What Is Term Auction Facility?

A Term Auction Facility (TAF) is a monetary policy program used by the Federal Reserve to help increase liquidity in the U.S. credit markets. TAF allows the Federal Reserve to auction set amounts of collateral-backed short-term loans to depository institutions (savings banks, commercial banks, savings and loan associations, credit unions) that are judged to be in sound financial condition by their local reserve banks. 

TAFs are implemented with the express purpose of addressing "elevated pressures in short-term funding markets," according to a press release from the Federal Reserve System Board of Governors in 2007. 

Participants bid through the reserve banks, with a minimum bid set at an overnight indexed swap rate relating to the maturity of the loans. These auctions allow financial institutions to borrow funds at a rate that is below the discount rate. 

Understanding Term Auction Facility (TAF)

The Term Auction Facility (TAF) was first used by the Fed on December 17, 2007, in response to the 2007 subprime crisis, which caused liquidity problems in the market. The move in 2007 was in coordination from other central banks, including the Bank of Canada, the Bank of England and the European Central Bank. To participate in the TAF auctions, institutions had to be eligible to borrow under the primary credit program.

After the Fed's attempt to increase liquidity by decreasing its discount rate failed to achieve the desired result, the Fed teamed up with other central banks around the world to create this monetary policy instrument in an attempt to prevent the situation from growing worse.

The first two auctions on December 17 and 20, 2007, released a combined $40 billion of liquidity into the market. The final TAF was conducted on March 8, 2010.