Magazine article Economic Trends

A Sign of Normalization

Magazine article Economic Trends

A Sign of Normalization

Article excerpt

02.02.10

During the recent financial turmoil, the Federal Reserve created several emergency credit facilities to address the extreme demands for liquidity. Several of these facilities involved lending to institutions outside the set of those permitted by the Federal Reserve Act in normal circumstances. To extend credit to them, the Fed needed to invoke its authority under section 13(3) of the Act, which allows it to expand the types of permissible borrowers under exigent and emergency conditions.

Four of the Federal Reserve's new credit facilities were allowed to expire on February 1. These include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). As financial market functioning improved, private sources of liquidity became sufficient and the demand for credit via the special facilities diminished. It is important to note that credit extended through these facilities required good collateral backing. Moreover, to limit the use of the facilities, the terms of lending were set to be less attractive than private sources. …

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