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FRM Part I · FRM Exam Part I · Anatomy of the Great Financial Crisis of 2007-2009

Which feature of the Federal Reserve's response to the crisis is best described as a response to the freezing of the commercial paper and repo funding markets after September 2008?

The Fed created emergency liquidity facilities, such as the Commercial Paper Funding Facility, that lent to or bought paper from non-bank borrowers and dealers. This addressed frozen short-term wholesale funding markets, rather than raising rates or changing clearing rules.

  1. ACreation of emergency facilities that lent to or purchased paper from non-bank borrowers and dealers, such as the Commercial Paper Funding FacilityCorrect
  2. BRaising the federal funds target rate sharply to attract foreign deposits
  3. CEliminating reserve payments to banks to force lending
  4. DMandating that all banks adopt central clearing for mortgage securities

Explanation

As wholesale funding markets froze, the Fed used Section 13(3) emergency powers to create facilities like the CPFF and dealer lending facilities, providing liquidity beyond traditional banks. The Fed cut rates rather than raising them, and the other options were not responses.

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