What Is the Term Auction Facility?

The Term Auction Facility (TAF) was a monetary policy used by the Federal Reserve to increase liquidity in the U.S. credit markets. The TAF began following the financial crisis of 2007. It allowed 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 were judged to be in sound financial condition by their local reserve banks. The Facility relieved the pressure on lending institutions during a period of financial distress.

Key Takeaways:

  • The Term Auction Facility (TAF) was a monetary policy used by the Federal Reserve to increase liquidity in the U.S. credit markets during the financial crisis of 2007.
  • The TAF was a mechanism whereby the Federal Reserve auctioned collateral-backed short-term loans to depository institutions.
  • Financial institutions could borrow funds at a rate below the discount rate through the TAF.
  • The first two auctions on December 17 and 20, 2007, released a combined $40 billion of liquidity into the market. 

Understanding the Term Auction Facility (TAF)

The TAF was 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 for TAF funds through the reserve banks with a minimum bid set at an overnight indexed swap rate related to the maturity of the loans. These auctions allowed financial institutions to borrow funds at a rate that was below the discount rate

Why the Term Auction Facility Emerged

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.

Bank funding markets, particularly term funding markets, came under severe pressure at the start of the financial crisis in 2007. Because the future of financial institutions was at risk, investors were hesitant to lend at maturities beyond the shortest of terms. The Federal Reserve attempted to increase the amount of liquidity available to financial institutions through the discount window.

Many banks, however, would not borrow at the discount window for fear that it would be a sign of institutional weakness. The Federal Reserve established the TAF in December 2007 to meet the growing demand for funds.

Under the program, the Federal Reserve auctioned 28-day loans and, later, 84-day loans, to depository institutions that were in sound financial condition. The TAF helped promote the distribution of liquidity at a time when unsecured bank funding markets were under stress. Depository institutions eligible to borrow under the Federal Reserve's primary credit program could participate in the TAF.

$3.8 trillion

The total amount the Fed lent to 416 banks under the TAF.

How the Term Auction Facility Worked

All loans extended under the TAF were fully collateralized. The funds were allocated through an auction. Participating depository institutions placed bids specifying an amount of funds up to a pre-specified limit. The bids also specified an interest rate that the depository institutions would be willing to pay for the funds. The funds were allocated beginning with the highest interest rate offered until either all funds were allocated or all bids were satisfied. All borrowing institutions paid the same interest rate, which was the rate associated with the bid that would fully subscribe the auction, or in the case that total bids were less than the amount of funds offered, the lowest rate that was bid.

The TAF was created under the Federal Reserve's standard discount window lending authority granted under Section 10B of the Federal Reserve Act. The auctions were administered by the Federal Reserve Bank of New York, with loans granted through the 12 Federal Reserve Banks.

TAF Lending

The facility was first announced on December 12, 2007, and the final TAF auction was held on March 8, 2010, with credit extended under that auction maturing on April 8, 2010. All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility.

The move to implement the TAF in 2007 was in coordination with other central banks, including the Bank of Canada, the Bank of England, and the European Central Bank. In total, the Fed lent $3.8 trillion to 416 banks under the TAF.