Overview of Special Issue: Federal Reserve Policy Responses to the Financial Crisis.Financial crises ; Federal Reserve System ; Bank liquidity

Patricia C. Mosser

English

Research Papers in Economics

FRBNY Economic Policy Review / May 2011 1
Overview
am very pleased to introduce this set of papers describing 
several of the monetary policy programs that the Federal 
Reserve developed to respond to the recent financial crisis. The 
Federal Reserve’s response to the financial crisis that began in 
2007 was extraordinary in several dimensions. The expansion 
of the Fed’s balance sheet—initially to provide liquidity to 
financial institutions and markets and later to purchase long-
term assets—was enormous. In addition, the programs 
included an unprecedented expansion of Fed counterparties, of 
the collateral eligible for borrowing from the Fed, and of the 
types of assets purchased for the Fed’s portfolio.
The first two papers in this volume examine two of the 
Federal Reserve’s innovative lender-of-last-resort (LOLR) 
facilities created during the crisis: Linda S. Goldberg, Craig 
Kennedy, and Jason Miu analyze the central bank dollar swap 
facilities (and the associated provision of U.S. dollar liquidity 
by foreign central banks), while Tobias Adrian, Karin 
Kimbrough, and Dina Marchioni consider the Commercial 
Paper Funding Facility (CPFF). These facilities, along with 
other crisis-related liquidity programs such as the Term 
Auction Facility, the Primary Dealer Credit Facility, the Term 
Securities Lending Facility, and the Asset-Backed Commercial 
Paper Money Market Mutual Fund Liquidity Facility, allowed 
the Federal Reserve to provide LOLR funding to broad swaths 
of the financial system.1 Collectively, they vastly expanded the 
types of financial institutions, the geographic location of 
1 See Armantier, Krieger, and McAndrews (2008), Adrian, Burke, and McAndrews 
(2009), Fleming, Hrung, and Keane (2009), and Duygan-Bump et al. (2010).
financial firms, and the classes of collateral eligible for 
borrowing from the Federal Reserve.
Lender of last resort is a—if not the—defining characteristic 
of central banking.2 In normal times, the Federal Reserve is the 
LOLR only to depository institutions located in the United 
States through its standing discount window or primary credit 
facility. During the crisis, traditional discount window lending 
to banks was insufficient to stem contagion and liquidity runs 
in the financial system, particularly in funding markets and 
among financial institutions beyond traditional banking. 
Liquidity provided to banks was not distributed to the rest of 
the financial system because of balance-sheet constraints at the 
largest financial institutions and counterparty credit risk 
concerns. The central bank swap lines and the CPFF were 
designed to allow the Federal Reserve to make liquidity 
available to foreign banks outside the United States and to 
the commercial paper market, respectively.
While the new Fed facilities shared a common goal—to ease 
financial market conditions—the papers in this volume make 
clear that each facility was carefully designed to address the 
specific dislocations or liquidity problems in particular 
markets, and to do so in a way that ensured that the Federal 
Reserve’s lending was appropriately secured. For example, the 
central bank swap lines directly addressed the excess demand 
for/shortage of U.S. dollar short-term funding outside the 
United States, while the CPFF was specifically designed to 
2 Many central banks, including the Federal Reserve, were created after financial 
crises in which private financial market participants were unable to provide 
liquidity necessary to maintain normal financial and banking functions.
Patricia C. Mosser 
Patricia C. Mosser is a senior vice president in the Markets Group of
the Federal Reserve Bank of New York.
The views expressed are those of the author and do not necessarily reflect 
the position of the Federal Reserve Bank of New York or the Federal 
Reserve System.
I2O v e r v i e w
support term issuance of commercial paper when that market 
became distressed in the aftermath of the Lehman Brothers 
bankruptcy. Despite their different designs, the two facilities 
shared a couple of common traits. Both were structured to 
carefully manage counterparty risk and both were priced to be 
attractive facilities only during periods of market stress. This 
latter characteristic was important in allowing for an orderly 
winding down of the facilities over time.
In the volume’s third paper, Joseph Gagnon, Matthew 
Raskin, Julie Remache, and Brian Sack discuss the 
implementation and impact of the Federal Reserve’s large-scale 
asset purchase (LSAP) programs implemented through spring 
2010. While the broad policy purpose of the LSAPs was also to 
ease financial conditions, the purchase programs were 
aimed at directly lowering the cost of credit to households and 
businesses rather than at easing funding conditions for 
financial intermediaries. By purchasing large quantities of 
agency debt, agency mortgage-backed securities (MBS), and 
U.S. Treasury securities, the programs aimed to directly 
reduce long-term interest rates and thus reduce the cost of 
borrowing. As such, the LSAPs posed different policy design 
and implementation issues, including the size and timing of 
purchases. While the purchase programs themselves were 
temporary, their impact on asset prices (and on the Federal 
Reserve’s balance sheet) has been more sustained. Indeed, the 
paper concludes that the purchases completed through spring 
2010 lowered the ten-year term premium by 30 to 100 basis 
points. In addition, it finds that the purchases had even larger 
effects on long-term agency debt and agency MBS yields by 
improving market liquidity and removing assets with high 
prepayment risk from private portfolios.
The three papers discuss the policy intent of the liquidity 
programs and the asset purchases, how various elements of 
program design and implementation were chosen in order to 
achieve those policy goals, and the challenges inherent in the 
designs. The papers also provide an early read on the impact 
and policy effectiveness of each of the facilities. As such we 
hope that these studies can serve both as historical references 
on the structure, design, and implementation of these 
extraordinary programs and as preliminary assessments of the 
programs’ contributions to alleviating market stresses and 
allowing the financial system to begin a long road back to its 
role in credit formation and intermediation. We also hope that 
researchers and central bankers will study and evaluate these 
policy programs in the coming years.
References
Adrian, T., C. R. Burke, and J. J. McAndrews. 2009. “The Federal Reserve’s 
Primary Dealer Credit Facility.” Federal Reserve Bank of New York 
Current Issues in Economics and Finance 15, no. 4, August.
Armantier, O., S. Krieger, and J. McAndrews. 2008. “The Federal 
Reserve’s Term Auction Facility.” Federal Reserve Bank of 
New York Current Issues in Economics and Finance 14, 
no. 5, July.
Duygan-Bump, B., P. M. Parkinson, E. S. Rosengren, G. A. Suarez, and P. S. 
Willen. 2010. “How Effective Were the Federal Reserve Emergency 
Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper 
Money Market Mutual Fund Liquidity Facility.” Federal Reserve 
Bank of Boston Working Paper no. QAU10-3, April 29.
Fleming, M. J., W. B. Hrung, and F. M. Keane. 2009. “The Term 
Securities Lending Facility: Origin, Design, and Effects.” Federal 
Reserve Bank of New York Current Issues in Economics and 
Finance 15, no. 2, February.
The views expressed are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York 
or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or implied, as to the 
accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any information contained in 
documents produced and provided by the Federal Reserve Bank of New York in any form or manner whatsoever.

How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility.” Federal Reserve Bank of Boston Working Paper no.

The Federal Reserve’s Primary Dealer Credit Facility.” Federal Reserve Bank of

The Federal Reserve’s Term Auction Facility.” Federal Reserve

The Term Securities Lending Facility: Origin, Design, and Effects.” Federal Reserve Bank of New York Current Issues in

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