Japan\u27s Outright Purchases of Commercial Paper (Japan GFC)

Following the collapse of Lehman Brothers in September 2008, the global commercial paper (CP) market began to tighten as interest rates rose and investors sought more-liquid money market securities. The Bank of Japan (BOJ) introduced several operations in late 2008 to promote liquidity in the CP market. In January 2009, the BOJ began to purchase CP and asset-backed CP outright from banks and other financial institutions. The BOJ could purchase up to ¥3 trillion of CP with a residual maturity of up to three months, among other short-term securities, via 10 purchases of up to ¥300 billion each. The BOJ limited its purchases to CP with a credit rating of a-1 or guaranteed by a company rated a-1. The BOJ would conduct purchases until March 31, 2009; it later extended the measure until December 31, 2009. As the CP market normalized, usage of the outright purchase measure decreased, with the last bid occurring in September 2009. The measure is seen as relatively successful, as interest rates on CP decreased during its first few months and the program provided needed liquidity to financial institutions during a period of market stress

Japan\u27s Special Funds-Supplying Operations (Japan GFC)

Following the collapse of Lehman Brothers in September 2008, the global commercial paper (CP) market began to tighten as interest rates rose and investors sought more-liquid money market securities. The Bank of Japan (BOJ) introduced several measures in late 2008 to make liquidity available to nonfinancial corporations that were strapped for cash. In December 2008, the BOJ implemented special funds-supplying operations in order to provide unlimited liquidity to banks and other financial institutions so they could continue to fund nonfinancial corporations. The BOJ would provide one- to three-month loans against an equal value of eligible corporate debt at a rate equal to the target uncollateralized overnight call rate, which was consistently 0.1% throughout the operation’s lifetime. The short-term credit market gradually improved over the next year amidst consistent usage of the special operations. Approximately ¥38 trillion in loans were provided before the special operations ceased in March 2010. The special operations are viewed as relatively successful, as they contributed to shrinking CP spreads during the first few months of implementation and promoted new issuances of CP and other corporate debt

How the Federal Reserve aided the Peoples Bank of China in addressing its 2015 Stock Market Crash

An insight into the July 2015 exchange between the Federal Reserve Board and the People\u27s Bank of China (PBOC) discussing efforts to apply lessons from the 1987 Black Monday stock market crash to a similar crash that was occurring in China

UK Bank Recapitalisation Scheme

Following the collapse of Lehman Brothers and the ensuing global credit crunch in late 2008, Her Majesty’s Treasury (HMT) announced a large economic package to provide support to the UK banking sector. As part of the package, the eight largest banks committed themselves to raising their total Tier 1 capital by £25 billion through either private fundraising or government assistance. Thus, the economic package featured a new Bank Recapitalisation Scheme to invest up to £50 billion in capital into UK banking and credit institutions that could not raise their assets in the private sector. Government capital was invested into either ordinary or preference shares of the participating institution. As additional requirements of participating in the scheme, institutions had to commit themselves to three years of competitive lending toward homeowners and small businesses, allow HMT to appoint new nonexecutive directors, and withhold all 2008 executive and board member bonuses. In 2009 alone, HMT invested approximately £37 billion into Lloyds Banking Group (LBG) and the Royal Bank of Scotland (RBS), where all invested interest was held by the government subsidiaries of UK Financial Investments, and later UK Government Investments. While the government remains a majority shareholder in RBS, it has sold off all invested interests in LBG

The Hungarian Guarantee Scheme (Hungary GFC)

In the midst of the global financial crisis, in October 2008, the Magyar Nemzeti Bank (MNB), the Hungarian national bank, noticed a selloff of government securities by foreign banks and a large depreciation in the exchange rate of the Hungarian forint (HUF) in foreign exchange (FX) markets. Hungarian banks experienced liquidity pressures due to margin calls on FX swap contracts, prompting the MNB and Minister of Finance to seek assistance from the International Monetary Fund (IMF), the European Central Bank (ECB) and the World Bank. The IMF and ECB approved Hungary’s requests in late 2008 to create a €20 billion facility, with €2.3 billion intended to back a bank support package. The program involved the creation of two schemes, one of which, the guarantee scheme, was funded by a Refinancing Guarantee Fund (RGF) and aimed to provide domestic banks with guarantees on newly issued interbank loans and wholesale debt contracts with foreign counterparties. Some analyses deemed the guarantee scheme unsuccessful, since no banks ever participated in the scheme, in large part due to Hungary’s own low sovereign debt rating. This prompted the Hungarian government to use a portion of the bank support program to extend direct on-lending measures under a liquidity scheme to three of its largest domestic financial institutions in March 2009

Hungary Recapitalization Scheme

In the midst of the global financial crisis in October 2008, the Magyar Namzeti Bank (MNB), the Hungarian national bank, noticed a selloff of government securities by foreign banks and a large depreciation in the exchange rate of the Hungarian forint (HUF) in FX markets. Hungarian banks experienced liquidity pressure due to margin calls on FX swap contracts, prompting the MNB and Minister of Finance to seek assistance from the International Monetary Fund (IMF), European Central Bank (ECB) and the World Bank. The IMF and ECB approved the Hungarian government’s (the State) requests in late 2008 to create a €19 billion facility, with HUF 600 billion (€2.2 billion) intended to back a bank support program (the Program). The Program would involve the creation of two schemes, one of which, the recapitalization scheme, would be financed by a Capital Base Enhancement Fund (CBEF), aimed at shoring up the capital ratio of large banks operating in Hungary and maintaining financial stability in Hungary. Only one institution, FHB Mortgage Bank plc, participated in the scheme, having drawn down HUF 30 billion in March 2009, which was fully repaid by February 2010. Nonetheless, some analyses of the recapitalization scheme deemed it relatively successful since its operation reassured banks and investors that financial institutions would have a capital buffer in the event of a sudden economic decline or to backstop the ongoing risks in long-term funding. However, due to the low usage of the overall Program, the State created a new liquidity scheme to provide direct on-lending measures to three of its largest domestic financial institutions in March 2009. The recapitalization scheme was repeatedly approved for extension by the European Commission, until it was finally allowed to expire in June 2013

The Rescue of American International Group Module C: AIG Investment Program

In September 2008, the Federal Reserve Bank of New York (FRBNY) extended an $85 billion credit line to AIG to address its liquidity stresses, but AIG’s balance sheet remained under pressure. The insurance giant was projected to report large third-quarter losses and was at risk of being downgraded by major credit rating agencies. For these reasons, in early November 2008, the US Treasury invested$40 billion of Troubled Assets Relief Program (TARP) funds into AIG in exchange for 4 million shares of AIG Series D preferred stock and a warrant to purchase AIG common stock. The investment helped repay a portion of AIG’s debt to the FRBNY, restructured the terms of the credit line, and deleveraged AIG’s balance sheet. With similar concerns arising at the end of the first quarter of 2009, Treasury made a second TARP investment of $30 billion in exchange for 300,000 shares of Series F preferred stock and another common stock warrant. Treasury converted all the preferred stock from its TARP investments into AIG common stock in January 2011 and sold it over the following two years

The Rescue of American International Group Module A: The Revolving Credit Facility

On September 15, 2008, the big three rating agencies downgraded AIG’s credit ratings multiple levels, exacerbating liquidity strains that the company was experiencing due to increasing cash demands by securities borrowers and collateral calls by credit default swap (CDS) customers. To prevent AIG from filing for bankruptcy, the Federal Reserve (the Fed) announced on the following day that, pursuant to its emergency powers, it would provide the company with an $85 billion Revolving Credit Facility (RCF). The RCF was secured by AIG assets and interests in its subsidiaries and required AIG to grant the US Department of the Treasury a 79.9$6.4 billion in capitalized interest and fees from the program

The Rescue of American International Group Module F: The AIG Credit Facility Trust

In September 2008, American International Group, Inc. (AIG) experienced a liquidity crisis. To avoid the insurance giant’s bankruptcy, the Federal Reserve Bank of New York (FRBNY) extended an $85 billion emergency secured credit facility to AIG. In connection with the credit facility, AIG issued 100,000 shares of preferred stock, with voting rights equal to and convertible into 79.9% of the outstanding shares of AIG common stock, to an independent trust (the Trust) set up by the FRBNY. Three trustees held the stock for the sole benefit of the US Treasury, exercised the rights, powers, authorities, discretions, and duties of the preferred stock, and acted as the beneficial owner of AIG. On January 14, 2011, the Trust converted the preferred stock into AIG common stock, and, after transferring the common stock to the Treasury’s General Fund, the Trust effectively dissolved. Over the next two years, Treasury sold the common stock in a series of six public offerings returning a profit to the government. The government’s equity investment and the Trust were controversial, raising debate about nationalization, transparency, and independence of the Trustees

Yale Program on Financial Stability Lessons Learned: Scott Alvarez, Esq.

Alvarez, who was General Counsel of the Federal Reserve System, Board of Governors during 2007-2009, gives us his take on how best to prepare for future crises