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Discussion Paper
Which Dealers Borrowed from the Fed’s Lender-of-Last-Resort Facilities?
Sarkar, Asani; Acharya, Viral V.; Hrung, Warren B.; Fleming, Michael J. (2017-05-10)
During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions?the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the ...
Liberty Street Economics , Paper 20170510

Discussion Paper
The Role of Central Bank Lending Facilities in Monetary Policy
Lee, Helene; Sarkar, Asani (2017-06-30)
Central bank lending facilities were vital during the financial crisis of 2007-08 when many banks and nonbank financial institutions turned to them to meet funding needs as private funding dried up. Since then, there has been renewed interest in the design of central bank lending facilities in the post-crisis period. In this post, we compare the Federal Reserve?s discount window with the lending facilities at three other major central banks: the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We observe that, relative to the other central banks, the Fed?s ...
Liberty Street Economics , Paper 20170630

Discussion Paper
Counterparty and Collateral Policies of Central Bank Lending Facilities
Lee, Helene; Sarkar, Asani (2017-08-16)
In a previous post, we compared the Federal Reserve?s discount window with the standing lending facilities (SLFs) at the Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ). We showed that the Fed?s discount window was less integrated with monetary policy than the SLFs of the other central banks. In this post, we observe that the counterparty and collateral policies of the Fed?s discount window are similarly less integrated with the practices involved in monetary policy operations, in comparison with the other central banks.
Liberty Street Economics , Paper 20170816

Discussion Paper
Did Investor Sentiment Affect Credit Risk around the 2016 Election?
Sarkar, Asani (2017-11-29)
Immediately following the presidential election of 2016, both consumer and investor sentiments were buoyant and financial markets boomed. That these sentiments affect financial asset prices is not so surprising, given past stock market evidence and episodes such as the dot-com bubble. Perhaps more surprising, the risk of corporate default?which is driven mainly by firms? financial health but also by bond liquidity?also fell following the election, as indicated by lower yield spreads. In this post, I show that, although expectations of better corporate and macroeconomic conditions were the ...
Liberty Street Economics , Paper 20171129

Discussion Paper
Options of Last Resort
Denison, Erin; Sarkar, Asani; Hrung, Warren B.; Fleming, Michael J. (2018-02-26)
During the global financial crisis of 2007-08, collateral markets became illiquid, making it difficult for dealers to obtain short-term funding to finance their positions. As lender of last resort, the Federal Reserve responded with various programs to promote liquidity in these markets, including the Primary Dealer Credit Facility and the Term Securities Lending Facility (TSLF). In this post, we describe an additional and rarely discussed liquidity facility introduced by the Fed during the crisis: the TSLF Options Program (TOP). The TOP was unique among crisis-period liquidity facilities in ...
Liberty Street Economics , Paper 20180226

Discussion Paper
Is Stigma Attached to the European Central Bank's Marginal Lending Facility?
Lee, Helene; Sarkar, Asani (2018-04-16)
The European Central Bank (ECB)?s marginal lending facility has been used by banks to borrow funds both in normal times and during the crisis that started in 2007. In this post, we argue that how a central bank communicates the purpose of a facility is important in determining how users of the facility are perceived. In particular, the ECB never refers to the marginal lending facility as a back-up source of funds. The ECB?s neutral approach may be a key factor in explaining why financial institutions are less reluctant to use the marginal lending facility than the Fed?s discount window.
Liberty Street Economics , Paper 20180416

Discussion Paper
Did Banks Subject to LCR Reduce Liquidity Creation?
Shachar, Or; Sarkar, Asani; Roberts, Daniel (2018-10-15)
Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may ?run? (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect ofthe ...
Liberty Street Economics , Paper 20181015

Discussion Paper
Creditor Recovery in Lehman’s Bankruptcy
Denison, Erin; Sarkar, Asani; Fleming, Michael J. (2019-01-14)
Expectations of creditor recovery were low when the Lehman Brothers bankruptcy process started. On the day the firm filed for bankruptcy in September 2008, the average price of Lehman?s senior bonds implied a recovery rate of about 30 percent for senior creditors. A month later the bond price was implying a recovery rate of 9 percent, consistent with results from Lehman?s CDS auction. Two and a half years later, Lehman?s estate estimated that the recovery rate for holding company creditors would be just 16 percent. So, ten years after the filing, how much did creditors actually recover?
Liberty Street Economics , Paper 20190114a

Discussion Paper
How Much Value Was Destroyed by the Lehman Bankruptcy?
Fleming, Michael J.; Sarkar, Asani; Denison, Erin (2019-01-14)
Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. Recovery prospects for creditors, who submitted about $1.2 trillion of claims against the Lehman estate, were quite bleak. This week, we will publish a series of four posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down. Where appropriate, we also consider the liquidation of Lehman?s investment banking affiliate, ...
Liberty Street Economics , Paper 20190114b

Discussion Paper
Lehman's Bankruptcy Expenses
Denison, Erin; Sarkar, Asani; Fleming, Michael J. (2019-01-15)
In bankruptcy, firms incur expenses for services provided by lawyers, accountants, and other professionals. Such expenses can be quite high, especially for complex resolutions. These direct costs of bankruptcy proceedings reduce a firm?s value below its fundamental level, thus constituting a ?deadweight loss.? Bankruptcy also carries indirect costs, such as the loss in value of assets trapped in bankruptcy?a subject discussed in our previous post. In this post, we provide the first comprehensive estimates of the direct costs of resolving Lehman Brothers? holding company (LBHI) and its ...
Liberty Street Economics , Paper 20190115

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