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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Emergency Collateral Upgrades
Mark A. Carlson
Marco Macchiavelli
Abstract

During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.


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Mark A. Carlson & Marco Macchiavelli, Emergency Collateral Upgrades, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2018-078, 15 Nov 2018.
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Subject headings:
Keywords: Financial crisis ; Lender of last resort ; Collateral ; Dealers ; Repo
DOI: 10.17016/FEDS.2018.078
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