RDP 2019-10: Emergency Liquidity Injections Appendix A: Emergency Liquidity Injection Policies in Europe and the United States

This appendix reviews some of the largest liquidity injection policies adopted by authorities in Europe and the United States around late 2008. Both regions utilised secured lending, bank equity purchases, and unsecured lending subsidisation. Unsecured lending subsidisation was mostly through government guarantees on banks' unsecured debt, with also some direct loans to banks. The United States relied most heavily on secured lending; in Europe, government guarantees on banks' unsecured debt were more prominent.

A.1 Europe

The ECB increased secured lending by modifying and expanding its existing tools for open market operations. These were the main refinancing operations (MRO) and longer-term refinancing operations (LTRO), under which banks borrowed from the ECB against eligible collateral. MROs were previously conducted weekly with one-week maturity and LTROs typically conducted monthly with maturities of one month and longer. In March 2008, the ECB announced it would run a series of LTROs with six-month maturities, compared to maturities of three months in previous LTROs. Prior to October 2008, the ECB priced the MROs and LTROs by taking bids from banks comprising interest rates and corresponding quantities, auctioning a predetermined total amount at the lowest successful interest rate bid; the amount auctioned was calibrated to leave the outcome interest rate a certain level above the ‘deposit rate’ that the ECB pays banks on their overnight cash holdings. On 15 October for MROs and 30 October for LTROs, the ECB switched to a fixed rate tender with full allotment, whereby it fixed the interest rate and banks could borrow any amount requested. On 23 October, the ECB also substantially widened the range of eligible collateral, accepting more corporate debt instruments and lowering the required credit rating of collateral from A– to BBB–. The most rapid and substantial increase in MRO and LTRO lending occurred between late September and late October 2008, rising from €480 billion to €820 billion. Over the same period the interest rate on the ECB's lending declined from around 4.7 to 3.75 per cent, above the interbank rate (EONIA) which declined from 3.70 to 3.55 per cent.

In mid October, several European countries offered government guarantees on banks' newly issued debt, guaranteeing around €770 billion, and often charging prices estimated to be close to market rates in normal times.[14] Around the same time, some of these countries engaged in bank recapitalisation schemes, with a combined cap of €140 billion, and purchased or guaranteed around €43 billion of banks' assets.[15] A large component of this was the Swiss National Bank's (SNB) transaction with UBS, under which the SNB created a ‘bad bank’ fund, owned and mostly funded by the SNB, that purchased around €30 billion worth of assets from UBS with an arrangement that the SNB would receive UBS shares if the bad bank eventually made a loss. The transaction therefore had similarities to an equity purchase. In November 2013, the SNB sold the last of the fund back to UBS and announced that it made around €2.8 billion capital gains on top of interest payments.

A.2 The United States

Throughout the crisis the US Federal Reserve introduced a number of new facilities for collateralised open market operations, including the term auction facility (TAF), the primary dealer credit facility (PDCF) and the term securities lending facility (TSLF).[16] The TAF, introduced in March 2007, lent to a wide range of depository institutions – in contrast to the standard open market operations that only transact with the 20 or so primary dealers – for terms of one or three months, via single price auctions each of a fixed total amount. The largest monthly increase in TAF lending was from US$125 to 390 billion between early October and early November 2008. The PDCF, introduced in March 2008, lent funds without limit to primary dealers on an overnight basis, at the Fed's overnight policy rate and with an additional frequency-based fee for each loan to a borrower that had used the facility more than 45 times. The TSLF, also introduced in March 2008, made one-month loans of Treasury securities to primary dealers, collateralised by other securities, through single price auctions. In mid September 2008, the Fed widened its acceptable collateral for the PDCF – from investment-grade securities to those typically accepted in private repo markets – and the TSLF – from certain types of AAA securities to any investment-grade debt instruments. From mid September to early October 2008, TSLF loans outstanding rose from US$135 billion to 275 billion, and overnight lending under the PDCF rose from zero to US$155 billion.

US authorities also injected substantial liquidity using unsecured debt subsidisation and bank equity purchases. On 7 October 2008, the Fed introduced the commercial paper funding facility (CPFF) to purchase newly issued commercial paper of three-month maturity from a wide variety of companies, with a substantial proportion from the banking sector. It purchased unsecured commercial paper (essentially making unsecured loans), charging the overnight index swap (OIS) rate plus 100 basis points, and asset-backed commercial paper (ABCP), charging the OIS rate plus 300 basis points. By the end of October the Fed owned US$157 billion of unsecured commercial paper and US$94 billion of ABCP. On 14 October 2008, the FDIC implemented the temporary liquidity guarantee program (TLGP), which guaranteed without limit banks' newly issued unsecured debt, charging a 75 basis point fee for any loan that applied the guarantee. TLGP-guaranteed debt outstanding reached US$224 billion by the end of 2008, later peaking at US$336 billion.

Bank equity purchases in the United States were made under the Troubled Assets Relief Program (TARP). The largest part of TARP was the Capital Purchase Program (CPP), through which on 28 October 2008 the US Treasury purchased US$115 billion of equity and warrants from 8 of the largest US banks, and by February 2009 had disbursed a total of US$194 billion to 317 different financial entities. Additional TARP funds were spent on institution-specific purchases, providing AIG US$40 billion on 10 November 2008 – which it used to partially repay a senior unsecured loan of US$85 billion from the Fed made on 15 September – and providing Bank of America US$20 billion on 16 January 2009. The US Treasury made positive returns on the CPP and both institution-specific purchases.


The €770 billion figure multiplies 5.7 per cent of euro area GDP (provided in Table 2 of Attinasi (2010)) by 2009 euro area GDP of €12.9 trillion. It excludes guarantees placed in 2009. [14]

These figures are from Attinasi (2010) and Panetta et al (2009). [15]

Some facilities not discussed are: the term asset-backed securities loan facility (TALF) and the large-scale asset purchases (LSAP), aimed at stimulating lending to borrowers outside the financial system; and the money market investor funding facility (MMIFF), targeted at liquidity problems in the money market fund sector. [16]