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FRM Part II · FRM Exam Part II · The Failure Mechanics of Dealer Banks

After Bear Stearns' near-failure, the Federal Reserve created the Primary Dealer Credit Facility (PDCF) in March 2008. What was the main purpose of this facility?

The PDCF gave primary dealers overnight loans against collateral from the Federal Reserve. It acted as a lender of last resort for non-depository dealer banks, easing their dependence on short-term repo funding in stress. It provided liquidity, not capital or asset purchases.

  1. ATo provide overnight collateralized loans to primary dealers, reducing their dependence on the repo market during stressCorrect
  2. BTo inject permanent equity capital into investment banks in exchange for preferred shares
  3. CTo guarantee all money market fund balances against losses
  4. DTo purchase distressed mortgage assets directly from dealer banks at par

Explanation

The PDCF offered overnight collateralized borrowing from the Fed to primary dealers, acting as a lender of last resort to non-bank dealers who lacked access to the discount window. It was a liquidity facility, not capital injection, a money fund guarantee, or an asset purchase program.

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