Crisis US money market
18 marzo 2015
Crisis liquidity
Response to the crisis
Mbs
• Main problem: MBS collateral in repo
• The dealers in MBS were damaged by the lack
of liquidity so they had to be replaced by the
public sector.
Shadow banks
Repo financing
• Shadow banks used repo as means of
financing because it was cheap.
taxonomy
• Money market rates
LiBor  federalFunds  repo
Short term Rates spread
• Befor the crisi erupted the spread between
these rates were a few basis
• A basis point = 0.01
BASIS POINT
• Smallest measure of quoting the yield on a bond, note, or
other debt instrument. One basis point is equal to one
hundredth of one percent (0.01%): one percent of a yield
equals 100 basis points. For example, an interest rate of 5
percent is 50 basis point higher than the interest rate of 4.5
percent. Similarly, a spread of 50 basis points (between the
bid price and offer price of a bond) means the investor
must pay 0.5 percent more to buy it than he or she could
realize from selling it.
Read more:
http://www.businessdictionary.com/definition/basispoint.html#ixzz2wVQGCcpu
repo
• REPO SONO LA MAGGIORE FONTE DI FIN.
• PER I DEALERS NEI TITOLI CHE FANNO IL
MERCATO.
• Se un dealer acquista un titolo si finanzia per
mezzo di un repo in cui offre come garanzia il
titolo acquistato. La controparte e’ un altro
dealer o un’impresa non finanziaria.
Federal funds market
• The fed. funds is an inter-bank market where
banks that borrow fed funds receive deposits
at the Fed and pay an interest.The Federal
funds rate is determined by the supply of and
demand for funds. The fed however tries to
keep it within a certain range and in order to
make it converge to the desired target it lends
against collateral.
• Le banche che non hanno accesso ai fed funds
devono invece pagare il libor.
• Fed funds and libor prestiti non sono
assicurati ma le banche osservano con
attenzione i bilanci delle controparti.
• Questi tassi sono allineati dall’arbitragggio. Gli
operatori che possono farlo prendono a
prestito al tasso piu’ economico e danno a
prestito al tasso piu’ elevato.
• Questa struttura e’ antecedente la nascita
dello shadow banking ma lo shadow banking
l’ha utilizzata cosicche’ durante la crisi essa ne’
stata influenzata.
• Il crollo delle relazioni di arbitraggio tra i tassi
durante la crisi e’ la prova EVIDENTE dei
problemi di liquidita’ ad essa collegati.
overnight money market rates
Vertical lines
• Vertical lines show when Bear Stearns and
Lehman failed.
First period
• In the first period from july 2007 to march
2008 the spread between the libor rate and
the federal funds rate increased while the
spread between treasury repos and federal
funds rate decreased. In this period the fed
intervened every day in the market to stabilize
the federal funds rate at its target rate which
was 2% (falling from 5%).
Fed funds rate and target
Second period
• In the second period overnight rates go back
to the pre-crisis standards.
• The reason for this behaviour is not that
problems in markets have vanished but rather
the fed intervention exchanging Treasuries
with MBS and facilities TAF . Fed acts as public
lender of last resort.
Figure explanation
• As wealth holders attempt to get rid of their
MBS the dealers must buy them. The Fed
supports them with various facilities. PDCF
provides funds to dealers while TAF provides
fund to banks. The Fed finances these loans by
selling treasuries.
third period
• After Lehman’s collapse the spread between
repo rates and fed funds rates and that
between Libor rates and federal funds rate
have increased. In this period the Fed
intervened as dealer di last resort.
Expansion fed’s balance
• This intervention made the balance sheets of
the fed double within some weeks. Rates fell
from 2% to 0%. The most important thing
however is the expansion of the Fed’s balance
sheet.
fed assets
fed liabilities
Comment graph
• The Fed used open market operations as
policy tool until the end of 2007. From the
spring of 2008 onwards it started using special
facilities and this has changed the composition
of its balance sheet .
Third period
• After Lehman’s colapse the fed’s balance sheet
has dramatically expanded. On the assets side
we can see the various new facilities
introduced by the Fed. These facilities were
just temporary. When they expired in 2010
the Fed used the sums reimbursed to buy
directly in the market MBS. On the liabilities’
side we can see that reserves have increased.