The Evolution of the Federal Reserve’s Term Auction Facility and Community Bank Utilization Kyle Allen, Scott Hein, and Matthew Whitledge

Disclaimer: As a researcher I come with a lot of baggage I like community bankers. Some of my good friends are either community bankers or themselves like community bankers. I believe the community bank business model is different from what large banks do and is viable in the future. Relationship banking and using soft information amongst other matters means community banks are different. To the extent the financial crisis entailed banks, it was the large banks, nor community banks. Community banks suffered “collateral damage” in the financial crisis, but those that would misstep failed. I don’t think the Federal Reserve and many other banking regulators fully understand how different community banks are. I don’t like the academic use of asset size as the sole gauge of identifying community banks.

Overview of Paper Community Bank Identification Focus on business model and uniqueness of community banks Use the FDIC’s broader identification of community banks method, going beyond simple asset size identification method. Distinguish between “community banks” and all others, “non- community banks” Federal Reserve’s Term Auction Facility (TAF) Evolution -- 3 changes implemented by the Fed: Decrease in minimum bid amount Introduction of longer term loans Increase total auction amount to $150 billion, morphs system from lending freely at a penalty rate to lending at potentially below market rates Results Fed was not oblivious to community bank utilization of TAF Most important change was increase in total auction amount, October 2008 Community banks were less likely to participate, especially early in TAF’s existence

Community Bank Identification Alternative measures, asset size as the sole identifier Typically it is $1 billion in total assets Federal Reserve uses $10 billion in total assets Conference of State Bank Supervisors recent concern about floating definition FDIC (2012) measure, provides a superior means of community bank identification 1.Business focus 2.$1 billion in total assets, adjusted for inflation 3.Geographic, branch, and deposit/branch limit Improvements Focuses beyond simple asset size; Community Bank attributes and business model

Term Auction Facility Purpose Designed to “promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress” Process Auctions every two weeks, total auction offering amount was announced by Fed and known in advance. Like discount window borrowing, borrowers had to post acceptable collateral. Each bank could submit up to two bids per auction Bids contain loan amount requested and rate borrower was willing to pay Bids awarded from the highest to lowest rate, until all funds allocated, with stated minimum bid announced Available to institutions in “generally sound financial condition” Can borrow up to a total of 10% of the total auction amount Dutch auction, all winning bidding banks pay the same rate

Additional TAF Research Analyzed within small and large Banks, mainly focused on financial position of borrowing banks and how they used the funds Berger, Black, Bouwman, and Dlugosz (2014) Privately-held institutions borrowed twice as much when scaled Cyree, Griffiths, and Winters (2014) Foreign banks were the largest borrowers Benmelech (2012) Borrowers willing to pay more for TAF than Discount Window, early on in TAF, see this as evidence of a stigma associated with discount window borrowing Armantier, Ghysels, Sarkar, and Shrader (2011)

Timeline of the Fed’s Term Auction Facility December 12, 2007 The Federal Reserve establishes Term Auction Facility February 14, 2008 The Federal Reserve lowers minimum bid size from $10 million to $5 million August 14, 2008 The Federal Reserve offers 84 day loans for the first time March 11, 2010 The Federal Reserve extends the last loan for the TAF October 9, 2008 The Federal Reserve raises total offering amount to $150 billion (1)(2)(3)(4)

Number of Loans extended in Different Sub- periods, mainly large (>$5m) loans, accepting smaller bids after Feb. 14, 2008, Change #1 Time Period Less than $10 Million$10 Million or More TotalCBTotalCB (1) Before Feb 14, (2) Feb 14 to July 31, (3) Aug 14 to Sep. 25, (4) After October 1, , Total Loans ,694781

Maturity Break-down of # of TAF Loans, Introduction of Longer-term Loans, August 14, 2008, Change # 2 Time PeriodMaturity of 28 days or lessMaturity greater than 28 days (1) Before Feb 14, (2) Feb 14 to July 31, (3) Aug 14 to Sep. 25, (4) After October 1, 20081,8561,348 Total Loans2,7911,423

Marked Increase in Total Offering Amount, after the fact no longer lending at a penalty rate, Change #3, the Big Change, October 9, 2008 BeforeAfter Number of Auctions 2337 Avg. Offer Amount ($B) Avg. Stop Out Rate (%) Avg. Total Submitted ($B) Avg. Total Accepted ($B) Avg. Number of Bidders Avg. Bid to Cover Ratio

Community vs. Non-Community Bank TAF Utilization (1)(2) (3) (4)Full Sample Dec. 1, 2007 to Feb. 13, 2008 Feb. 14, 2008 to July 31, 2008 Aug. 14, 2008 to Sep Oct 1, 2008 to Mar. 31, 2010 Dec. 1, 2007 to Mar. 31, 2010 Non-Community Banks Total Amount Borrowed($ billion) $27.99$268.62$ $1, $1, Total Number of Borrowings ,140 1,603 Med. TAF Loan Amount ($ mil) $200$240$430$150 Med. TAF Loan to Total Assets Med. TAF Loan to Core Deposits Community Banks Total Amount Borrowed($ billion) $0.161$7.21$2.77$58.18$68.32 Total Number of Borrowings ,1401,231 Med. TAF Loan Amount ($ mil) $14$17$12.5$10$11 Med. TAF Loan to Total Assets Med. TAF Loan to Core Deposits

Bank Utilization: Probit Model Estimation, Likelihood of TAF Utilization Before October 1, 2008After October 1, 2008 All BanksNon-Comm.Comm.All BanksNon-Comm.Comm. Probability of Borrowing.03%.73%.01%1.93%16.89%1.21% Log Total Assets (12.05)(6.24)(8.57)(18.90)(9.34)(9.61) NCFD (-1.19)(-1.21)(-1.48)(1.36)(1.79)(1.82) Tier 1 Ratio (-2.58)(-2.76)(-1.01)(-0.51)(-0.05)(-0.74) STD ROA (0.54)(-0.57)(1.28)(-0.56)(-2.58)(1.29) ROE (1.34)(-0.34)(1.87)(0.72)(-0.73)(0.79) Spread (-2.70)(-1.95)(-3.58) (5.57)(0.82)(6.10) CRE (3.84)(2.37)(1.38)(4.39)(2.93)(2.18) MBS (-1.47)(-0.79)(-1.79)(1.38)(-0.20)(1.26) Pseudo R

Conclusions The Federal Reserve adjusted the program guidelines as the crisis evolved. They seemed to recognize early on they weren’t serving community banks, with reduction in size of minimum bid amount. Still, either program constraints, or lack of need, limited community banks’ ability to borrow in the first half of TAF program. Community banks didn’t fully take advantage of the program in the latter half, even when monies were relatively inexpensively priced. Community banks did increase use, but funds were very inexpensive.

References Armantier, O., E. Ghysels, A. Sarkar, and J. Shrader, Stigma in financial market: Evidence from liquidity auctions and discount window borrowing during the crisis (No. 483). Staff Report, Federal Reserve Bank of New York. Benmelech, Efraim, An Empirical Analysis of the Fed's Term Auction Facility. No. w National Bureau of Economic Research. Berger, A., L. Black, C. Bouwman, and J. Dlugosz, The Federal Reserve’s Discount Window and TAF Programs: “Pushing on a String?” Working Paper. Cyree, Ken, Mark Griffiths, and Drew Winters, TAF: Wall Street Bailout or Main Street Funding? Working Paper. FDIC Community Banking Study, Retrieved September, 2013, from full.pdf. full.pdf Federal Reserve, Term Auction Facility Questions and Answers (FRB: Frequently asked questions (revised January 12, 2009)).