Lender of next-to-last resort?

There seems to be an alternative to the discount stigma – is the liquidity problem too big for (orthodox) central banks?

The Federal Home Loan Bank System: Lender of Next-to-Last Resort?

Morten Bech, Federal Reserve Bank of New York

When we look at the FHLB balance sheet, we see a $746b surge in net lending to the banking system (at an annualized rate) in Q3. Is it true, then, that banks are suffering from an access to funding? If banks have been shy about tiptoeing to the discount window, they seem to have had no such bashfulness on their way to borrowing or securing advances from FHLB.

How, then, can any Fed official get in front of a microphone with a straight face and say we have a liquidity problem, best addressed by a TAF facility, which at the moment is scheduled to auction off a fraction of that which has already been loaned by FHLB to the banking system?

‘Liquidity’ for fed member banks is about price, not quantity. There is a ‘liquidity problem’ when the term structure of interbank rates isn’t to the fed’s liking.

Currently, the issue seems to be LIBOR – the fed wants the spread over fed funds to be narrower, particularly over year end. The ‘new facility’ should directly address this particular pricing issue.

There is another problem with this injecting liquidity story. If the Fed wishes to maintain the fed funds rate at the current target, assuming the demand curve for reserves remains stable, the Fed will have to remove as many reserves through open market operations as they inject through the TAF.

Yes. Not a problem. The TAF should function exactly that way to narrow spreads above.

If they don’t, the reserves will be in surplus, and the fed funds rate will fall below the target. In fact, the Fed’s balance sheet has been growing relatively slowly, even though they have been easing, especially when compared to the unprecedented expansion of FHLB balance sheet growth.

Yes, again, it’s all about price, not quanity.

The FHLB is acting as a broker – long with some investors/banks/etc and short with others.