. The largest expansion came after the collapse of Lehman Brothers in September 2008: the ECB enlarged its set of eligible collateral, added 12-month LTROs, and added special-term refinancing operations (STROs) that matured at the end of the reserve maintenance period. In a first, the ECB also said it would satisfy all demands for liquidity in a TRO at a fixed rate, abandoning the auctions that it had long used to determine the interest rates it charged. This demand-driven, “full-allotment” policy combined with the longer maturities to ease interbank rates from their panicked highs. At its peak in summer 2009, more than EUR 729 billion was outstanding. The ECB recouped all loans on this program

Venezuela: Reserve Requirements, GFC

Leading up to the Global Financial Crisis (GFC), the Banco Central de Venezuela (BCV) sought to tamp down inflation by raising its interest rate target and by raising the marginal reserve requirement for banks, which it had introduced in 2006. By late 2008, the GFC began to hit Venezuelan banks and the country’s public oil producer (PDVSA). Widespread deposit withdrawals squeezed banks and pushed the interbank lending rate to 28%. The BCV responded in December 2008 by lowering the marginal reserve requirement, applicable to deposits above 90 billion bolívars (USD 4.2 million), from 30% to 27% of deposits. It held the minimum cash reserve requirement at 17%. The global recession also cut into the revenue of PDVSA, the country’s biggest exporter. To free up bank liquidity for the purchase of PDVSA bonds and stimulate the economy, the BCV cut the marginal requirement three times between June and October 2010, setting it equal to the minimum requirement of 17%. The first cut in the marginal reserve requirement, from 30% to 27%, released VEF 6 billion (USD 2.8 billion) of liquidity into the financial system

United States: New York Clearing House Association,The Panic of 1907

Signs of financial panic had marked the months leading up to mid-October 1907 when depositors began to run on banks and trust companies across New York City, most notably the Knickerbocker Trust Company, then New York City’s third largest, on October 22. Cash injections from the US Treasury and from leading banker J.P. Morgan failed to reassure depositors and investors. On October 26, the New York Clearinghouse (NYCH), whose membership included most banks in New York, voted to issue clearinghouse loan certificates (CLCs) to help stabilize the financial panic. CLCs were collateralized by securities and could be used among members for settlement and to free up cash for other uses. NYCH banks also limited cash payments to depositors—including out-of-state national banks—to preserve reserves, paying instead in certified checks backed by the clearinghouse. Clearinghouses in other cities quickly followed suit by issuing CLCs and limiting cash payments. Outstanding NYCH CLCs peaked at $88 million on December 16 before gold imports from Europe expanded the supply of legal tender. Cash payments resumed in January 1908 after most borrowers decided to redeem their CLCs. By the time the NYCH canceled the last remaining CLCs in March, it had issued more than twice as many CLCs than in any previous crisis. While the NYCH’s actions stabilized the financial panic, some criticized the three-month limitation of payments as unnecessary. The failure of the NYCH to issue certificates sooner, and the depth of the Panic of 1907, catalyzed the movement for a federal reserve system

Eurozone: Pandemic Emergency Purchase Program

The COVID-19 pandemic quickly engulfed the European Union\u27s economy in 2020. As investors sought safe assets, marketable debt yields rose dramatically. To lower the cost of borrowing, the European Central Bank (ECB), alongside the 19 national central banks (NCBs) that comprise the Eurosystem, purchased marketable debt in secondary markets. Asset eligibility mirrored that of the ECB\u27s Asset Purchase Program (APP), an ongoing quantitative easing program which the ECB expanded during the pandemic. The main difference was that the PEPP allowed debt issued by Greece, which did not have an investment-grade credit rating. The rate that the PEPP purchased securities within each asset class could also vary, unlike the APP. When the ECB announced the PEPP on March 27, 2020, it approved EUR 750 billion (USD 825 billion) in total purchases to wind down no later than December 2020. The ECB expanded the program twice to allow EUR 1.85 trillion in asset purchases through March 2022. As of February 2022, the ECB and NCBs had purchased a total of EUR 1.6 trillion in assets through the program. The PEPP\u27s effects in the months after the pandemic outbreak were difficult to disentangle from the concurrent APP except that the ECB was able to close yield spreads between German and Greek debt. Debt yields stabilized shortly after the PEPP\u27s establishment and the APP\u27s expansion

European Central Bank: Fine-Tuning Operations

Credit in the European interbank market tightened in August 2007 as banks sustained losses in mortgage-backed securities markets. On August 9, the European Central Bank (ECB) announced a EUR 95 billion fine-tuning operation (FTO). The Eurosystem continued providing FTOs carrying overnight maturities through the next three business days. Two more bouts of interbank funding stress—in March and September 2008—caused the ECB to deploy more FTOs. The ECB provided liquidity through 12 emergency, overnight FTOs, all but one at least EUR 25 billion in size. All operations, except the first and last, used variable-rate, fixed-allotment auctions. The first and last operations used a procedure known as fixed-rate, full-allotment, which saw the ECB provide as much liquidity as banks requested at the central bank’s policy rate. In October 2008, the ECB tendered its last emergency FTO in favor of its longer-term refinancing operations, which would comprise most of its broad-based liquidity support for the duration of the crisis. However, FTOs were not a tool designed to fight financial crises. They were a technical measure—in other words, the ECB typically used them to tweak reserves to keep interest rates within its monetary policy target range. Crisis usage of FTOs often preceded introductions and expansions of crisis-fighting tools. This sequencing led some scholars to characterize the FTOs as the central bank’s first line of defense during the Global Financial Crisis. Though FTOs seemed to halt the spikes in interbank funding spreads, they were ineffective at relieving stress in those markets, a task they were not designed to address

Canada: Bankers’ Acceptance Purchase Facility

Bankers’ acceptances (BAs) are a form of investment security guaranteed by banks to fund loans to businesses against their credit lines. In Canada, BAs underpin the Canadian Dollar Offered Rate (CDOR), the main benchmark used to calculate floating interest rates in Canada’s derivatives market. In 2018, BAs formed the largest segment of money market securities traded in the secondary market at around CAD 35 billion (USD 26 billion) per week. When asset managers and the country’s public pension providers began shedding BAs amid the COVID-19 pandemic in early 2020, CDOR spiked, and the effects threatened to ripple throughout the Canadian financial system. On March 13, 2020, the Bank of Canada (BoC) established the Bankers’ Acceptance Purchase Facility (BAPF). The BAPF conducted multi-rate reverse auctions with Canadian primary dealers for highly rated BAs of remaining maturities up to 76 days. In its first two operations, dealers sold the BoC the total offered amounts of CAD 15 billion and CAD 20 billion, and the BA market stabilized. The BoC bought another CAD 12 billion of BAs in four operations in April. It continued to offer to buy CAD 10 billion in weekly, then biweekly reverse auctions until October, with no further bids from banks