COVID-19 and Fed emergency facilities
by Ashish Deccannawar abstract COVID-19 led to systemic liquidity crisis around March 2020. The Federal Reserve Board (Fed) took extraordinary efforts and reacted with a lightning speed to alleviate this exogenous shock. Fed created number of liquidity facilities under the section 13(3) of the Federal Reserve Act citing unusual and exigent circumstances. Each and every facility played a critical role in not only stabilizing the American economy but also leading to rapid recovery. The aim of this article is to provide view on effectiveness of these emergency facilities that stabilized the financial markets and highlight the key differences between 2008 financial crisis era facilities and COVID-19 related emergency facilities.
quicker announcement but lag in the operational details During the COVID-19 crisis the Fed re-introduced most of the 2008 crisis era facilities without taking much time. However, the Fed lagged in providing operational details on how these facilities can be used. Announcements of these facilities did provide the positive signal to the market; however, the initial phase of these facilities lacked guidance on operational implementation on these facilities. Banks in the initial phase struggled and were in the limbo on how they can implement these facilities to benefit the American economy.
reputational challenges associated with the facilities Fed Discount window lending facility is considered as lending of last resort and thus has a stigma associated with tapping into Fed’s discount window facility. One would wonder if the similar stigma is also associated with the Fed’s emergency facilities. Based on the 2008 Financial Crisis experience, it was clear that pretty much most of the large banks have drawn down on the Fed’s emergency facilities that were made available in the Financial Crisis. In the 2020 COVID-19 crisis, banks were likely to tap down on most of the facilities either to manage their liquidity or to achieve affordable funding compared to other expensive funding sources. But how banks reacted to these facilities and whether they draw down on these facilities or not is yet to be seen in the published data.
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