Emergency loans and collateral upgrades: How broker-dealers used Federal Reserve credit during the 2008 financial crisis

Abstract

During the 2008 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers: one provided collateralized loans; the other, collateral upgrades. These facilities alleviated dealers’ funding pressures when access to repos backed by illiquid collateral deteriorated. The ability to upgrade collateral allowed dealers to continue funding their own illiquid inventories (avoiding potential firesales) and to provide better bond market liquidity. It also helped sustain dealers’ credit to hedge fund clients, which in turn posted relatively better returns.