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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 Term Auction Facility (TAF), introduced in December 2007, was designed to address the problem that banks avoided the discount window during the crisis?

The TAF auctioned term funds to depository institutions against discount-window collateral, with the rate set by the auction. This reduced the stigma of borrowing, because banks bid anonymously in an auction rather than individually approaching the Fed's discount window and signaling weakness.

  1. ALoans were auctioned to depository institutions against a broad range of collateral, which reduced the stigma attached to borrowing at the discount windowCorrect
  2. BLoans were made only to non-bank broker-dealers at a penalty rate against Treasury securities
  3. CThe Fed bought commercial paper directly from nonfinancial corporations
  4. DThe Fed lent Treasury securities to primary dealers against less liquid collateral

Explanation

The TAF auctioned term funds to depository institutions against collateral acceptable at the discount window, with the rate set by auction. Banks avoided the discount window because borrowing signaled weakness, and the auction format reduced that stigma. The other options describe the PDCF, CPFF, and TSLF respectively.

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