## Securities Markets vs. Bank Lending (wp17152, Section 1)

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### Introduction and purpose
- Market freezes and market liquidity squeezes have occurred with negative consequences (example: September 2008 U.S. ABCP market).
- During exceptional episodes central banks expanded operation types, lengthened lending duration, and broadened counterparties and eligible collateral.
- As capital markets deepen and banks become less central, official support beyond traditional lender-of-last-resort (LOLR) lending may be needed to maintain financial stability.
- The paper develops a framework to analyze central bank emergency support to securities markets by answering four questions:
  - (1) why should central banks support market functioning?;
  - (2) which markets should be supported?;
  - (3) when should support be given?;
  - (4) how should central banks support markets?

### Why central banks should support market functioning (objectives and market failures)
- Intermediate objectives of market support:
  - safeguarding the flow of credit;
  - averting fire sale dynamics;
  - supporting the transmission of monetary policy.
- Financial-stability risks that motivate intervention:
  - securities dealers unable to sell or refinance inventory, reducing market-making capacity;
  - financial firms facing liquidity demands or reduced access to funding, possibly resulting in fire sales (forced sales below intrinsic value).
- Sources of significant market failure warranting intervention:
  - asymmetric information;
  - incomplete markets;
  - externalities from selling behavior.
- Ex-ante regulatory measures can be tightened but cannot eliminate tail events; contingency for intervention remains necessary.

### Which markets to support (criteria and intervention frontier)
- Intervention as last resort; costs of not intervening must outweigh intervention costs.
- Moral-hazard risks if actions are perceived as not last-resort.
- Official support best directed at securities markets that are:
  - temporarily impaired but normally liquid;
  - relatively large and/or highly connected to the financial system;
  - markets where credit risk is typically low.
- Benchmark money and bond markets identified as natural candidates for support.
- “Intervention frontier” concept: three-dimensional normalized space (importance, liquidity, credit quality); securities within the frontier are potential candidates for support.

### When to intervene (timing and diagnosis)
- Timing complicated because underlying market imperfections driving illiquidity are not easily identifiable.
- Central banks should analyze a wide set of indicators to diagnose the problem and determine when to start an intervention.
- Useful inputs for timing:
  - qualitative information from market participants;
  - quantitative indicators used in FX interventions;
  - measures of pricing noise and violations of no-arbitrage conditions.
- Key monitoring elements:
  - flow-of-credit indicators (issuance volumes, credit spreads);
  - fire-sale indicators (turnover volumes, bid-ask spreads, price volatility measures);
  - repo and financing market indicators (dealer funding constraints).

### How to intervene (instruments, modalities, and diagnosis-based choice)
- Broad categories of central bank support:
  - structural measures (e.g., securities lending programs, collateral policies);
  - provision of liquidity to financial intermediaries as LOLR;
  - direct intervention as market makers of last resort (MMLR);
  - facilitating markets (alternate trading venues).
- Choice depends on root cause:
  - If lack of funding liquidity is root problem:
    - use repos to sustain collateral valuations or resolve uncertainty about creditworthiness of key intermediaries (e.g., securities dealers).
  - If fragility of market liquidity is root problem:
    - use tools to remove price risk (e.g., reverse auctions) or reduce information asymmetries (through direct purchases).
- Central bank interventions for market functioning are distinct from large-scale asset purchases aimed at monetary accommodation at the zero lower bound.

### Boxed examples and operational design elements
- Categories and rationale:
  - structural measures change securities availability; collateral policies influence liquidity premiums;
  - liquidity provision helps dealers facing funding constraints;
  - alternate trading venues help when counterparties unwilling to transact;
  - direct intervention can remove financial risk and restore price discovery.
- Objectives of emergency support (three core):
  - maintain satisfactory flow of credit (e.g., CP freezes impede payroll and working capital);
  - counter fire-sale dynamics (price falls trigger liquidation spirals and margin calls);
  - support monetary policy transmission (ECB and BOE explicitly identify transmission support).
- Process: monitoring, triggers, diagnosis, program design.
- Risk mitigation measures: counterparty assessments; haircuts and margins; minimum credit criteria; special purpose vehicles; government indemnities.
- Practical program design elements:
  - clear objectives tied to market-functioning metrics;
  - diagnose funding vs. market liquidity problems;
  - choose instrument (repos / collateral swaps / widening eligible collateral; auctions or direct purchases; fixed or variable rate operations);
  - central bank risk mitigation (counterparty assessments; haircuts; SPVs; government indemnities).
- Minimum credit-rating thresholds commonly set high for private-sector securities to limit central bank balance-sheet risk; government bonds usually treated differently.

### Key statistics from Table 1 — Securities Markets vs. Bank Lending (September 30, 2016; In US$ billions)
- Euro Area:
  - (1) Debt Securities Outstanding 16,402;
  - (2) Bank Loans Outstanding 13,319;
  - In Percent (1)/(2) 123;
  - (3) Central Gov’t Securities 7,689;
  - In Percent [(1)-(3)]/(2) 65
- Korea:
  - (1) 1,771;
  - (2) 1,833;
  - In Percent 97;
  - (3) 543;
  - In Percent 67
- Mexico:
  - (1) 710;
  - (2) 242;
  - In Percent 293;
  - (3) 375;
  - In Percent 138
  - Note: “Only credit by private banks is included.”
- United Kingdom:
  - (1) 5,915;
  - (2) 1,951;
  - In Percent 303;
  - (3) 2,688;
  - In Percent 165
- U.S.A.:
  - (1) 37,614;
  - (2) 8,566;
  - In Percent 439;
  - (3) 16,505;
  - In Percent 246
- Sources listed for table: BIS, Bloomberg, ECB, U.S. Federal Reserve System (The Fed), BOE, Banco de Mexico.

### Selected examples of market support (Table 2 and program highlights)
- Examples of security types, typical liquidity in normal times, relative size/importance, and minimum credit rating (selected lines preserved as in source):
  - Euro Area:
    - Government bonds (SMP) — Very liquid; Very important; BBB-/Baa3
    - Covered bonds (CBPP1) — Liquid; Important; BBB-/Baa3 (note: covered bonds required at least one rating no lower than AA, while none of its ratings could be below BBB-/Baa3)
  - U.K.:
    - Commercial paper — Very Liquid; Very Important; A1/P1
    - Corporate bonds — Liquid; Very Important; A-
  - U.S.:
    - Commercial paper — Very Liquid; Very Important; A1/P1/F1
    - Asset-back securities — Very Liquid; Very Important; AAA
  - Korea:
    - Commercial paper — Liquid; Important; No
    - Corporate bonds — Very Liquid; Very Important; No
  - Indonesia:
    - Government bonds — Very Liquid; Very Important; No
  - Mexico:
    - Government bonds — Very Liquid; Very Important; No
    - IPAB bonds (Deposit Insurance Agency) — Liquid; Very Important; No
- Not all securities within a category that meet minimum criteria are accepted; requirements may include minimum issuance or tranche sizes.
- Euro area eligibility below BBB-/Baa3 could be granted/maintained based on compliance with an EU-IMF financial assistance program.

### Case study — Bank of England Commercial Paper Purchasing Program (Box 2)
- Trigger and purpose:
  - Commenced February 2009 after corporate funding access deteriorated.
  - Aim: restore funding access for high-quality nonfinancial borrowers by addressing fire-sale dynamics and elevated spreads.
- Key indicators used and chart elements (labels and scales preserved as presented):
  - Chart series: CP Spread to OIS; Weekly purchases and stock purchased; BOE CP Purchases; Gross CP Issuance (daily avg, GBP m); ECP to OIS (RHS); A1/P1 CP to OIS (RHS).
  - Y-axis scales: 0.0, 0.5, 1.0, 1.5, 2.0, 2.5, 3.0 (left scale); 0, 250, 500, 750, 1000, 1250, 1500 (right scale).
  - Date range on x-axis: Jul-08 through Oct-11 (exact tick labels preserved).
  - Units and annotations: (GBP millions); Percent.
  - Data sources: Bloomberg and BOE.

### U.S. examples — AMLF, PDCF, TALF and program design lessons
- Primary Dealer Credit Facility (PDCF):
  - Established March 2008 to allow PDs overnight funding collateralized with investment-grade securities at the same rate applied to Primary Credit Facility.
  - In September 2008 eligible collateral expanded to include all collateral pledgeable in the triparty repo system.
  - Initially announced for at least six months; after extensions operated until May 2009, for a total of 14 months.
- Asset-Backed Commercial Paper Money Market Liquidity Facility (AMLF):
  - Launch date: September 19, 2008.
  - Structure: lending against eligible ABCP via nonrecourse repos; effectively a Fed guarantee on short-term paper.
  - Peak program size: US$147 billion.
  - Peak spread: between ABCP and AA-rated CP exceeded four percentage points; spread diminished thereafter.
  - Eligibility: U.S. depository institutions, U.S. bank holding companies, U.S. branches and agencies of foreign banks.
  - ABCP eligibility criteria included net redemptions thresholds for MMMFs (exceeding 5 percent in one day, or 10 percent in 5 business days or less), U.S. issuer, U.S. dollars, minimum credit rating A1/P1, and purchased on or after September 19, 2008.
  - Loans provided for maturity of ABCP, to a maximum of 120 or 270 days for depositary and non-depository institutions, respectively.
  - Pricing and collateral: no haircuts, fees, or additional spreads; program was nonrecourse to borrowing banks.
- TALF:
  - Provided nonrecourse term funding for structured products, mainly ABS issued after 1/1/2009.
  - Facility multiyear; haircuts required; U.S. Treasury took 2nd loss position; credit risk classified Low-medium.

### Intervention methods — auctions versus direct purchases; nonrecourse instruments
- Auctions:
  - Advantages: ex-ante and ex-post transparency; facilitate price discovery; competitive neutrality.
  - Risks: collusion; narrow participation.
  - Auction targets:
    - Targeting a rate — fixed-rate, full-allotment: puts a ceiling on rates but accepts uncertain volume and financial risk.
    - Targeting a volume — variable-rate, fixed-volume: supports price discovery and controls financial risk.
  - Allocation: uniform-priced auctions or multiple-price auctions.
  - Auction sizing: regular small auctions can provide reference pricing; auctions must be large enough to be meaningful if intended to remove market risk.
- Direct purchases:
  - Preferred when prices fall precipitously, instruments nonstandard, or auctions too slow.
  - Offer immediate, forceful response.
  - Risks: reduced transparency; potential misunderstanding of intent; competitive neutrality concerns; front-running risks.
  - Recommendation: high bar for bilateral interventions; favor transparency and neutrality when possible.
- Nonrecourse instruments:
  - Combine funding and price insurance (collateralized funding with embedded option relieving borrower repurchase obligation beyond threshold).
  - Pricing must incentivize participation and compensate central bank for optionality (higher interest, fee, or higher haircut).
  - Haircut trade-off: too large may fail to prevent fire sales; too low increases authority risk and moral hazard.
  - Historical use: Fed incorporated nonrecourse elements during the GFC to stem fire sales from MMMF redemptions and ABS market stresses.

### Risk management, exit, coordination, and operational considerations
- Risk mitigation and operational features:
  - Counterparty assessments, haircuts and margins, minimum credit criteria, SPVs, government indemnities.
  - Legal, custody, valuation, and specialist operational needs for complex securities.
  - Some central banks face legal constraints on securities they can purchase or counterparties they can deal with.
- Exit and unwind:
  - Programs should end when market conditions prompting them are addressed (restored flow of credit and/or reduced fire-sale risk signaled by lower volatility and narrowing spreads).
  - Short-term instruments unwind naturally after cessation; longer-term instruments may be allowed to roll off or be sold.
  - Pricing of program funding should incentivize resumption of market-based activity; examples: Fed’s TALF saw ABS markets resuscitated well short of program limit (US$70 billion used against a US$1 trillion limit).
- Monetary policy implications:
  - Emergency support actions increase monetary base and may put downward pressure on short-term interest rates.
  - Central banks should sterilize marginal liquidity and/or ensure interest rates do not fall below targets (tools include selling short-term government securities or paying interest on reserves).
  - Historical note preserved: only in October 2008 was the Fed granted authority to pay interest on reserves under the Emergency Economic Stabilization Act of 2008.
- Coordination:
  - Securities market support should be part of a broader crisis-management package; coordination across monetary, fiscal, and financial-stability policies emphasized.
  - Government involvement via indemnities or capital commitments may be needed when intervention risks exceed central-bank tolerance.

### Governance, preparedness, transparency, and accountability
- Decision-making and preparedness:
  - Establish intra-stakeholder committee (at least governor, supervisor, minister of finance) meeting regularly (perhaps twice yearly) with more frequent meetings as issues become acute.
  - Operational working group for anticipation, preparation, monitoring; keep records for ex-post accountability.
  - Pre-establish SPVs, accounting, governance, government support levels, and counterparty legal agreements.
  - Ongoing monitoring, scenario analysis, end-to-end testing, and schedules of haircuts for repos/assets swaps.
- Transparency and communication:
  - Clear communication demonstrating understanding and willingness to act is critical.
  - Balance ex-ante transparency with avoiding premature disclosure that could undermine stabilization efforts.
  - Consider delayed disclosure where appropriate to minimize stigma while preserving accountability.
- Minimize moral hazard:
  - High bar for intervention; avoid generating expectations of bailouts and avoid public pre-commitments to support markets.

### Appendix summaries (market failures, FX parallels, past programs)
- Appendix I — Market-failure sources:
  - Three identified sources: (1) asymmetric information; (2) incomplete markets; (3) externalities.
  - Interactions among failures can reinforce illiquidity and market freezes.
- Appendix II — Foreign exchange intervention channels relevant to securities markets:
  - Signaling channel; portfolio balance channel; microstructure/order-flow channel.
  - Indicators of dysfunction analogous to FX: acceleration in price changes, increasing volatility, widening bid-offer spreads, turnover composition changes.
- Appendix III — Past programs to support securities markets (selected highlights preserved):
  - Euro area Securities Market Program (May 2010): purchases of selected sovereign bonds; credit risk: High.
  - ECB Covered Bond Purchase Program (CBPP 1) (July 2009): first stage limited to €60 billion; credit risk: High.
  - Korea Bond Market Stabilization Fund (November 2008): credit risk: High.
  - BPAs Repurchase Auctions (Mexico) (November 2008): Bank of Mexico offered up to MXN150 billion; MXN146.7 billion utilized.
  - BOE Commercial Paper Program (March 2009): BOE purchased newly issued CP in reverse auctions; Treasury indemnified BOE.
  - AMLF (U.S.) (September 2008): peak US$147 billion; objective to prevent ABCP fire sales.
  - CPFF (U.S.) (October 2008): purchase 90-day CP and ABCP from highly rated issuers; credit risk: Medium.
  - TALF (U.S.) (March 2009): support to structured product markets; credit risk: Low-medium.
- Appendix IV — Lender-of-Last-Resort issues:
  - LOLR provides liquidity to solvent and viable entities facing sudden temporary liquidity pressures.
  - Access principles: limit to solvent and viable entities; some central banks argue for lending to all regulated solvent banks to reduce contagion risk.
  - Conditions and safeguards: adequate collateralization, pricing above standing credit facility rate, supervisory conditionality, government support if needed.
  - Communication: retain flexibility, avoid pre-commitment, disclose enough for contingency planning, consider delayed disclosure to minimize stigma.

*Source: IMF Working Paper — wp17152, Section 1 (and associated boxes and appendices).*

### 1. Securities Markets vs. Bank Lending .................................................................................

### 1. Securities Markets vs. Bank Lending

### Introduction and purpose
- Market freezes and market liquidity squeezes have occurred in the past with negative consequences; example: in September 2008, liquidity in the U.S. asset-backed commercial paper (ABCP) market evaporated.
- During exceptional episodes central banks expanded operation types, lengthened lending duration, and broadened counterparties and eligible collateral.
- As capital markets deepen and banks become less central, official support beyond traditional lender-of-last-resort (LOLR) lending may be needed to maintain financial stability.
- The paper develops a framework to analyze central bank emergency support to securities markets by answering four questions: (1) why should central banks support market functioning?; (2) which markets should be supported?; (3) when should support be given?; and (4) how should central banks support markets?

### Why central banks should support market functioning
- Central bank support helps meet mandates regarding the maintenance of financial stability and price stability.
- Identified intermediate objectives of market support:
  - safeguarding the flow of credit;
  - averting fire sale dynamics;
  - supporting the transmission of monetary policy.
- Financial stability risks arise when:
  - securities dealers cannot sell or refinance inventory, reducing their ability to make markets;
  - financial firms (including asset managers) face increasing liquidity demands from end-investors or reduced access to funding, possibly resulting in fire sales (forced sales that drive prices below intrinsic value).
- Significant market failures prompting consideration of intervention can result from asymmetric information, incomplete markets, or externalities.
- Ex-ante regulatory measures can be tightened but cannot eliminate tail events that may freeze key markets, thus necessitating contingency for intervention.

### Which markets to support
- Intervention should be truly a last-resort action; costs of not intervening must outweigh potential costs of intervention.
- Risks of moral hazard arise if actions are perceived as not last-resort.
- Official support is best directed at securities markets that are:
  - temporarily impaired but normally liquid;
  - relatively large and/or highly connected to the financial system;
  - markets where credit risk is typically low.
- Benchmark money and bond markets are identified as natural candidates for support.

### When to intervene (timing and diagnosis)
- Timing is complicated because underlying market imperfections driving illiquidity are not easily identifiable.
- Central banks need to analyze a wide set of indicators to diagnose the nature of the problem and determine when to start an intervention.
- Useful inputs for timing:
  - qualitative information from market participants;
  - quantitative indicators used in FX interventions;
  - measures of pricing noise and of violations of no-arbitrage conditions.

### How to intervene (instruments and modalities)
- Broad categories of central bank support to market functioning:
  - structural measures;
  - provision of liquidity to financial intermediaries as LOLR;
  - direct intervention as market makers of last resort (MMLR);
  - facilitating markets.
- Choice of instruments depends on whether the root cause is a loss of funding liquidity or a loss of market liquidity:
  - If lack of funding liquidity is the root problem:
    - use measures such as repos to sustain collateral valuations or resolve uncertainty about creditworthiness of key intermediaries (e.g., securities dealers).
  - If fragility of market liquidity is the root problem:
    - use tools to remove some price risk (for example, reverse auctions) or reduce information asymmetries (through direct purchases).
- Central bank interventions differ from large-scale asset purchases aimed at providing additional monetary accommodation at the zero lower bound.

### Relationship to existing literature and paper’s contribution
- The paper builds on and extends discussions of central banks as market makers of last resort (MMLR) and situates MMLR within the broader context of official support to securities markets.
- Existing literature has often treated MMLR as an extension of LOLR; this paper provides a conceptual framework and systematic discussion of central bank actions to support markets, contributing to the more recent and limited literature on central bank roles in securities market interventions.

*Source: IMF Working Paper — wp17152, Section 1.*

### Box 1. Central Bank Actions to Support Market Functioning

### Box 1. Central Bank Actions to Support Market Functioning

### Categories and Rationale for Official Support
- Central bank actions to support market functioning can be divided into four categories: structural measures (securities lending programs and collateral policies), liquidity provision (LOLR-type operations), facilitation of markets (alternate trading venues), and direct intervention (market-maker-of-last-resort / buyer-of-last-resort activities).
- Structural measures change the volume of securities available; collateral policies influence liquidity premiums; liquidity provision helps securities dealers facing funding constraints; alternate trading venues help when counterparties are unwilling to transact; direct intervention can remove underlying financial risk and restore price discovery.
- The case for supporting securities markets depends on:
  - the relative importance of securities markets for financial intermediation;
  - their interconnectedness with the rest of the economy;
  - the types of intermediaries normally responsible for provision of market liquidity.
- Trend noted: principal trading firms (PTFs) and other nonbanks replacing banks as market makers challenges resilience of market liquidity and traditional central bank emergency liquidity provision.

### Objectives of Emergency Support
- Emergency support is exceptions-based and considered only when there is a severe disruption to securities markets.
- Three core objectives tied to securities market functioning:
  - Maintaining a satisfactory flow of credit:
    - Short-term funding market freezes (for example, for commercial paper (CP)) can prevent firms from meeting payroll and working capital needs; long-term funding market freezes can impede investment.
  - Countering fire-sale dynamics:
    - Price falls below fundamental value can trigger liquidation spirals, margin calls, weakened balance sheets, reduced market-making, and feedback loops reducing flow of credit.
  - Supporting the transmission of monetary policy:
    - Severe disruptions can undermine transmission; ECB and BOE explicitly identify transmission support as a motive for intervention (ECB Decision of 14 May 2010—ECB/2010/5; BOE Sterling Monetary Framework “Red Book” statement).
- These objectives are interrelated: a stoppage in primary markets can cause secondary market demand to fall (primary → secondary causality) and vice versa (secondary → primary causality).

### Process: Monitoring, Triggers, Diagnosis, Program Design
- Emergency support involves: monitoring and assessing markets; determining triggers threatening financial stability; diagnosing the problem; designing a program.
- Monitoring should emphasize markets within the “intervention frontier.”
- Key monitoring elements include flow-of-credit indicators (issuance volumes, credit spreads) and fire-sale indicators (turnover volumes, bid-ask spreads, price volatility measures).
- Central bank risk mitigation measures include counterparty assessments, haircuts and margins, minimum credit criteria, special purpose vehicles, and government indemnities.

### Which Markets Should Be Supported (Criteria)
- Relevant criteria to assess candidate markets:
  - (1) Liquidity in normal times (outstanding volumes, turnover ratios, bid-offer spreads, price impact).
  - (2) Relative size and/or importance to the financial system (interconnectedness, ownership concentration, role in price discovery).
  - (3) Credit quality (minimum credit standards to limit central bank balance sheet risk).
- Benchmark money and bond markets are natural candidates because they tend to be:
  - largest;
  - most widely held;
  - safe assets and high-quality collateral; and
  - central to price discovery and monetary transmission.
- The “intervention frontier” concept: in a three-dimensional normalized space (importance, liquidity, credit quality), securities within the frontier are potential candidates for support; those beyond are not.

### Empirical Indicators and Triggers for Intervention
- Useful indicators (analogous to FX intervention metrics):
  - bid-offer spreads;
  - measures of price impact;
  - pace of interest rate changes and interest rate volatility;
  - turnover and composition changes in secondary markets;
  - credit spreads and implied default probabilities.
- Signs that market participants have withdrawn (asymmetric information / uncertainty) include:
  - increased price volatility;
  - wider-than-usual bid-offer spreads;
  - sharp widening in corporate bond spreads (BOE example during GFC).
- An unusually fast and large decline in market activity is a strong signal of problems; liquidity begets liquidity and depth/resilience erode as volumes decline.
- Repo and financing market indicators are critical because failures here lead to dealer funding constraints and reduced market liquidity.
- Qualitative information from market participants is essential and may be as important as lagged quantitative indicators; authorities should maintain a close dialog while being mindful of potential informational bias.

### Triggers Specific to Objectives
- Triggers indicating a disruption to the flow of credit:
  - judgment that firms cannot feasibly raise funds at reasonable prices for working capital or investment;
  - sharp falls in primary market volumes or tenors;
  - sharp widening in credit spreads and fall in issuance (BOE CP Program example).
- Triggers indicating fire-sale risks:
  - failing secondary market activity and large deviations of prices from fundamentals;
  - forced sales by asset managers from investor redemptions;
  - reduced dealer inventories and unwillingness to make markets;
  - loss of financing by dealers or leveraged investors;
  - heightened uncertainty about asset values leading investors to refuse to hold assets.

### Key Tables and Examples (selected figures from analysis)
- Table 1 — Securities Markets vs. Bank Lending (September 30, 2016; In US$ billions)
  - Euro Area: (1) Debt Securities Outstanding 16,402; (2) Bank Loans Outstanding 13,319; In Percent (1)/(2) 123; (3) Central Gov’t Securities 7,689; In Percent [(1)-(3)]/(2) 65
  - Korea: (1) 1,771; (2) 1,833; In Percent 97; (3) 543; In Percent 67
  - Mexico: (1) 710; (2) 242; In Percent 293; (3) 375; In Percent 138
  - United Kingdom: (1) 5,915; (2) 1,951; In Percent 303; (3) 2,688; In Percent 165
  - U.S.A.: (1) 37,614; (2) 8,566; In Percent 439; (3) 16,505; In Percent 246
  - Sources listed: BIS, Bloomberg, ECB, U.S. Federal Reserve System (The Fed), BOE, Banco de Mexico.
  - Note: For Mexico, “Only credit by private banks is included.”
- Table 2 — Selected Examples of Market Support since 2007 (Security types, liquidity in normal times, relative size/importance, minimum credit rating)
  - Euro Area:
    - Government bonds (SMP) — Very liquid; Very important; BBB-/Baa3
    - Covered bonds (CBPP1) — Liquid; Important; BBB-/Baa3 (note: covered bonds required at least one rating no lower than AA, while none of its ratings could be below BBB-/Baa3)
  - U.K.:
    - Commercial paper — Very Liquid; Very Important; A1/P1
    - Corporate bonds — Liquid; Very Important; A-
  - U.S.:
    - Commercial paper — Very Liquid; Very Important; A1/P1/F1
    - Asset-back securities — Very Liquid; Very Important; AAA
  - Korea:
    - Commercial paper — Liquid; Important; No
    - Corporate bonds — Very Liquid; Very Important; No
  - Indonesia:
    - Government bonds — Very Liquid; Very Important; No
  - Mexico:
    - Government bonds — Very Liquid; Very Important; No
    - IPAB bonds (Deposit Insurance Agency) — Liquid; Very Important; No
  - Notes:
    - Not all securities within a given category that meet minimum criteria are accepted; there could be requirements of minimum issuance or tranche sizes.
    - For the euro area, eligibility below BBB-/Baa3 could be granted/maintained based on compliance with an EU-IMF financial assistance program.

### Practical Considerations and Design Elements
- Intervention is rare and operationally challenging; parallels exist with FX intervention.
- Program design should include:
  - clear objectives tied to market functioning metrics;
  - diagnosis of whether problem is loss of funding liquidity, loss of market liquidity, or both;
  - choice of support instrument (repos / collateral swaps / widening eligible collateral; direct interventions to remove price risk via auctions or direct purchases; fixed or variable rate operations);
  - central bank risk mitigation (counterparty assessments; haircuts and margins; minimum credit criteria; special purpose vehicles; government indemnities).
- The minimum credit rating threshold is often set high for private sector securities to limit central bank balance-sheet and taxpayer risk; government bonds are usually treated differently given their status as the least-risky domestic currency asset.

*Source: IMF Staff.*

### Box 2. The Bank of England’s Commercial Paper Purchasing Program

### Box 2. The Bank of England’s Commercial Paper Purchasing Program

### Background and trigger for intervention
- The BOE commenced a program for purchasing commercial paper in February 2009 after market conditions deteriorated to the point where it had become difficult for U.K. corporates to raise funding.
- Key indicators that triggered the program:
  - A sharp widening of the spreads on commercial paper.
  - An associated decline in primary market activity.
  - Secondary market turnover was generally low in normal circumstances.

### Market indicators and graphical elements (as presented)
- Chart annotations and series labels:
  - Y-axis scales shown: 0.0, 0.5, 1.0, 1.5, 2.0, 2.5, 3.0 (left scale); 0, 250, 500, 750, 1000, 1250, 1500 (right scale).
  - Date range on x-axis: Jul-08, Oct-08, Jan-09, Apr-09, Jul-09, Oct-09, Jan-10, Apr-10, Jul-10, Oct-10, Jan-11, Apr-11, Jul-11, Oct-11.
  - Chart series and labels exactly as printed:
    - CP Spread to OIS
    - Weekly purchases and stock purchased
    - BOE CP Purchases
    - Gross CP Issuance (daily avg, GBP m)
    - ECP to OIS (RHS)
    - A1/P1 CP to OIS (RHS)
  - Units and annotations: (GBP millions); Percent.
- Data source caption under figure: Source: Bloomberg and BOE.

### Purpose and intended effect
- The program aimed to restore funding access for high-quality nonfinancial borrowers that had lost access to commercial paper markets by addressing fire-sale dynamics and elevated spreads.
- By purchasing commercial paper, the BOE sought to alleviate acute funding stress and support market functioning where primary issuance and market liquidity had declined.

### Relation to broader market-stability actions (context in text)
- The program is presented alongside other examples of central-bank market-support measures used during the crisis (e.g., Fed’s AMLF, TSLF, PDCF), illustrating a menu of interventions to counteract sharp credit-spread moves and rapid outflows.
- Emphasis placed on assessing indicators that impact objectives: the flow of credit, fire sales, and the transmission of monetary policy, and on the need for timely judgment calls by authorities.

### Implementation considerations (inferred from adjacent discussion)
- Triggers for intervention included sharp moves in credit spreads accompanied by heavy mutual fund redemptions or abrupt declines in primary issuance.
- The choice of intervention tool (direct purchases like the BOE’s program, repo operations, collateral swaps, or facilities for dealers) depends on the diagnosed source of the problem—loss of funding liquidity versus loss of market liquidity—and on market structure and counterparty considerations.

*Source: Bloomberg and BOE.*

### 2010. There was also a program offering options on TSLF over periods of heightened collateral pressure

### 2010. There was also a program offering options on TSLF over periods of heightened collateral pressure

### Primary Dealer Credit Facility (PDCF)
- Established in March 2008 to allow PDs access to overnight funding collateralized with investment-grade securities at the same rate applied to Primary Credit Facility (i.e., discount window borrowings by depository institutions).
- In September 2008, the range of eligible collateral was expanded to include all collateral that could be pledged in the triparty repo system.
- Initially announced to be available for at least six months; after extensions, it operated until May 2009, for a total of 14 months.

### A Loss of Market Liquidity — key consequences
- Asset managers may not be able to liquidate securities to meet redemption pressures, which may lead to contagion if some segments are liquidity-constrained.
- Securities dealers, under pressure (perhaps because of a loss of funding liquidity), could face solvency problems if asset prices are depressed significantly below their fundamental values.
- Normally creditworthy nonfinancial borrowers may lose access to short- and long-term funding markets, directly impacting the broader economy.
- During periods of stress, the liquidity and solvency of banks and nonbank financial issuers may be adversely impacted, reducing their ability and willingness to extend credit to the economy.
- Sovereign issuers may lose access to funding where secondary market freezes lead to failures in the primary market.

### Intervention methods — overview and risks
- Two broad approaches:
  - Reverse auctions
  - Bilateral direct (on-market) purchases
- Common trade-offs:
  - Auctions: higher ex-ante and ex-post transparency; facilitate price discovery and competitive neutrality; risks include collusion and narrow participation.
  - Direct purchases: greater discretion and speed; suited for non-standardized/diverse instruments; risks include lack of transparency, competitive neutrality concerns, dealing at nonmarket prices, and front-running.
- Table 4 (summary in text) lists appropriate circumstances and risk profiles for each method.

### Reverse auctions — design choices and guidance
- Auctions add demand to an unbalanced market and aid price discovery; useful where there is uncertainty about asset values.
- Two main policy targets (mutually exclusive in one operation):
  - Targeting a rate — fixed-rate, full-allotment: accepts all bids at the announced fixed rate/spread; suitable to put a ceiling on rates but requires confidence in rate choice and acceptance of uncertain volume and financial risk.
  - Targeting a volume — variable-rate, fixed-volume: sets volume and lets market reveal supply at different prices; supports price discovery and better controls financial risk.
- Allocation methods in variable-rate auctions:
  - Uniform-priced auctions — all successful bidders allocated at the same rate; helps eliminate the winners’ curse.
  - Multiple-price auctions — successful bidders allocated at their bid rate; provides more information on the supply curve and may be less prone to collusion.
- Auction sizing guidance:
  - Regular small auctions can provide reference pricing when price discovery is the major issue.
  - Auctions must be large enough to be meaningful and representative of wider market transactions if they are intended to remove market risk.

### Direct purchases — when and risks
- Preferred when prices are falling precipitously, instruments are nonstandard, or auctions would take too long.
- Offer immediate, forceful response to market stress.
- Risks: reduced transparency relative to auctions; potential misunderstanding of central bank intent; unequal pricing access in thin markets; competitive neutrality concerns.
- Recommendation: bar for using direct bilateral interventions should be relatively high; favor more transparency and neutrality when possible.

### Case examples — Bank of England programs
- Box 5: BOE Commercial Paper Program (February 2009)
  - Issuer eligibility: Sterling-denominated issuance of nonfinancial companies making a material contribution to the U.K. economy.
  - Maturity: initially three months; ultimately adjusted to any maturity from one week to three months.
  - Pricing: tiered margin over OIS by credit rating: A1/P1/F1 75 basis points (bps), A2/P2/F2 125 bps, A3/P3/F3 300 bps for primary market issues; the higher of the above or the initial issue spread for secondary market purchases plus a 25-bps fee.
  - Counterparties: dealers acting as principal and secondary market holders authorized for the purposes of the Financial Services and Markets Act.
  - Facility structure: window open daily between 10 a.m. and 11 a.m. for purchases at the fixed rates noted above; no individual daily results published — a weekly summary of volumes purchased was released each week.
  - Risk management: BOE applied an issuer limit known only to the issuer.
  - Exit: BOE announced 12 months’ notice of closure; facility closed to new issuance in November 2011.
- Box 6: BOE Corporate Bond Program (March 2009)
  - Objective: improve price discovery as corporate bond spreads had widened.
  - Initial frequency: three auctions per week; later reduced to one purchase and one sales operation per week.
  - Eligible securities: U.K. sterling–denominated unsubordinated corporate bonds of credit rating BBB- or higher; at least one year to maturity; minimum issue size £100million.
  - Auction calibration: BOE stood ready to purchase up to £2 million or £5 million pounds of each eligible bond (depending on outstanding volume) at least once a week.
  - Participants: wholesale market making firms that were BOE counterparties in open market operations.
  - Format: uniform price auctions; purchases subject to a minimum clearing spread; offers specified as a spread to a reference U.K. gilt.
  - Limits: no disclosed per-dealer volume cap, but BOE imposed an undisclosed total volume limit per line to avoid undermining liquidity.
  - Exit and outcomes: auctions to sell began January 2010; regular auctions ceased June 2013 (facilities remained reactivatable); scheme formally closed August 2016; program was successful with credit spreads falling and smaller purchases in early 2012 when euro-area pressures reemerged.

### Non-recourse instruments — logic and pricing considerations
- Purpose: combine funding and price insurance to address fire sales and funding-driven disposals.
- Mechanism: central bank provides collateralized funding with an embedded option (nonrecourse lending) relieving borrower of repurchase obligation if collateral falls beyond a threshold, thus limiting downside risk for borrower.
- Pricing objectives:
  - Incentivize participation and minimize adverse selection and moral hazard.
  - Compensate central bank for optionality (selling a put) — may require higher interest rate, a fee, or a higher haircut.
  - Use option pricing approaches where possible; recognize judgment is required for tail events with sparse price observations.
- Haircut considerations:
  - Too large a haircut may inflict perceived excessive losses on investors and fail to prevent fire sales.
  - Too low a haircut increases risk to authorities and moral hazard.
- Relative attractiveness:
  - Pricing nonrecourse repos may be easier than outright asset purchases by the central bank (investor of last resort).
- Historical use:
  - The Fed incorporated nonrecourse elements during the GFC to stem fire sales resulting from redemption pressures faced by MMMFs and when end-investors pulled back from ABS markets.

*Source: IMF staff, extracted from wp17152 (2010 content section).*

### Box 7. The Federal Reserve’s AMLF to Address Fire Sale Risk

### Box 7. The Federal Reserve’s AMLF to Address Fire Sale Risk

### Program design and purpose
- Established because the Fed could not directly purchase ABCP and needed to respond quickly to severe redemption pressures faced by MMMFs and resultant fire-sale dynamics.
- Structure: lending to financial institutions against eligible ABCP via nonrecourse repos, effectively providing a Fed guarantee on this short-term paper.
- Operational incentive: financial institutions could buy the ABCP from eligible MMMFs at amortized cost and fund them at the primary credit rate; given the positive cost of carry, institutions were incentivized to take part.
- Launch date: September 19, 2008.
- Program peak size: US$147 billion.
- Market signal: peak spread between ABCP and AA-rated CP exceeded four percentage points; thereafter the spread diminished rapidly towards pre-crisis levels.

### Eligibility and operational features
- Eligible counterparty institutions:
  - U.S. depository institutions,
  - U.S. bank holding companies,
  - U.S. branches and agencies of foreign banks.
- ABCP eligibility criteria:
  - Purchased from MMMFs (operating under Securities and Exchange Commission Rule 2a-7) that had experienced net redemptions exceeding 5 percent of assets under management in a single day, or 10 percent in a period of 5 business days or less.
  - Issued by a U.S. issuer in U.S. dollars.
  - Minimum credit rating of A1/P1.
  - Purchased on or after September 19, 2008.
- Loan tenor and limits:
  - Loans provided were for the maturity of the ABCP, to a maximum of 120 or 270 days for depositary and non-depository institutions, respectively.
- Pricing, collateral, and risk allocation:
  - No haircuts, fees, or additional spreads to be paid.
  - Program was nonrecourse to the borrowing banks, which in effect guaranteed repayment of the ABCP.
  - Transactions did not incur any additional capital charges.

### Outcomes and metrics
- Program effectiveness evidenced by containment and ultimate reversal in spreads.
- Peak program size: US$147 billion.
- Peak spread: over four percentage points between ABCP and AA-rated CP.
- Data frequency notes from source figure:
  - AA-Spreads are at daily frequency; ABCP outstanding data and the AMLF size data are weekly.
  - ABCP rated equivalent to AA-long term rating.
  - Units showing the AMLF’s size are magnified by a factor of 10 on the left y axis.

### Relation to special purpose vehicles (SPVs) and moral hazard
- Legal constraints led the Fed to set up vehicles to which it lent and which in turn purchased targeted securities, rather than purchasing directly.
- Publicly established separate vehicles facilitate ring-fencing of assets and clarity about risk-sharing with the sovereign.
- Privately incorporated SPVs incentivized investor screening of asset quality, minimizing moral hazard via haircuts (investor takes first loss) and duration-matched funding arrangements.
- Nonrecourse feature limited investor downside in some U.S. programs.

### Considerations for effectiveness and exit
- Key success factors:
  - Authorities must demonstrate understanding of the problem and commitment to deal with it.
  - Open-ended programs (time and volume) send strong commitment signals; flexible guidance can demonstrate commitment without tying authorities to fixed times or quantities.
- Ending the program:
  - Programs should end when the market conditions that prompted their introduction have been satisfactorily addressed (restored flow of credit and/or risk of fire sales largely passed, evidenced by lower price volatility and narrowing spreads).
  - Programs with announced time or volume limits could be shut down early; open-ended programs can also be closed when appropriate.
  - Pricing matters: funding rates should incentivize participants to resume market-based activities; rates set too low risk central bank buying more securities than desired, rates set too high may impede market recovery.
  - Example: Fed’s TALF where ABS markets were resuscitated well short of the program limit (US$70 billion as against a limit of US$1 trillion).
- Unwinding the program:
  - For short-term instruments (e.g., CP markets) unwind naturally follows program cessation.
  - For longer-term instruments, options are to allow assets to roll off or to sell prior to maturity; context and any initial commitment to hold to maturity must be considered.
  - When assets are loans to SPVs that purchased securities, there may be no option for early or discretionary balance sheet unwind.

### Crisis coordination, monetary policy, and operational considerations
- Coordination:
  - Securities market support should be part of a broader crisis management package; isolated support may be insufficient if systemic banking risks remain.
  - Close coordination across monetary, fiscal, and financial stability policies is emphasized.
- Monetary policy impact:
  - Emergency support actions generally increase the monetary base and may put downward pressure on short-term interest rates.
  - Central banks should sterilize marginal liquidity and/or ensure interest rates do not fall below targeted levels if securities market support eases monetary conditions more than desired.
  - Sterilization options include selling short-term government securities or the central bank’s own securities; frameworks often include an interest rate floor where the central bank pays interest on reserves.
  - Historical note: Only in October 2008 was the Fed granted the authority to pay interest on reserves under the Emergency Economic Stabilization Act of 2008.
- Legal, risk management, and operational issues:
  - Some central banks face legal constraints on types of securities they can purchase or counterparties they can deal with.
  - Interventions may involve complex securities requiring specialist custodians, valuation agents, trading services, and asset or risk managers.
  - Central banks should be fully collateralized with adequate haircuts and margining provisions; exception is nonrecourse repos which inherently do not allow margining.
  - To mitigate market risk without taking credit risk, central banks can book securities on a hold-to-maturity basis.

### Transparency, accountability, and government role
- Communication:
  - Clear communication demonstrating understanding and willingness to act is critical; poor communication may worsen problems and require prolonged interventions.
  - Balance needed between ex-ante transparency and avoiding premature disclosure that could undermine stabilization efforts.
- Government involvement:
  - Central banks should be sufficiently capitalized; indemnities or commitments to replenish capital may be needed when intervention risks exceed tolerance.
  - Off-balance sheet vehicles can preserve central bank autonomy while allowing the Treasury to cover losses and receive profits, clarifying fiscal cost.
  - Requesting indemnities effectively involves the government in intervention decisions and assumes government solvency and willingness to take on risks.

### Preparedness, stakeholder coordination, and monitoring
- Decision-making framework:
  - Establish intra-stakeholder committee (at least governor, supervisor, minister of finance) meeting regularly (perhaps twice yearly) with more frequent meetings as issues become acute.
  - Operational working group to anticipate, prepare, and monitor interventions; keep records for ex-post accountability.
- Structural preparedness:
  - Pre-establish SPVs, accounting, governance arrangements, formalized levels of government support, and counterparty legal agreements (e.g., for nonrecourse loans).
- Ongoing monitoring and testing:
  - Operational group to provide regular updates, scenario analyses, and assessments of potential contagion.
  - End-to-end testing and simulations to identify gaps and improve procedures.
  - Operational group to prepare a schedule of haircuts where repos or asset swaps are used.
- Continuous coordination and information sharing within and across stakeholders to inform program performance, changes in market conditions, and exit structure and timing.

### Conclusion and guiding principles
- Primary objectives for emergency support of securities markets:
  - Ensure credit flow is not unduly disrupted, avoiding detrimental real economy impacts.
  - Mitigate the risk that financial asset fire sales could threaten solvency in important parts of the economy.
- High bar for intervention:
  - Actions should be targeted at markets that are normally liquid, relatively large and important (interconnected), and of high credit quality.
  - Trigger interventions only when financial stability and monetary policy transmission objectives are under threat, typically signaled by unusually large changes in trading activity and prices not fully explained by fundamentals.
  - Design actions to address underlying problems while incentivizing participants to reenter markets and minimizing risks to the central bank.
- Minimize moral hazard:
  - Avoid generating expectations of bailouts; do not publicly pre-commit to support markets.
- Preventative measures:
  - Strengthen ex-ante liquidity regulation and asset managers’ liquidity management tools to reduce tail risks.
  - Recognize the interaction between regulation/supervision and modalities of official support as an important area for further analysis.
- Emergency support should be coordinated within a broader crisis management package; restoring market confidence may require forceful, coordinated responses across institutions and policy areas.

*Source: The Fed and IMF staff.*

### Appendix I. Market Failures—Revisiting the Theory

### Appendix I. Market Failures—Revisiting the Theory

### Market-failure sources that can trigger market freezes
- Three sources identified: (1) asymmetric information; (2) incomplete markets; and (3) externalities.
- Market freezes occur when markets cannot deliver the best outcome; official intervention can, in theory, make at least some agents better off without making anyone worse off by creating conditions for trade to resume.

### Asymmetric information
- When some traders are better informed about fundamental asset values, adverse selection can cause market makers to reduce provision of market liquidity.
- Result: uncertainty about appropriate fundamental-driven asset prices and reduced market-making.

### Incomplete markets
- Some risks cannot be hedged; market-makers normally provide liquidity insurance by facilitating conversion of assets into cash before maturity (Davis 1994).
- Investors cannot buy insurance against large liquidity shocks; under heightened uncertainty, investors sell less liquid assets, putting downward pressure on prices.

### Externalities from selling behavior
- Financial firms’ large exposures to liquidity risk can create externalities when forced sales depress asset prices (Acharya, Krishnamurthy, and Perotti 2011).
- Price drops reduce collateral values, worsen funding conditions, and cause additional sales; market making declines as dealers’ capital bases are eroded and inventories rise.

### Interactions among failures
- Market failures are not mutually exclusive and can reinforce each other.
- Examples: absence of insurance markets may be due to information asymmetries; incomplete markets lead to hoarding of liquid assets, worsening adverse selection (Malherbe 2014).

---

### Appendix II. Foreign Exchange Intervention Channels

### Relevance to securities markets
- FX intervention literature aligns with securities market intervention on motives, channels of influence, and indicators/techniques.
- Objective of combating excessive volatility and exchange rate overshooting has an analogue in securities markets (Moreno 2005).

### Channels of influence
- Signaling channel: intervention signals about future monetary policy and the equilibrium exchange rate (Dominguez and Frankel 1993; Ishii and others, 2006) — analogous to asymmetric information motivations in securities markets.
- Portfolio balance channel: intervention changes currency composition of market portfolios, prompting supportive follow-on transactions — applicable to securities markets.
- Microstructure/order-flow channel: interventions influence markets via microstructure and order flow (Evans and Lyons 1999; Dominguez 2003; Eckhold and Hunt 2005) — transferable to securities markets.

### Indicators of market dysfunction
- Relevant indicators include: acceleration in exchange rate changes, increasing volatility, widening bid-offer spreads, and changes in composition and magnitude of market turnover (Canales-Kriljenko, Guimaraes and Karacadag 2003).
- Assessing when markets have become dysfunctional is challenging and is state- and market-dependent; not amenable to all-encompassing rules of thumb.

---

### Appendix III. Past Programs to Support Securities Markets

### Objectives and common design features
- Programs aimed to support flow of credit, prevent fire-sale dynamics, and in some cases support monetary policy transmission.
- Country-specific designs varied by targeted markets, legal constraints, and political considerations.
- Common features: nonrecourse element limiting risks to private sector participants; support for one market often implied support for related markets or institutions.
- Use of intermediary vehicles or SPVs was common to enable participation by entities the central bank could not own outright.

### Selected program highlights (start dates and salient features preserved)
- Securities Market Program (Euro area) (May 2010)
  - Support: Selected euro area sovereign bond markets; Euro area sovereigns.
  - Intermediaries: Market makers eligible to participate in Euro system monetary policy operations.
  - Objectives: Allow monetary transmission; support easing of funding conditions; ensure depth and liquidity.
  - Main features: ECB purchased bonds in the secondary market; Credit risk: High.

- Covered Bond Purchase Program (Euro area) (July 2009)
  - Support: Euro area covered bond markets; Euro area banks.
  - Intermediaries: Market makers eligible to participate in Euro system monetary policy operations.
  - Objectives: Improve market liquidity; encourage easing of credit conditions; support banks issuing covered bonds; spur credit growth.
  - Main features: ECB purchased bonds in the primary and secondary markets; Minimum quality and outstanding requirements; First stage (CBPP 1) limited to €60 billion; Credit risk: High.

- Secondary Market Purchases of GSecs (India) (August 2013)
  - Support: Government bond market.
  - Intermediaries: Market makers.
  - Objective: Reduce yields in the longer part of the curve.
  - Main features: Purchases via OMO auctions; 10-year yields fell by 51 bps after announcement.

- Bond Market Stabilization Fund (Korea) (November 2008)
  - Support: CP and corporate bond markets; CP and corporate bond issuers.
  - Intermediaries: Market makers.
  - Objectives: Improve corporate bond market liquidity; allow CP and corporate bond markets to function.
  - Main features: Fund set up by BOK in conjunction with insurers and other institutional investors; Credit risk: High.

- BPAs Repurchase Auctions (Mexico) (November 2008)
  - Support: Mutual fund; Bond markets.
  - Objective: Provide liquidity to mutual funds; prevent further selloffs.
  - Main features: Bank of Mexico offered to buy up to MXN150 billion of bonds issued by the deposit insurance agency; MXN146.7 billion of this amount was utilized.

- Commercial Paper Program (U.K.) (March 2009)
  - Support: CP market; CP issuers.
  - Intermediaries: None.
  - Objective: Reduce spreads in the CP market; allow the primary CP market to function.
  - Main features: BOE purchased newly issued CP in reverse auctions; Minimum quality requirement; Issuers had to contribute materially to the U.K. economy; Penalty rates applied; BOE functioned as an agent for the Treasury; Treasury indemnified BOE against losses.

- Corporate Bond Purchase and Sale Program (U.K.) (March 2009)
  - Support: Corporate bond market; Corporate bond issuers.
  - Intermediaries: Market makers.
  - Objectives: Reduce spreads; stimulate new issuance of £ corporate bonds; trigger portfolio rebalancing.
  - Main features: BOE purchased bonds trading in the secondary market in reverse auctions; Minimum quality requirement; Credit risk: High.

- AMLF (U.S.) (September 2008)
  - Support: ABCP market; Money market mutual funds.
  - Intermediaries: Banks.
  - Objectives: Prevent fire sales in the ABCP market; support MMMFs; support structured product market.
  - Main features: Banks purchased ABCP from MMMFs; Banks refinanced the paper at the Fed nonrecourse; No capital charge for banks; Minimum quality requirement; No haircut; Credit risk: High.

- CPFF (U.S.) (October 2008)
  - Support: Commercial paper market; Commercial paper issuers.
  - Intermediaries: SPV (CPFF LLC).
  - Objectives: Allow primary CP market to function; support CP issuers, banks, and structured product market.
  - Main features: Purchase 90-day CP and ABCP from highly rated U.S. issuers; CP was held to maturity and nonrecourse; Primary dealers acted as transaction agents; Private sector firms supported asset management and custody; Minimum quality requirement; Restrictions on amounts issued by facility participants; Issuers paid a signup fee and paid short rates plus spreads; No haircut; Credit risk: Medium.

- TALF (U.S.) (March 2009)
  - Support: Structured product market; Structured product issuers.
  - Intermediaries: SPV (TALF LLC); SP investors; Primary dealers.
  - Objectives: Support structured product issuers; restore functioning of the primary SP market; support secondary SP market; support consumers and businesses funded by SP market.
  - Main features: Provided nonrecourse term funding for SP, mainly ABS issued after 1/1/2009; Facility was multiyear, providing long-term, held-to-maturity financing for purchasers from issuers; Private sector firms assessed credit and provided custody; Minimum quality requirement; TALF led to overall spread tightening in the SP markets due to signaling effect; Helped SP originators via reduction of rollover risk; Haircuts were required; U.S. Treasury took 2nd loss position; Credit risk: Low-medium.

---

### Appendix IV. A Summary of Lender-of-Last Resort Issues

### Role and scope of LOLR
- LOLR provides liquidity—reserve money, foreign exchange (FX), or securities—at the central bank’s discretion to one or a small group of solvent and viable entities facing sudden and temporary liquidity pressures that could undermine financial stability.
- Performed under the central bank’s financial stability mandate, generally set out in legislation.

### Principles and access
- LOLR should be provided only to solvent and viable entities, assessed on an ongoing basis; differentiating liquidity from solvency may require judgment and supervisory consultation.
- Some central banks limit lending to systemically important institutions, but there is a strong argument for lending to all regulated solvent and viable banks to reduce contagion risk.
- Support to nonbanks may be considered in some instances, but must be carefully structured, restricted to certain regulated and supervised entities, and not viewed as a pre-commitment. Security dealers and systemically important central clearing counterparties may be an important subgroup.

### Conditions and safeguards
- LOLR support should meet temporary liquidity needs with a credible prospect of repayment on or before maturity.
- Central banks and counterparties should consider why alternative liquidity sources are unavailable; LOLR should not be used for capital management exercises (e.g., debt buybacks).
- Operations should be adequately collateralized; central banks may accept any unencumbered asset if ownership can be legally transferred, priced, and risk managed.
- Pricing of central bank credit should be above the cost of monetary policy lending operations, including the standing credit facility rate, to balance incentives and viability.
- Controls to minimize moral hazard are needed, including supervisory intrusion and conditionality; funding plans should be prepared early with supervisory input.
- Government support should be available when central banks have concerns about the counterparty, collateral, scale, length, or exit strategy to preserve central bank autonomy and balance-sheet protection.
- Communication: central banks should retain flexibility in published frameworks, avoid pre-commitment, disclose enough to allow contingency planning, and consider delayed disclosure to minimize stigma while preserving policy effectiveness.

*Source: wp17152 - Appendix I. Market Failures—Revisiting the Theory*

### References

### References

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### Foreign exchange intervention, order flow, and microstructure
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### Market microstructure, high-frequency trading, and flow toxicity
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*Source: wp17152 - References (wp17152 - References).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2017/wp17152.pdf_