The Federal Reserve's Balance Sheet: An Update

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Chairman Ben S. Bernanke

At the Federal Reserve Board Conference on Key Developments in Monetary Policy, Washington, D.C.

October 8, 2009

The Federal Reserve's Balance Sheet: An Update

To fight a recession, the standard prescription for a central bank
is to lower its target short-term interest rate, thereby easing
financial conditions and supporting economic growth. In the current
downturn, however, the Federal Reserve has faced two historically
unusual constraints on policy. First, the financial crisis, by
increasing credit risk spreads and inhibiting normal flows of financing
and credit extension, has likely reduced the degree of monetary
accommodation associated with any given level of the federal funds rate
target, perhaps significantly. Second, since December, the targeted
funds rate has been effectively at its zero lower bound (more
precisely, in a range between 0 and 25 basis points), eliminating the
possibility of further stimulating the economy through cuts in the
target rate. To provide additional support to the economy despite these
limits on traditional monetary policy, the Federal Open Market
Committee (FOMC) and the Board of Governors have taken a number of
actions and initiated a series of new programs that have increased the
size and changed the composition of the Federal Reserve's balance

I thought it would be useful this evening to review for you
the most important elements of the Federal Reserve's balance sheet, as
well as some aspects of their evolution over time. As you'll see, doing
so provides a convenient means of explaining the steps the Federal
Reserve has taken, beyond conventional interest rate reductions, to
mitigate the financial crisis and the recession, as well as how those
actions will be reversed as the economy recovers. I laid out some of
these points in April at a conference sponsored by the Federal Reserve
Bank of Richmond, but a lot has happened in the intervening period and
so an update seems timely.1

For those of you who might be interested in learning more about the
Federal Reserve's policy strategy, by the way, an excellent source of
information is a feature of the Board's website titled "Credit and
Liquidity Programs and the Balance Sheet."2
This source provides extensive and regularly updated information on our
programs and goes well beyond the basic balance sheet data that we
publish every week.3

To get started, slide 1
provides a bird's eye view of the Federal Reserve's balance sheet as of
September 30, the quarter end, with the corresponding data from just
before the crisis for comparison. As you can see, the assets held by
the Federal Reserve currently total about $2.1 trillion, up
significantly from about $870 billion before the crisis. The slide
shows the principal categories of assets we hold, grouped (as I will
explain) so as to correspond to the various types of initiatives we've
taken to address the crisis. The liability side of the balance sheet,
also summarized in slide 1, primarily consists of currency (Federal
Reserve notes) and bank reserve balances (funds held in accounts at the
Federal Reserve by commercial banks and other depository institutions).
Later in my remarks, I will discuss the relationship between Federal
Reserve liabilities and broader measures of the money supply. I will
also discuss ways we can manage the link between the size of the
Federal Reserve's balance sheet and the broader money supply during the
transition back to a more familiar framework for monetary policy. Our
capital, the difference between assets and liabilities, is about $50

The Asset Side of the Federal Reserve's Balance Sheet
now look at the balance sheet in more detail, beginning with the asset
side. For decades, the Federal Reserve's assets consisted almost
exclusively of Treasury securities. Since late 2007, however, the share
of our assets made up of Treasury securities has declined, while our
holdings of other financial assets have expanded dramatically. As slide
1 shows, putting aside the miscellaneous "other assets" category, which
includes such diverse items as foreign exchange reserves and the
buildings owned by the Federal Reserve System, the assets on the
Federal Reserve's balance sheet can be usefully grouped into four

(1) short-term lending programs that provide backstop liquidity to
financial institutions such as banks, broker-dealers, and money market
mutual funds;

(2) targeted lending programs, which include loans to nonfinancial
borrowers and are intended to address dysfunctions in key credit

(3) holdings of marketable securities, including Treasury notes and
bonds, the debt of government-sponsored enterprises (GSEs) (agency
debt), and agency-guaranteed mortgage-backed securities (MBS); and

(4) emergency lending intended to avert the disorderly collapse of
systemically critical financial institutions. I will say a bit more
about each of these in turn.

Short-Term Lending Programs for Financial Institutions
The breakdown of the first category of assets--short-term lending programs for financial institutions--is shown on slide 2.
As you can see, these assets currently total about $264 billion, which
is about 12 percent of the assets on the Federal Reserve's balance
sheet. This category of assets consists mainly of loans made directly
or indirectly to sound financial institutions. Such loans are fully
secured by collateral and, in almost all cases, by recourse to the
borrowing institution, and are for maturities no greater than 90 days.
Thus, they involve very little credit risk; the Federal Reserve has
suffered no losses on any of these loans.

From its beginning, the Federal Reserve, through its discount
window, has provided credit to depository institutions to meet
unexpected liquidity needs, usually in the form of overnight loans. The
provision of short-term liquidity is, of course, a longstanding
function of central banks, and--as we know from Bagehot and earlier
authors--a principal tool for arresting financial panics.4
Indeed, when short-term funding markets deteriorated abruptly in August
2007, the Federal Reserve's first response was to try to increase the
liquidity available to the market by lowering the rate charged for
discount window loans and by making it easier for banks to borrow at
term. However, as in some past episodes of financial distress, banks
were reluctant to rely on discount window credit, frustrating the
Federal Reserve's efforts to enhance liquidity. The banks' concern was
that their recourse to the discount window, if it somehow became known,
would lead market participants to infer weakness--the so-called stigma
problem. To address this issue, in late 2007, the Federal Reserve
established the Term Auction Facility (TAF), which, as the name
implies, provides fixed quantities of term credit to depository
institutions through an auction mechanism. The introduction of this
facility seems largely to have solved the stigma problem, partly
because the sizable number of borrowers provides a greater assurance of
anonymity, and possibly also because the three-day period between the
auction and auction settlement suggests that the facility's users are
not using it to meet acute funding needs on a particular day. As slide
2 shows, as of September 30, conventional discount window loans totaled
$29 billion, and funds auctioned through the TAF totaled $178 billion.
These programs, along with similar lending by other major central
banks, appear to have helped stabilize the financial system here and
abroad by ensuring depository institutions access to ample liquidity.
In particular, increases in Federal Reserve loans to banks have been
associated with substantial improvements in interbank lending markets,
as reflected, for example, in the sharp declines in the spread between
the London interbank offered rate, or Libor, and measures of expected
policy rates.

Like depository institutions in the United States, foreign banks
with large dollar-funding needs have also experienced powerful
liquidity pressures over the course of the crisis. This unmet demand
from foreign institutions for dollars was spilling over into U.S.
funding markets, including the federal funds market, leading to
increased volatility and liquidity concerns. As part of its program to
stabilize short-term dollar-funding markets, the Federal Reserve worked
with foreign central banks--14 in all--to establish what are known as
reciprocal currency arrangements, or liquidity swap lines. In exchange
for foreign currency, the Federal Reserve provides dollars to foreign
central banks that they, in turn, lend to financial institutions in
their jurisdictions. This lending by foreign central banks has been
helpful in reducing spreads and volatility in a number of
dollar-funding markets and in other closely related markets, like the
foreign exchange swap market. Once again, the Federal Reserve's credit
risk is minimal, as the foreign central bank is the Federal Reserve's
counterparty and is responsible for repayment, rather than the
institutions that ultimately receive the funds; in addition, as I
noted, the Federal Reserve receives foreign currency from its central
bank partner of equal value to the dollars swapped. Because the loan to
the foreign central bank, as well as the repayment of principal and
interest, are set in advance in dollar terms, the Federal Reserve also
bears no exchange rate risk in these transactions. Slide 2 shows the
current value of outstanding swap lines at $57 billion, down from $554
billion at the end of last year, reflecting the marked improvement in
dollar-funding markets across the globe.

In March 2008, following a sharp deterioration in funding conditions
and the near failure of the investment bank Bear Stearns, the Federal
Reserve opened up its short-term lending facilities to primary dealers.5
Discount window lending and swap lines are part of the Federal
Reserve's standard toolkit and are recognized in the Federal Reserve
Act with provisions specifically identifying and authorizing each
practice. However, the extension of credit to primary dealers is not
authorized by the act in routine circumstances. To make these loans,
which we judged to be necessary for the stability of the financial
system and of the economy, the Board of Governors invoked general
emergency lending authority provided by section 13(3) of the act, which
allows the Federal Reserve to make secured loans under "unusual and
exigent" circumstances to any individual, partnership, or corporation.
Using this authority, the Federal Reserve made short-term
collateralized loans available to primary dealers through an analogue
to the discount window called the Primary Dealer Credit Facility
(PDCF). In serving as a lender of last resort to this important class
of financial institutions, the Federal Reserve supported broader market
and systemic stability. Reflecting a gradual improvement in financial
markets, outstanding PDCF credit dropped to zero this past spring. For
similar reasons, the Federal Reserve also invoked the 13(3) authority
to provide liquidity to another type of financial institution, money
market mutual funds. The money fund industry suffered a significant run
in September 2008 after a prominent fund "broke the buck"--that is, was
unable to maintain a net asset value of $1 per share. Together with an
insurance program offered by the Treasury, the Federal Reserve's
lender-of-last-resort activity helped to end the run and stabilize the
money funds. The final row of slide 2 shows that credit outstanding
under the Federal Reserve programs aimed at stopping the run on money
funds has also dropped essentially to zero.6

The unstinting provision of liquidity by the central bank is crucial
for arresting a financial panic. By the same token, the pricing and
terms of central bank lending facilities should discourage usage and
encourage firms to return to the private markets when the panic
subsides. Slide 2 shows that this has been the case. Short-term lending
to financial institutions was zero in June 2007, just before the crisis
began, and exceeded $1.1 trillion at the end of last year. Currently,
as I mentioned, this category has fallen to about $264 billion, a
decline of more than 75 percent since the turn of the year. We expect
this trend to continue as markets improve.

Targeted Lending to Address Credit Market Dysfunction
The second category of assets on the Federal Reserve's balance sheet, shown on slide 3,
consists of targeted lending programs aimed at improving the
functioning of certain key credit markets, thereby providing critical
support to the economy. Unlike the first category of assets, some of
these loans are to nonfinancial borrowers. As the slide shows, this
category comprises the Commercial Paper Funding Facility (CPFF) and the
Term Asset-Backed Securities Loan Facility (TALF). The current amount
of credit outstanding under these programs is about $84 billion,
or four percent of the assets held by the Federal Reserve.

The commercial paper market is an important source of short-term
funding for both financial and nonfinancial firms in the United States.
In September 2008, the collapse of the investment bank Lehman Brothers
set off a chain reaction: The money fund that broke the buck, to which
I just alluded, did so because of its losses on Lehman Brothers
commercial paper. Because money market funds are major investors in
commercial paper, the run on the money funds that ensued also severely
disrupted the commercial paper market. During this period, commercial
paper rates spiked, even for the highest-quality firms. Moreover, most
firms were unable to borrow for terms longer than a few days, exposing
both the borrowing firms and the lenders to significant rollover risk.
The Federal Reserve's CPFF addressed this risk by offering to lend at a
term of three months, at a rate above normal market rates plus upfront
fees, to high-quality commercial paper issuers. This program appears to
have been quite successful. Since the CPFF was created, commercial
paper spreads have returned to near-normal levels, and--as
anticipated--borrowings from the CPFF have declined sharply, from $334
billion at the turn of the year to less than $50 billion today.

Before the crisis, securitization markets were an important conduit
of credit to the household and business sectors; some have referred to
these markets as the "shadow banking system." Securitization markets
(other than those for mortgages guaranteed by the government) were
virtually shut down in the crisis, eliminating an important source of
To address this concern, the Federal Reserve, in conjunction with the
Treasury, launched the TALF. Under the TALF, eligible investors may
borrow to finance purchases of the AAA-rated tranches of certain
classes of asset-backed securities. The program originally focused on
credit for households and small businesses, including auto loans,
credit card loans, student loans, and loans guaranteed by the Small
Business Administration. More recently, we have added commercial
mortgage-backed securities to the program, with the goal of mitigating
a severe refinancing problem in that sector.

The TALF has had some success in restarting securitization markets.
Rate spreads for asset-backed securities have declined substantially,
and we are seeing some market activity that does not use the facility.
Like our other programs, the TALF carries little credit risk for the
Federal Reserve, because we lend investors less than the value of the
collateral and because capital from the Treasury provides additional
loss-absorption capacity. Unlike the other programs, TALF credit
outstanding has increased over time, as the loans made under this
program are for terms ranging from three to five years.

Relative to the Federal Reserve's short-term lending to financial
institutions, the CPFF and the TALF are rather unconventional programs
for a central bank. I believe they are justified by the extraordinary
circumstances of the past year and by the need for the central bank's
crisis response to reflect the evolution of financial markets. Nonbank
sources of credit, such as the commercial paper market and the
securitization markets, are critical to the U.S. economy, especially
compared with the more bank-centric economies of many foreign
countries. By backstopping these markets, the Federal Reserve has
helped normalize credit flows for the benefit of the economy.

Purchases of Longer-Term, Marketable Securities
third major category of assets on the Federal Reserve's balance sheet
is holdings of high-quality, marketable securities--specifically,
Treasury securities, agency debt, and agency-backed MBS. As shown by
slide 4, these holdings currently total about $1.6 trillion, or about
75 percent of Federal Reserve assets. By way of comparison, slide 4
also shows that, prior to the crisis, the Federal Reserve held $791
billion in securities, which was about 90 percent of its assets, and
that all of these securities were Treasury obligations.

Even as other categories of assets shrink, Federal Reserve holdings
of longer-term securities are set to continue to rise in the near term
and will increasingly dominate the asset side of the balance sheet. As
slide 4 shows, our holdings of securities declined from the period
before the crisis to the beginning of this year. The Federal Reserve
announced in November 2008 that it would begin to purchase agency debt
and agency MBS; then in March, it announced plans to increase such
purchases to as much as $1.25 trillion in agency-backed MBS and $200
billion in agency debt, and also announced plans to buy up to $300
billion in Treasury securities.8 We recently indicated that we expect to purchase the full $1.25 trillion of agency-backed MBS announced in March.9
The Treasury purchase program is being completed this month, while the
purchases of agency securities will be executed by the end of the first
quarter of 2010. Note, incidentally, that the Federal Reserve's
purchases of Treasury securities have served only to bring its holdings
of U.S. Treasury debt back to roughly the level of before the crisis.
The principal goals of our recent security purchases are to lower the
cost and improve the availability of credit for households and
businesses. As best we can tell, the programs appear to be having their
intended effect. Most notably, 30-year fixed mortgage rates, which
responded very little to our cuts in the target federal funds rate,
have declined about 1-1/2 percentage points since we first announced
MBS purchases in November, helping to support the housing market.

Support for Specific Institutions
In addition to
the programs I have discussed, the Federal Reserve has provided
financing directly to specific systemically important institutions. In
particular, with the full support of the Treasury, we used our
emergency lending powers to facilitate the acquisition of Bear Stearns
by JPMorgan Chase & Co. and also to prevent the imminent default of
the insurance company AIG. Slide 5 summarizes the amount of credit outstanding from these episodes.

From a credit perspective, these emergency loans obviously carry
more risk than traditional provisions of central bank liquidity. Two
observations on this point are worth making: First, these loans amount
to less than five percent of the Federal Reserve's balance sheet. Thus,
Federal Reserve loans that are collateralized by riskier securities are
quite small compared with our holdings of assets with little or no
credit risk. Second, and more important, these financial risks were the
result of actions taken to avert what likely would have been a
substantial further intensification of the financial crisis, with
potentially dire economic consequences.

All that said, we undertook these operations with great discomfort
and only because the United States has no workable legal framework for
winding down systemically critical financial institutions in a way that
would allow firms to fail and their creditors to lose money without
inflicting massive damage on the financial system. The Administration
and other regulatory agencies have joined the Federal Reserve in
calling on the Congress to develop a special resolution regime for
systemically critical nonbank financial institutions, analogous to one
already in place for banks, that could be invoked when the impending
failure of such institutions threatens financial stability. The rules
governing such a regime should spell out as precisely as possible the
role that the Congress expects the Federal Reserve to play in such

The Liability Side of the Federal Reserve's Balance Sheet
reviewed the main categories of assets on the Federal Reserve's balance
sheet, let me touch briefly on the liability side (slide 6).
The two main components of our liabilities are Federal Reserve notes
(that is, paper currency) and reserves held at the Federal Reserve by
depository institutions. In addition, as the government's fiscal agent,
the Federal Reserve holds Treasury deposits.

The amount of currency in circulation is determined by the public's
demand. The "public" here includes non-U.S. residents, as, by some
estimates, more than one-half of U.S. currency by value is held outside
the country. Banks are required to deposit with the Federal Reserve a
certain quantity of reserves, which depends on the amount of customer
deposits that the banks hold.10
Reserves exceeding the required amounts are called excess reserves. As
you can see from slide 6, the large majority of bank reserves are
currently excess reserves.

Effectively, the Federal Reserve funds its lending and securities
purchases primarily through the creation of bank reserves. As you can
see, the quantity of bank reserves held at the Federal Reserve has
risen dramatically as the Federal Reserve's balance sheet has expanded,
and reserves are likely to continue to grow as the Federal Reserve
purchases additional agency-backed securities. Currency and bank
reserves together are known as the monetary base; as reserves have
grown, therefore, the monetary base has grown as well. However, because
banks are reluctant to lend in current economic and financial
circumstances, growth in broader measures of money has not picked up by
anything remotely like the growth in the base. For example, M2, which
comprises currency, checking accounts, savings deposits, small time
deposits, and retail money fund shares, is estimated to have been
roughly flat over the past six months.

Large increases in bank reserves brought about through central bank
loans or purchases of securities are a characteristic feature of the
unconventional policy approach known as quantitative easing. The idea
behind quantitative easing is to provide banks with substantial excess
liquidity in the hope that they will choose to use some part of that
liquidity to make loans or buy other assets. Such purchases should in
principle both raise asset prices and increase the growth of broad
measures of money, which may in turn induce households and businesses
to buy nonmoney assets or to spend more on goods and services. In a
quantitative-easing regime, the quantity of central bank liabilities
(or the quantity of bank reserves, which should vary closely with total
liabilities) is sufficient to describe the degree of policy

Although the Federal Reserve's approach also entails substantial
increases in bank liquidity, it is motivated less by the desire to
increase the liabilities of the Federal Reserve than by the need to
address dysfunction in specific credit markets through the types of
programs I have discussed. For lack of a better term, I have called
this approach "credit easing."11
In a credit-easing regime, policies are tied more closely to the asset
side of the balance sheet than the liability side, and the
effectiveness of policy support is measured by indicators of market
functioning, such as interest rate spreads, volatility, and market
liquidity. In particular, the Federal Reserve has not attempted to
achieve a smooth growth path for the size of its balance sheet, a
common feature of the quantitative-easing approach.

Exit Strategy
colleagues at the Federal Reserve and I believe that accommodative
policies will likely be warranted for an extended period. At some
point, however, as economic recovery takes hold, we will need to
tighten monetary policy to prevent the emergence of an inflation
problem down the road. Looking at the Federal Reserve's balance sheet
is useful, once again, in helping to understand key elements of the
Federal Reserve's exit strategy from its current policies (slide 7).

As we just saw in slide 6, banks currently hold large amounts of
excess reserves at the Federal Reserve. As the economy recovers, banks
could find it profitable to be more aggressive in lending out their
reserves, which in turn would produce faster growth in broader money
and credit measures and, ultimately, lead to inflation pressures. As
such, when the time comes to tighten monetary policy, we must either
substantially reduce excess reserve balances or, if they remain,
neutralize their potential effects on broader measures of money and
credit and thus on aggregate demand and inflation.

To some extent, excess reserves will automatically contract as
improving financial conditions lead to reduced use of our special
lending facilities and, ultimately, to their closure. Indeed, as I have
already noted, the amount of credit outstanding in the first two
categories of assets (short-term lending to financial institutions and
targeted lending programs) has already declined substantially, from
about $1.5 trillion at the beginning of the year to about $350 billion.
In addition, reserves could be reduced by about $100 billion to $200
billion each year over the next few years as securities held by the
Federal Reserve mature or are prepaid.

However, even if our balance sheet stays large for a while, we have
two broad means of tightening monetary policy at the appropriate
time--paying interest on reserve balances and taking various actions
that reduce the stock of reserves. In principle, we could use either of
these approaches alone; however, to ensure effectiveness, we likely
would use both in combination.

The Congress granted us authority last fall to pay interest on
banks' balances at the Federal Reserve. Currently, we pay banks an
interest rate of 1/4 percent. When the time comes to tighten policy, we
can raise the rate paid on reserve balances as we increase our target
for the federal funds rate. In general, banks will not lend funds in
the money market at an interest rate lower than the rate they can earn
risk-free at the Federal Reserve. Moreover, they should compete to
borrow any funds that are offered in private markets at rates below the
interest rate on reserve balances because, by so doing, they can earn a
spread without risk. Thus, the interest rate that the Federal Reserve
pays should tend to put a floor under short-term market rates. Raising
the rate paid on reserve balances also discourages excessive growth in
money or credit, because banks will not want to lend out their reserves
at rates below what they can earn at the Fed. Considerable
international experience suggests that paying interest on reserves is
an effective means of managing short-term market rates. For example,
the European Central Bank (ECB) allows banks to place excess reserves
in an interest-paying deposit facility. Even as the ECB's liquidity
operations have substantially increased its balance sheet, the
overnight interbank rate has remained at or above the ECB's deposit
rate. The Bank of Japan, the Bank of Canada, and several other foreign
central banks have also used their ability to pay interest on reserves
to maintain a floor under short-term market rates.

Although, in principle, the ability to pay interest on reserves
should be sufficient to allow the Federal Reserve to raise interest
rates and control money growth, this approach is likely to be more
effective if combined with steps to reduce excess reserves. I will
mention three options for achieving such an outcome.

First, the Federal Reserve could drain bank reserves and reduce the
excess liquidity at other institutions by arranging large-scale reverse
repurchase agreements (reverse repos) with financial market
participants, including banks, the GSEs, and other institutions.
Reverse repos, which are a traditional and well-understood tool of
monetary policy implementation, involve the sale by the Federal Reserve
of securities from its portfolio with an agreement to buy the
securities back at a slightly higher price at a later date. Reverse
repos drain reserves as purchasers transfer cash from banks to the Fed.
Second, using the authority the Congress gave us to pay interest on
banks' balances at the Federal Reserve, we can offer term deposits to
banks, roughly analogous to the certificates of deposit that banks
offer to their customers. Bank funds held in term deposits at the
Federal Reserve would not be available to be supplied to the federal
funds market. Third, the Federal Reserve could reduce reserves by
selling a portion of its holdings of long-term securities in the open
market. Each of these policy options would help to raise short-term
interest rates and limit the growth of broad measures of money and
credit, thereby tightening monetary policy.

Overall, the Federal Reserve has a wide range of tools for
tightening monetary policy when the economic outlook requires us to do
so. We will calibrate the timing and pace of any future tightening,
together with the mix of tools, to best foster our dual objectives of
maximum employment and price stability.

By using our balance sheet, the Federal Reserve
has been able to overcome, at least partially, the constraints on
policy posed by dysfunctional credit markets and by the zero lower
bound on the federal funds rate target. By improving credit market
functioning and adding liquidity to the system, our programs have
provided critical support to the financial system and the economy.
Moreover, we have carried out these programs responsibly, with minimal
credit risk and with close attention to the exit strategy. Our
activities have resulted in substantial changes to the size and
composition of our balance sheet. When the economic outlook has
improved sufficiently, we will be prepared to tighten the stance of
monetary policy and eventually return our balance sheet to a more
normal configuration.




1. Ben S. Bernanke (2009), "The Federal Reserve's Balance Sheet,"
speech delivered at "Looking Forward: Rebuilding the Credit Markets."
the 2009 Credit Markets Symposium sponsored by the Federal Reserve Bank
of Richmond, held in Charlotte, N.C., April 2-3. Return to text

2. See "Credit and Liquidity Programs and the Balance Sheet." Return to text

3. The Federal Reserve publishes its balance sheet
each week, typically around 4:30 p.m. Thursday. The balance sheet is
included in the Federal Reserve's H.4.1 Statistical Release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks." Return to text

4. See Brian F. Madigan (2009), "Bagehot's Dictum in Practice: Formulating and Implementing Policies to Combat the Financial Crisis,"
speech delivered at "Financial Stability and Macroeconomic Policy," a
symposium sponsored by the Federal Reserve Bank of Kansas City, held in
Jackson Hole, Wyo., August 20-22; and Ben S. Bernanke (2008), "Liquidity Provision by the Federal Reserve,"
speech delivered (via satellite) at the Financial Markets Conference
sponsored by the Federal Reserve Bank of Atlanta, held in Sea Island,
Ga., May 13. Return to text

5. Primary dealers are broker-dealers that trade in U.S. government securities with the Federal Reserve Bank of New York. Return to text

6. The programs for money market funds are the
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility, or AMLF, and the Money Market Investor Funding Facility, or
MMIFF. Return to text

7. The shutdown of these markets was traced, in
part, to broad concerns about the risks of structured products,
particularly those backed by nonprime mortgages. In addition, these
difficulties were linked to the evaporation of liquidity from
short-term credit markets. In the years leading up to the financial
crisis, market participants increasingly used short-term debt to fund
the purchase of highly rated tranches of securitizations, in some cases
with little or no liquidity support. As a result, when short-term
credit markets froze, the demand for highly rated tranches of
securitizations dropped. Return to text

8. See Board of Governors of the Federal Reserve System (2008), "Federal
Reserve Announces It Will Initiate a Program to Purchase the Direct
Obligations of Housing-Related Government-Sponsored Enterprises and
Mortgage-Backed Securities Backed by Fannie Mae, Freddie Mac, and
Ginnie Mae
," press release, November 25; and Board of Governors of the Federal Reserve System (2009), "FOMC Statement," press release, March 18. Return to text

9. Board of Governors of the Federal Reserve System (2009), "FOMC Statement," press release, September 23. Return to text

10. Reserves can also be held in the form of vault cash. Return to text

11. See Ben S. Bernanke (2009), "The Crisis and the Policy Response," speech delivered at the Stamp Lecture, London School of Economics, London, England, January 13; and Ben S. Bernanke (2009), "Federal Reserve Policies to Ease Credit and Their Implications for the Fed's Balance Sheet," speech delivered at the National Press Club Luncheon, National Press Club, Washington, D.C., February 18. Return to text