On March 17, 2008, in response to the subprime mortgage crisis and the collapse of

Bear Stearns The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The comp ...

, the

Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...

announced the creation of a new lending facility, the Primary Dealer Credit Facility (PDCF). Eligible borrowers include all financial institutions listed as

primary dealer A primary dealer is a firm that buys government securities directly from a government, with the intention of reselling them to others, thus acting as a market maker of government securities. The government may regulate the behaviour and number of ...

s, and the term of the

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

is a

repurchase agreement A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two pa ...

, or "repo" loan, whereby the broker dealer sells a

security" \n\n\nsecurity.txt is a proposed standard for websites' security information that is meant to allow security researchers to easily report security vulnerabilities. The standard prescribes a text file called \"security.txt\" in the well known locat ...

in exchange for funds through the Fed's

discount window The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by ...

. The security in question acts as

collateral Collateral may refer to: Business and finance * Collateral (finance), a borrower's pledge of specific property to a lender, to secure repayment of a loan * Marketing collateral, in marketing and sales Arts, entertainment, and media * ''Collate ...

, and the Federal Reserve charges an

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

equivalent to the Fed's primary credit rate. The facility was intended to improve the ability of broker dealers to access

liquidity Liquidity is a concept in economics involving the convertibility of assets and obligations. It can include: * Market liquidity, the ease with which an asset can be sold * Accounting liquidity, the ability to meet cash obligations when due * Liq ...

in the overnight loan market that banks use to meet their reserve requirements. The creation of the Primary Dealer Credit Facility constitutes the first time in the history of the Federal Reserve that the Fed has lent directly to

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

s, and it reflects the severity of the financial crisis perceived by Federal Reserve Chairman Ben Bernanke.Portfolio:Should the Fed lend to Investment Banks?
Retrieved January 30, 2009. Non-bank institutions such as investment banks exist outside the Fed's regulatory structure. A full detail of the nominal value of loans outstanding through the PDCF is available in the Federal Reserve's public

balance sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a Partnersh ...

.Federal Reserve, factors supplying reserve balances
Retrieved January 30, 2009. During the first three days the facility was open, an average of $13.3 billion was borrowed daily with $28.8 billion in loans outstanding. Lending activity peaked in the first week of October 2008, averaging around $150 billion daily. The facility closed on February 1, 2010. According to the Federal Reserve, all loans extended under this facility were repaid in full, with interest, in accordance with the terms of the facility. In total, $8.95 trillion in loans were made through the Facility.
Federal Reserve Transaction data. Retrieved June 23, 2011.

Changes to the Facility

On July 30, 2008, the

announced several actions to further increase

, including an extension of the Primary Dealer Credit Facility, through January 30, 2009. On September 14, 2008, in the wake of the collapse of

Lehman Brothers Lehman Brothers Holdings Inc. ( ) was an American global financial services firm founded in 1847. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States (behind Goldman Sachs, Morgan Stanley, a ...

, the Federal Reserve announced plans to expand the

eligible at the PDCF to include all collateral eligible in tri-party

repurchase agreements A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...

with the major clearing banks. Originally, only investment-grade debt securities were accepted as collateral through the PDCF. On December 2, 2008, the Federal Reserve announced a further extension of the PDCF through April 30, 2009. On March 17, 2020, the

reopened the PDCF in order to limit the economic impact caused by the COVID-19 pandemic.

Criticisms

The actions of the

, including the creation of the Primary Dealer Credit Facility, have expanded its balance sheet from $800 billion, consisting mainly of safe treasury bills, to over $2 trillion, consisting largely of riskier debt and

mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an 'instrument') which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals (a government agency or investment ba ...

. The decision to expand the eligible

was criticized for further weakening the Fed's

. Also, the Fed's actions have been criticized as a

power Power most often refers to: * Power (physics), meaning "rate of doing work" ** Engine power, the power put out by an engine ** Electric power * Power (social and political), the ability to influence people or events ** Abusive power Power may a ...

grab to become more powerful relative to other financial regulators such as the SEC and the

FDIC The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures credi ...

. Many have criticized the PDCF for lending to

s on the same terms as more tightly regulated financial institutions. They argue that since the Federal Reserve is now lending directly to investment banks that these institutions, along with other private-equity firms and

hedge fund A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as s ...

s, should face broader

regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...

. In a hearing of the

United States House Committee on Financial Services The United States House Committee on Financial Services, also referred to as the House Banking Committee and previously known as the Committee on Banking and Currency, is the United States congressional committee, committee of the United States H ...

on January 13, 2009, Rep. Alan Grayson (D-Fl) pressed Federal Reserve Vice Chairman Donald Kohn about releasing the details of exactly which firms have received funds from the Federal Reserve and specifically how much. The volume of lending at the PDCF was only published in the aggregate, shielding the identity of exactly which institutions used the facility and how much they borrowed. Data disclosing details of the loans is available on the Fed Board of Governors' site.Regulatory Reform - PDCF description
/ref>

References

External links

NYFR PDCF Terms
{{Stock market crashes Federal Reserve System Financial markets

Changes to the Facility

Criticisms

See also

References

External links