Comment on Adrian and McAndrews
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Comments on“The FdFederall R eserve’’s Primary Dealer Credit Facility” Tobias Adrian and James McAndrewsSGE Session on “The Fed’s New Lending Facilities”ASSA Meetings San Francisco JhJohn B. TaylorStanford UniversityJanuary 4, 2009Summary• Excellent paper on economic rationale for PDCF– Analogy: Broker‐Dealers (PDCF), Depository Institutions (PCF)• Focus onon role ofof the ReRepo market– Haircuts, margins, leverage, downward spirals (33:1 to 20:1)– Leverage first rose in recent crisis ((,SIVs, large rate cuts)• Structural changes over time:– Growth of broker‐dealers and hedge funds relative to dideposittory iitnstitituttiions– Trend toward tradable assets and liabilities– Repoo runs or margin spirals rarather than classic bank runsruns• Protections: Penalty rates, regulation, moral hazard• Main Comments:– Empirical Impact – Slippery slope to more facilitiesEmpiricall Findings• “credit default swap prices of pyprimary dealers fell after the introduction of the PDCF”• “To date, the PDCF seems to be having measurable effectcts on thethe repoo and otherother funding markets, as many primary dealers found that their perceived risk of default, as measured by credit default swap prices, declined after the facility’s introduction. ” • Yet nono evidence prpresentted in thethe paper, so lelet’s take a look at CDS rates for Merrill Lynch and Goldman Sachs (for example)…basis pointsmillions of dollars500400300150,000200125,000100100 ...
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Comments on e e era eserve s Primary Dealer Credit Facility Tobias Adrian and James McAndrews
SGE Session on “The Fed’s New Lending Facilities ASSA Meetings San Francisco
o n . ay or Stanford University ,
•
•
• •
Summary Excellent paper on economic rationale for PDCF Analogy: Broker ‐ Dealers (PDCF), Depository Institutions (PCF) Haircuts, margins, leverage, downward spirals (33:1 to 20:1) Levera e first rose in recent crisis SIVs lar e rate cuts Structural changes over time: Growth of broker ‐ dealers and hedge funds relative to epos ory nst ut ons Trend toward tradable assets and liabilities Protections: Penalty rates, regulation, moral hazard Main Comments: Empirical Impact Slippery slope to more facilities
• •
credit default swa rices of rimar dealers fell after the introduction of the PDCF To date, the PDCF seems to be having markets, as many primary dealers found that their perceived risk of default, as measured by credit default swap prices, declined after the facilitys introduction. , take a look at CDS rates for Merrill Lynch and Goldman Sachs (for example)
millions of dollars
150,000
125,000
100,000 75,000 50,000
25,000
0
PDCF
CDS Goldman Sachs
basis points 500
Weekly averages of daily CDS data and weekly average PDCF loans
400
200
100
0
millions of dollars
150,000 125,000
100,000 75,000 ,
25,000
0
PDCF CDS Merrill Lynch CDS Goldman Sachs
basis points 600
500
400
200
100
0
Daily CDS data with daily PDCF date interpolated from weekly average data
•
•
Gra hical evidence is difficult to inter ret • CDS rates appear to increase when PDCF loans rise! • But there are cause and effect issues to sort out • We can apply time series methods to sort out the timing differences ‐ ‐ between CDS rates (on Merrill Lynch and Goldman Sachs) and PDCF loans • Compute impulse response functions from the VARs • Look for significant effects
60
40
20
0
-20
PDCF and Goldman Sachs CDS Impulse Responses Based on Weekly Data Res onse to Choles ne S.D. Innovations ± 2 S.E. Response of CMER1U5 to CMER1U5 Response of CMER1U5 to PDCF 60
40
20
0
-20
-40 -40 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of PDCF to CMER1U5 Response of PDCF to PDCF 30,000 30,000
20,000
10,000
0
-10,000
20,000
10,000
0
-10,000
-20,000 -20,000 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
80
0
-40
PDCF and Merrill Lynch CDS Impulse Responses Based on Weekly Data Response to Cholesky One S.D. Innovations ± 2 S.E. Response of CGS1U5 to CGS1U5 Response of CGS1U5 to PDCF 80
0
-40
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Response of PDCF to CGS1U5 Response of PDCF to PDCF 30,000 30,000
20,000
10,000
0
-10,000
20,000
10,000
0
10,000 -
-20,000 -20,000 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
•
•
‐
negatively • of the PDCF CDS rates Gran er ‐ cause PDCF loans positively loans at the time of market stress
• • • •
•
•
A Slippery Slope to More Facilities? Securities (Treasury and Agency) held outright Repos Loans from the TAF Other Loans Primary Credit Facility (discount window) Primary Dealer Credit Facility Asset Back Commercial Paper Money Market Mutual Fund Liquidity Facility oans to Term Asset ‐ Backed Securities Loan Facility (credit card, student, auto)* Private Portfolio holdings Maiden Lane I (Bear Stearns) Maiden Lane II (AIG) Money Market Investor Funding Facility* Mortgage Backed Securities Purchase Program*
Note: Minimal change items are gold stock, SDRs, Treasury currency outstanding, seasonal and secondary discounts, float
billions of dollars 900
800
600 500
400
300
100
0
2000
December 31, 2008 $848 Billion
Reserve Balances of De ositor Institutions at Federal Reserve Banks
2002
2004
September 10, 2008 $8 Billion
2006 2008
