Term Auction Facility (TAF)

What Is the Term Auction Facility?

The Term Auction Facility (TAF) was a monetary policy utilized by the Federal Reserve to increase liquidity in the U.S. credit markets. The TAF started following the financial crisis of 2007. It permitted the Federal Reserve to auction set amounts of security supported short-term loans to depository institutions (savings banks, commercial banks, savings and loan associations, credit unions) that were decided to be in strong financial condition by their neighborhood reserve banks. The Facility eased the pressure on lending institutions during a period of financial distress.

Understanding the Term Auction Facility (TAF)

The TAF was executed with the express purpose of tending to "raised pressures in short-term funding markets," as per a press release from the Federal Reserve System Board of Governors in 2007.

Participants bid for TAF funds through the reserve banks with a base bid set at an overnight indexed swap rate connected with the maturity of the loans. These auctions permitted financial institutions to borrow funds at a rate that was below the discount rate.

Why the Term Auction Facility Emerged

The Term Auction Facility (TAF) was first utilized by the Fed on December 17, 2007, in response to the 2007 subprime crisis, which caused liquidity issues in the market.

Bank funding markets, especially term funding markets, went under extreme pressure toward the beginning of the financial crisis in 2007. Since the eventual fate of financial institutions was at risk, investors were reluctant to loan at maturities past the shortest of terms. The Federal Reserve endeavored to increase the amount of liquidity accessible to financial institutions through the discount window.

Many banks, nonetheless, wouldn't borrow at the discount window for fear that it would be an indication of institutional weakness. The Federal Reserve laid out the TAF in December 2007 to satisfy the developing need for funds.

Under the program, the Federal Reserve auctioned 28-day loans and, later, 84-day loans, to depository institutions that were in strong financial condition. The TAF advanced the distribution of liquidity when unsecured bank funding markets were under stress. Depository institutions eligible to borrow under the Federal Reserve's primary credit program could partake in the TAF.

$3.8 trillion

The total amount the Fed loaned to 416 banks under the TAF.

How the Term Auction Facility Worked

All loans extended under the TAF were fully collateralized. The funds were allocated through an auction. Participating depository institutions set bids indicating an amount of funds up to a pre-determined limit. The bids additionally indicated an interest rate that the depository institutions might want to pay for the funds. The funds were allocated beginning with the highest interest rate offered until either all funds were allocated or all bids were fulfilled. All borrowing institutions paid a similar interest rate, which was the rate associated with the bid that would fully buy in the auction, or in the case that total bids were not exactly the amount of funds offered, the most minimal rate that was bid.

The TAF was made under the Federal Reserve's standard discount window lending authority allowed under Section 10B of the Federal Reserve Act. The auctions were administered by the Federal Reserve Bank of New York, with loans allowed through the 12 Federal Reserve Banks.

TAF Lending

The facility was first announced on December 12, 2007, and the last TAF auction was held on March 8, 2010, with credit extended under that auction developing on April 8, 2010. All loans made under the facility were repaid in full, with interest, as per the terms of the facility.

The transition to carry out the TAF in 2007 was in a joint effort with other central banks, including the Bank of Canada, the Bank of England, and the European Central Bank. Altogether, the Fed loaned $3.8 trillion to 416 banks under the TAF.

Features

• The Term Auction Facility (TAF) was a monetary policy involved by the Federal Reserve to increase liquidity in the U.S. credit markets during the financial crisis of 2007.
• Financial institutions could borrow funds at a rate below the discount rate through the TAF.
• The initial two auctions on December 17 and 20, 2007, released a combined $40 billion of liquidity into the market.
• The TAF was a mechanism by which the Federal Reserve auctioned insurance supported short-term loans to depository institutions.