Why is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?

26 Pages Posted: 26 Oct 2005 Last revised: 10 Jun 2010

See all articles by Kenneth Garbade

Kenneth Garbade

Federal Reserve Bank of New York

John Kambhu

Federal Reserve Bank of New York

Date Written: April 1, 2006

Abstract

The U.S. Treasury announced in August 2005 that it is exploring whether to provide a backstop securities lending facility for U.S. Treasury securities. This paper examines the conceptual basis for such a facility by comparing the market for borrowing and lending Treasury securities to the market for borrowing and lending money prior to the founding of the Federal Reserve System. An inelastic supply of currency in the nineteenth century led to periodic suspensions of convertibility of bank deposits; Congress authorized a system of Federal Reserve Banks to address the problem. A similarly inelastic supply of Treasury securities has contributed to several recent episodes of chronic settlement fails. A backstop lending facility would mitigate the fails problem by allowing the Treasury to act as a lender of last resort of Treasury securities during periods of unusual market stress.

Keywords: securities lending, repurchase agreements, Federal Reserve, Treasury securities, settlement fails

JEL Classification: G18, H63

Suggested Citation

Garbade, Kenneth and Kambhu, John, Why is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities? (April 1, 2006). FRB of NY Staff Report No. 223, Available at SSRN: https://ssrn.com/abstract=829004 or http://dx.doi.org/10.2139/ssrn.829004

Kenneth Garbade (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

John Kambhu

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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