Dealer Financial Conditions and Lender-of-Last Resort Facilities

August 2014
Viral Acharya, Michael Fleming, Warren Hrung, and Asani Sarkar

We examine the financial conditions of dealers that participated in two of the Federal  Reserve’s lender-of-last-resort facilities – the Term Securities Lending Facility (TSLF) and  the Primary Dealer Credit Facility (PDCF) – that provided liquidity against a range of assets  during 2008-09. We find that dealers with greater leverage and lower equity returns prior to  borrowing from the facilities were more likely to participate in the programs, borrow more  and at higher bidding rates. These effects were stronger for facilities that allowed tendering  of more illiquid collateral. We also find that dealers who borrowed heavily in one facility  tended to do the same in the other. Moreover, dealers seem to have borrowed from the  PDCF mainly because they needed funds in addition to what they could obtain from the  TSLF and not because they valued the flexibility of shorter-term borrowing.