The Evolution of the Federal Reserve's Term Auction Facility and Community Bank Utilization

Abstract

The Term Auction Facility (TAF) was designed by the Federal Reserve to inject emergency short-term funds into all depository institutions, both large and small, as a supplement to the lender of last resort discount window offerings. We examine the evolution of the Federal Reserve’s design of the Term Auction Facility (TAF), document and describe both community and non-community FDIC insured banks usage of the facility. The facility seemed to be designed initially to help non-community banks more than community banks. Our research suggests that certain aspects of the structure of the TAF were changed fundamentally by the Federal Reserve, most especially when it greatly increased its offering amount. The change in offering amount meant that the facility became a cheaper source of funds than the discount window. However, we find that community banks were far less likely to use the facility than larger, non-community banks for funding during the financial crisis, most especially in the early stages of the financial crisis. Those community banks that used the facility in latter stages seemed to do so to mitigate concerns stemming from commercial real estate exposure or we attracted by it being a cheap source of funds.