The Fed gets loose: WTTAF?
No, I didn’t invent a new acronym for naughty words!
TAF = Term Auction Facility. Through this program, the Fed loans banks up to $100 billion every month in 28-day loans against different types of collateral.
The Fed has just announced plans to expand TAF, along with the range of acceptable collateral (i.e. credit card receivables and auto loans).
In last month’s TAF auction, banks submitted bids for $88 billion. Here’s the catch: there was only $50 billion available. Demand has far exceeded the supply of TAF loans for the past five months. Wonder why?
What economists say: “The interbank market is frozen by fear of counterparty credit risks.” -M. Feroli, JPMChase
What I say: Banks don’t trust other banks to pay back debts.
In recent periods collateral has been shaky. It has been hard to determine the true owner and hard to determine the true value (a la Bear Sterns). Now that banks have suddenly become risk-averse, the old collateral just isn’t enough to get a new loan.
That’s where TAF comes in handy…why borrow from another bank when you can borrow from the Fed?
Mortgage backed securities…now credit cards and auto loans… is the Fed engaging in too much risky business?
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