NEW YORK – In response to a near-complete halt of the securitization markets in the fall of 2008, the Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF) to provide liquidity to these markets and help prevent the shutdown of lending to consumers and small businesses. The program’s careful design allowed for success while minimizing the Federal Reserve’s risk exposure, according to a report from the New York Fed.
“The Federal Reserve's Term Asset-Backed Securities Loan Facility” is the latest article in the New York Fed’s Economic Policy Review series. Authors Adam Ashcraft, Allan Malz, and Zoltan Pozsar provide a complete overview of the TALF’s design and attempt to measure the extent to which the program succeeded.
Asset-backed securities markets supply a substantial share of credit to consumers and small businesses in the form of auto loans, student loans, and equipment loans—to name the largest categories—so any disruptions to these markets can have a negative effect on real economic activity. Such a threat was present during the fall of 2008, when investors fled not only the residential mortgage-backed securities that triggered the financial crisis, but also consumer and business asset-backed securities and commercial mortgage-backed securities.
In response to this liquidity crisis, the Federal Reserve established the TALF, which extended term loans, collateralized by securities, to buyers of certain high-quality asset-backed securities and commercial mortgage-backed securities. By promoting the new issuance and trading of structured credit, the program aimed to reduce uncertainty to credit issuers about their funding costs, making it more attractive to originate new loans.
The authors conclude that the TALF played a significant role in the policy response to the financial crisis: It succeeded in reviving securitization markets where liquidity was the fundamental problem and contributed to a tightening of secondary-market spreads, thus preventing the shutdown of lending to consumers and small businesses. Most significant, however, was the TALF’s ability to accomplish these objectives on such conservative terms and with limited risk to the Federal Reserve. Private investors were placed in a first-loss position and haircuts were imposed on loans. These and other program design features minimized the Federal Reserve’s risk exposure.
The study can be read in full in the New York Fed's Economic Policy Review.
The Federal Reserve’s Term Asset-Backed Securities Loan Facility »
Adam Ashcraft is a senior vice president in the New York Fed’s Credit and Payments Risk Group; Allan Malz is a vice president and senior analytical advisor in the Markets Group and the former head of policy and analytics for TALF; Zoltan Pozsar was a senior trader/analyst in the Markets Group when this article was written.