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

Which of the following best captures why the Federal Reserve's creation of the Primary Dealer Credit Facility (PDCF) in March 2008, following Bear Stearns' collapse, was relevant to dealer bank failure mechanics?

The PDCF provided primary dealers with overnight central bank loans against collateral, acting as a backstop when private repo funding vanished. This reduced the risk of forced fire sales of collateral. It did not waive capital requirements or guarantee debts.

  1. AIt gave dealers access to overnight central bank secured lending, reducing the risk that a loss of repo funding would force fire sales of collateralCorrect
  2. BIt removed all capital requirements for broker-dealers
  3. CIt guaranteed the unsecured bonds of all investment banks
  4. DIt allowed dealers to take insured retail deposits

Explanation

Dealers lack ordinary access to a lender of last resort. The PDCF lent overnight against collateral, offsetting the loss of private repo funding and limiting forced asset sales. It did not change capital rules, guarantee bonds, or give deposit access.

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