Suspicion confirmed

By an econometric analysis from Stefano Puddu and Andreas Wälchli; the Fed's Term Auction Facility provided needed liquidity to banks at a crucial time during the financial crisis...and the banks mostly used it prudently;

Between December 2007 and March 2010, the Fed auctioned a total of $3.81 trillion collateralised funds, with maturities of 28 or 84 days.

Which was needed because interbank lending had mostly dried up due to uncertainty.  Enter the lender of last resort;

Our findings highlight that all banks decrease their exposure in liquidity risk, but that banks that benefited from the programme decrease faster than others. The larger the amount of reserves received, the bigger the reduction in liquidity risk. In other words, TAF banks were able to more quickly adjust the structure of their debt maturity. 

Pretty much as the textbooks draw it up;

Our results highlight that:

• Banks did not adopt moral hazard behaviors, at least in the sample period observed.

This result can be explained by the fact that despite the fact that TAF banks were not subject to additional controls by the Fed or any other regulator, these banks might have felt themselves ‘under scrutiny’ and might have reacted accordingly, in order to look better when reassessed later on;

• The TAF programme provided the depository institutions with liquidity at the same time as a period of intensive restructuring on their liability side.

Therefore it is as if the TAF programme provided banks with extra time in order to adjust the exposures in their balance sheets. In this sense the Fed, through the TAF programme, acted as a lender of last resort, providing distressed banks with liquidity.