A new study from the New York Fed, “The Evolution of Treasury Cash Management during the Financial Crisis,” reveals how the U.S. Treasury altered its cash management practices during the 2008-09 financial crisis to facilitate the Federal Reserve’s expansion of credit to banks, primary dealers, and foreign central banks. Author Paul Santoro argues that this interaction exemplifies the close working relationship between the two institutions and the way in which each helps the other to carry out its statutory responsibilities.
As Santoro explains at the beginning of the study, the Treasury maintained its cash balances in two types of accounts: the Treasury General Account (TGA) at the Federal Reserve and the Treasury Tax and Loan Note accounts (TT&L accounts) at private depository institutions. In 2008, the relative size and stability of these accounts underwent a dramatic reversal as the Treasury took steps to accommodate the Fed’s extension of large amounts of credit through its lending facilities and other programs.
When the Fed’s credit policies caused its balance sheet to expand rapidly in September 2008, the Treasury took the first of two steps to offset the effects. Specifically, it launched the Supplementary Financing Program (SFP)—a sale of Treasury bills to the public—and deposited the proceeds in a new SFP account at the Fed. The SFP was designed to drain some of the reserves that the Fed’s liquidity programs were creating and to prevent the federal funds rate from plummeting.
The second step taken by the Treasury was prompted by the Fed’s decision to cut short-term interest rates and pay interest on excess reserves. The Treasury removed its cash from TT&L accounts and put it into the TGA because it was more remunerative than investing funds with the private sector. As a result, the TGA balances that in the pre-crisis period had fluctuated in a narrow band around $5 billion grew much larger and more variable. The TT&L balances, by contrast, stabilized at a low level of $2 billion. Like the Supplementary Financing Program, the Treasury’s shift of funds from the TT&L accounts to the TGA benefited the Fed by draining reserves from the banking system.