What is Term Auction Facility (TAF)?

Published by Thomas Herold in Banking, Laws & Regulations

'Term Auction Facility (TAF)' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

In response to the bank lending freeze that followed the outbreak of the banking and financial crisis in 2007, Ben Bernanke created and launched his Term Auction Facility TAF in December of 2007. The Fed was able to utilize its long mostly dormant discount window from December 2007 through to March 2010 as a creative new means of helping out struggling banks to access extra funds. They were then able to loan out these additional funds to consumers and businesses at their discretion. A primary new way of lending out such money to the banks lay in this Term Auction Facility.

Using the Term Auction Facility TAF, the Fed set up a system to auction out term funds to interested banking institutions. Any bank or credit union that already was able to borrow money via the primary credit program had eligibility to be a participant in these TAF Fed auctions.

The Fed was willing to accept bad loans as collateral for these funds. At every TAF auction, the Fed loaned out a set amount of money. They utilized the auction process starting with minimum bid rates in order to set the interest rates on these loan facilities. Banks could participate in the bidding process via phone through their local area Reserve Banks. The last of these TAF auctions occurred back on March 8 of 2010.

For the nearly three years that it ran, the Term Auction Facility worked according to a set out regular process. On a two weekly basis, the Federal Reserve would decide on the amount of money which it would then loan out on any given day. They would determine the minimum interest rate at which they would consent to loan out the funds. Banks which were interested in extra funds could then make bids for the dollar amount of money they wished to obtain at the interest rate they would agree to pay. Next the Federal Reserve sorted out the various competing bids by the level of interest rate that each participating bank offered them.

The Fed started with the greatest interest rate and then went on down from there, adding up the totals of money requested until they reached the maximum dollar amount which they were willing to lend out. Interest rates on each loan equaled the lowest interest rate which had been offered by the banks that had bids accepted.

The Fed was willing to do this so that there would not be funding shortfalls at a single institution which might cause the circular flow of credit and money in the whole American banking system to seize up and stop. In reality, most of the banks who borrowed from the Fed through the Term Auction Facility ended up leaving this money in their accounts with the Federal Reserve.

The Term Auction Facility served a useful purpose as the Federal Reserve Bank was willing to offer loans to member banks at rates that were lower than the associated market rates in exchange for putting up collateral in the form of bad loans that no one else would accept. On March 11, 2009, the banks had drawn total credit in the amount of $493.145 billion. The balance sheet of the Fed swelled to nearly a trillion dollars worth of collateral at its maximum extent.

In the end, the program proved to be successful for increasing confidence the banks had in each other, even though they did not loan out these borrowed funds generally. The TAF was originally intended to be more temporary than it turned out to be. Bernanke never envisioned it reaching the trillion dollar mark by June of 2008. All TAF funds have been repaid without taxpayers having to subsidize any of these loans which the Fed issued to the various banks.

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The term 'Term Auction Facility (TAF)' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.