Fed Economist Says Loan Auctions Cut Borrowing Costs
A Federal Reserve economist said the central bank's auctions of cash loans to commercial banks have had a “strong effect'' on reducing their borrowing costs, while new lending programs for securities firms may be less potent.
In addition, investors have placed a higher risk of default among financial institutions because of concerns about rising mortgage defaults, slowing economic growth and volatile financial markets, Tao Wu, a senior researcher at the Dallas Fed bank, said in a paper released today. Still, such concerns have had “little effect'' on the companies' borrowing costs.
The economist joins Fed officials in defending the Term Auction Facility's $75 billion biweekly sales, which Chairman Ben S. Bernanke said may be expanded. Stanford University economist John Taylor wrote in a paper last month that there is “no empirical evidence'' the Fed's auctions have cut banks' borrowing costs.
The TAF “has a strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns,'' Wu said, citing his analysis.
The TAF has lowered the spread between the one-month London interbank offered rate for dollars and the overnight indexed swap rate by at least 0.31 percentage point, and the three-month Libor-OIS difference by at least 0.44 point, Wu said fast cash loans. The OIS is a measure of what traders expect for the benchmark federal funds rate, which covers overnight loans between banks.
Taylor said he saw Wu's results and hasn't changed his conclusions. “We very much stand by our original findings that there's no robust impact'' from the TAF, Taylor said in a telephone interview.
`Contradict' Results
Wu said he took a different approach to analyzing data and acknowledged his results “contradict'' those of Taylor, who co-authored his study with San Francisco Fed economist John Williams.
The Term Securities Lending Facility, which provides as much as $200 billion in Treasuries in exchange for asset-backed securities, and the Primary Dealer Credit Facility, providing direct loans to Wall Street bond dealers, “are found to have had less discernible effects so far in relieving financial strains in the Libor market,'' Wu said.
`This is consistent with market observations of a weaker interest from primary dealers'' in those programs than commercial banks have shown in the TAF, he said.
Wu worked at the San Francisco Fed from 2001 to 2006 before joining the Dallas district bank, according to the Dallas Fed's Web site.