The Belgian Credit Guarantee Scheme (Belgium GFC)

Much like other developed economies during the global financial crisis, Belgium faced substantial systemic stress to its large and heavily concentrated financial system. To combat these mounting pressures, the Belgian government launched a wide-ranging, opt-in state debt guarantee program in a concerted effort to instill confidence and stymie the fear of runs in its financial sector. The debt guarantee scheme, pursuant to which eligible institutions could issue government-guaranteed debt, was originally put into place on October 15, 2008, and retroactively covered liabilities entered into from October 9, 2008, to October 31, 2009, with a maximum maturity of three years. It provided significant discretionary authority to the Minister of Finance, such as the ability to add additional conditions and to decline any bank from participating in the scheme. Eligibility was determined on a case by case basis. Fees and issuance thresholds were determined in the same way prior to two April 14, 2009, Royal Decrees, which homogenized fees and expanded the pool of eligible institutions. Belgium was also a key member in a number of high profile bank rescues, such as that of Dexia in conjunction with France and Luxembourg. Much of the structure of the guarantee scheme was initially based on the ad hoc scheme that the three nations devised for Dexia earlier in October 2008. The state guarantee scheme expired after no banks had made use of it by October 31, 2010, the last day for banks to issue guaranteed debt after amendments to the issuance window and maturity horizon

US Reconstruction Finance Corporation: Preferred Stock Purchase Program

By March 1933, the early collateralized lending programs of the Reconstruction Finance Corporation (RFC) had failed to prevent the recurrence of bank runs and panic in US financial markets. These conditions forced newly elected President Franklin Delano Roosevelt to call for a nationwide bank holiday from March 6 to March 9. On the final day of the holiday, a special session of Congress passed the Emergency Banking Act (EBA), which gave the RFC the power to make investments via preferred equity of distressed institutions. Under the EBA, the RFC could subscribe to and make loans on cumulative non-assessable preferred stock issued by state and national banks and trust companies. Preferred shares (senior to common shares) protected the government’s investment and were non-assessable, meaning the RFC would have no further liability if the companies experienced losses. Subsequent amendments and additions to the EBA in March and June expanded this authority to insurance companies and to other types of securities to enable state banks and trusts to participate. Any institution could file an application to one of the RFC’s field offices. The RFC required relatively impaired institutions to raise additional capital or impose haircuts on existing creditors. Aid offices sought to maximize profits and had a fair bit of autonomy. Larger requests had to be approved by the main office in Washington, DC, and by the Secretary of the Treasury. Dividends were normally just below market rates and were lowered throughout the life of the program. Widespread participation in the program did not occur until Chairman Jesse Jones aggressively communicated the necessity of the program to bankers in September 1933 and Roosevelt explained in October that federal deposit insurance would be eligible only to solvent institutions when it began on January 1, 1934. The RFC ultimately injected about $1.17 billion of capital into nearly 7,400 institutions, representing nearly one-third of total bank capital in the system at its peak. Unlike the earlier loan assistance, the program was seen as a resounding success and was widely credited with stabilizing the financial system

The US Supervisory Capital Assessment Program (SCAP) and Capital Assistance Program (CAP)

Due to continued stress during the Global Financial Crisis, the US Treasury released a series of additional measures in February 2009 that included a mandatory stress test for major U.S. bank holding companies (BHCs), backed by government capital. The stress test, known as the Supervisory Capital Assessment Program (SCAP), tested the capital adequacy of the 19 U.S. BHCs that had more than $100 billion in assets. A large interagency team of regulators and other experts estimated losses and income under two hypothetical scenarios for the group of BHCs: a baseline that reflected the consensus belief about the course of the current recession, and a more adverse scenario that reflected a deeper recession. The estimated loan losses under the more adverse scenario were higher than realized losses at any point in U.S. history. Ten of the 19 BHCs were required to increase their capital by a total of$75 billion, of which $65 billion had to be in the form of common equity. The 10 BHCs had six months to increase capital by issuing new shares, selling assets, curtailing payments to shareholders, or changing the composition of their capital by converting preferred shares or debt into common equity. If those sources were unavailable, they could apply for government capital through a backstop facility known as the Capital Assistance Program (CAP). Other banks, even if they were not part of the SCAP exercise, could also apply to CAP. Under CAP, Treasury would buy mandatorily convertible preferred shares in an institution, subject to certain restrictions. The shares had onerous terms to encourage institutions to find other sources of capital: they paid dividends of 9 percent, required a halt to dividend payments on other shares, came with limits on executive compensation, and contained warrants that allowed Treasury to purchase additional common stock. Ultimately, no institutions applied for CAP funds, and it terminated in November 2009. Academics and policymakers praised the stringency of the test as well as the Federal Reserve’s controversial decision to publicly release the details and results. They also argued that the availability of government capital through CAP was an essential fallback option supporting the stress test exercise. The Fed intended its capital targets to be high enough that banks could continue lending to creditworthy borrowers during an economic downturn, rather than merely survive. Ultimately, all but one of the institutions that the stress test identified as needing capital were able to obtain private capital without further government support

United Kingdom Asset Resolution Limited (UKAR)

As the Global Financial Crisis began to unfold, the United Kingdom (UK) saw two of its largest mortgage lenders in Bradford & Bingley (B&B) and Northern Rock begin to weaken dramatically under the pressure that housing and financial markets were facing. Northern Rock and B&B both faced severe funding problems due to a worsening global credit crunch and both would be nationalized in 2008. Despite this effort, the crisis continued to worsen globally, and the UK government created UK Asset Resolution Limited (UKAR) on October 1, 2010. This organization’s goal was to wind down and maximize the return on the £115.8 billion in mortgages and other assets that the government still had from B&B and what was now Northern Rock Asset Management. The government transferred those assets to UKAR along with B&B’s and NRAM’s associated liabilities, including loans from HM Treasury and the Financial Services Compensation Scheme (FSCS) with a principal of £48.7 billion at the end of 2010. UKAR has been able to consistently reduce its balance sheet and turn a profit every year since its inception. As of June 2019, the company made approximately £8.1 billion in profit, as well as paying off the entirety of its government loans. More recently, the company also sold off all of its assets and equity interest, thus ending government ownership of B&B and Northern Rock in February 2021

The European Central Bank\u27s Three-Year Long-Term Refinancing Operations (ECB GFC)

The announcement of the three-year Long-Term Refinancing Operations (LTROs) by the European Central Bank (ECB) on December 8, 2011, signaled the beginning of the largest ECB market liquidity programs to date. Continued and increasing liquidity-related pressures in the form of ballooning financial market credit default swap (CDS) spreads, Euro-area volatility, and interbank lending rates prompted a much more forceful ECB response than what had been done previously. The LTROs, using a repurchase (repo) agreement auction mechanism, allowed any Eurozone financial institution to tap essentially unlimited funding at a fixed rate of just 1%. Because the three-year LTROs were so similar to their shorter-maturity counterparts, the types of eligible collateral were almost identical, though the three-year operations were slightly less strict with the types of asset-backed securities (ABS), loans, and debts that could be pledged. The first operation, conducted on December 22, 2011, saw 523 banks draw €489.2 billion in funding, and the second operation, finalized on February 29, 2012, saw 800 banks draw €529.5 billion. Much of the liquidity, rather than being put into private credit markets, was placed at the ECB deposit facility to supplement the interbank lending market. Banks that were more vulnerable to a credit crunch, often located in peripheral countries such as Spain and Italy, tended to use the facility more and also drove the increase in the supply of private credit. Less at-risk institutions tended to engage in “reach-for-yield” strategies with debt from riskier sovereigns. Post-crisis evaluations were mixed, but analysts tend to agree that the facilities helped ease the initial shock in the Euro-area money market and reduce the impact of the credit crunch on the broader economy

The Federal Reserve Single-Tranche Term Repurchase Agreements (U.S. GFC)

As mortgage defaults and foreclosures continued to climb, the severe strains that started to plague credit markets in the middle of 2007 worsened further. Losses on housing-related securities and derivative instruments continued to climb, causing substantial damage to the balance sheets of large financial institutions that had levered up on these same securities. As their positions worsened, banks found it increasingly difficult to attract funding that wasn’t priced at exorbitantly high rates or for very short terms. Term funding markets, specifically those that centered on agency mortgage-backed securities (MBS), quickly dried up as fears of illiquidity and even insolvency spread. To remedy these concerns, the Federal Reserve announced a program called the Single-Tranche Term Repurchase Agreements, which auctioned off repurchase agreements (repos) to primary Dealers every week. This provided a critical source of funding to these institutions, which, at the time, could not access other avenues of funding, such as the discount window. The repos were short term, priced at market rates, and matured 28 days after the settlement date. Of the 20 institutions categorized as primary dealers at the beginning of 2008, 19 participated in the program, which had auctions running from March 7, 2008, to December 31, 2008. Usage peaked at, but never exceeded, $80 billion per month, though the Fed said in its initial press release that the program’s size could have gone up to$100 billion. While the program was smaller compared to other market liquidity initiatives, ST OMO operated at capacity for most of its duration, and spreads between agency MBS repo and Treasury repo rates fell dramatically toward the end of the issuance window

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

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

US Capital Purchase Program

During the fall of 2008, the US government was faced with a financial crisis of unprecedented scope. Having already exercised the authority to put Fannie Mae and Freddie Mac into conservatorship in September, the stage was set for the US government to intervene more broadly in strained financial markets. This intervention would ultimately come in the form of the Emergency Economic Stabilization Act of 2008 (EESA), which was passed on October 3, 2008. The main provision of EESA was the Troubled Asset Relief Program, or TARP, a $700 billion program initially designed to purchase troubled assets off the balance sheets of struggling financial institutions. Despite initially campaigning that the program would be used to purchase troubled mortgage-related assets, the worsening stress on the financial system, complexity of creating an asset purchase program, and size of the mortgage market caused the Treasury to announce the Capital Purchase Program (CPP), a program of broad-based capital injections, on October 14, 2008. Initially, the CPP was available to publicly traded US banks, but was expanded shortly after to include privately owned banks, S-corporations, and mutual banks, so long as they were based in the US At its launch, Treasury also solicited nine of the largest commercial and investment banks to enroll in the program to encourage broad adoption for banks across the country. These institutions would issue either preferred stock (public and private banks) or subordinated debt (S-corps and mutual banks) to the Treasury at rates of five percent, which would then increase to nine percent after five years. As subsequent programs to provide credit to low-income areas and small business, such as the Community Development Capital Initiative (CDCI) and Small Business Lending Fund (SBLF) developed, CPP institutions were also able to refinance CPP investments into lower-cost CDCI and SBLF ones. A total of 707 institutions issued$204.9 billion in CPP capital to the Treasury, which has recovered $226.8 billion through repayments; auctions; and income related to dividends, interest, and warrants

Monetization of Fiscal Deficits and COVID-19: A Primer

Monetization—also known as “money-financed fiscal programs” or “money-printing”—occurs when a government finances itself by issuing currency or other non-interest-bearing liabilities, such as bank reserves. It poses real risks—potentially excessive inflation and encroachment on central-bank independence—and some paint it as a relic of a bygone era. The onset of the COVID-19 crisis, however, forced governments to spend heavily to combat the considerable economic and public health impacts. As government deficits climbed, monetization re-entered the conversation as a way to avoid the massive debt burdens that some nations may face. This paper describes how monetization works, provides key historical examples, and examines recent central-bank measures. Based on our definition, much of what many are calling monetization today—in particular, central banks directly buying massive amounts of their own government’s bonds—is not necessarily monetization. To our knowledge, no central bank during the COVID-19 crisis took an action that meets our definition or explicitly stated that it was conducting monetization