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The program charges market rates, so that part isn't a subsidy--they're effectively letting banks bleed out the loss over time instead of recognizing it all at

The program charges market rates, so that part isn't a subsidy--they're effectively letting banks bleed out the loss over time instead of recognizing it all at once, hoping (probably correctly in most cases) that other parts of the bank's business will be profitable enough that they can slowly earn their way out of the hole. The program is undercollateralized though, so if a bank fails with such a loan outstanding then the Fed loses money. That part is a subsidy.

blitzar 4y ago
"Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower." The banks share (and bond) capital is on the line as well.
- tripletao 4y ago
  Yeah, that's why I said "if a bank fails". They can't selectively default on just that loan, since that would be stupid--they'd just all do that immediately. It's still a subsidy though. For example, if you lend my just-barely-solvent bank $100 unsecured, then I can bet it double or nothing on a fair coin flip. If I win then I keep all the gain, so it's +$50 EV to me. If I lose, then my bank fails and you take the loss, so it's -$50 EV to you. Banks are obviously regulated in many ways to discourage that kind of risk-taking, but this policy change slightly weakens that overall edifice.
  - intrasight 4y ago
    Yes. Of course, it's a subsidy. If the private sector did it, they would make bets and take positions, and that would be their incentive. That would be the way that the liquidity is funded, and they get paid. If the public sector manages the finances, as is the case with this scheme, then the risk taking is subsidized by the fact that the "traders" don't have to have the incentive of a gain because they're well paid (by us taxpayers) and benefited (by us taxpayers) employees of the government.
    - tripletao 4y ago
      > If the public sector manages the finances, as is the case with this scheme, I think the program might not work like you think? Beyond the initial decision to create the program, no one at the Fed exercises significant discretion. It's open to essentially all American banks, most of which are private businesses with the usual profit motives, whose managers decide when to borrow and how to use the proceeds. If such a bank gets in trouble, then its managers now have slightly greater incentive and ability to try gambling their way out, since their shareholders get all the upside and the Fed gets some of the downside. https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf https://www.federalreserve.gov/newsevents/pressreleases/file...

blitzar 4y ago

"Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower." The banks share (and bond) capital is on the line as well.

tripletao 4y ago
Yeah, that's why I said "if a bank fails". They can't selectively default on just that loan, since that would be stupid--they'd just all do that immediately. It's still a subsidy though. For example, if you lend my just-barely-solvent bank $100 unsecured, then I can bet it double or nothing on a fair coin flip. If I win then I keep all the gain, so it's +$50 EV to me. If I lose, then my bank fails and you take the loss, so it's -$50 EV to you. Banks are obviously regulated in many ways to discourage that kind of risk-taking, but this policy change slightly weakens that overall edifice.
- intrasight 4y ago
  Yes. Of course, it's a subsidy. If the private sector did it, they would make bets and take positions, and that would be their incentive. That would be the way that the liquidity is funded, and they get paid. If the public sector manages the finances, as is the case with this scheme, then the risk taking is subsidized by the fact that the "traders" don't have to have the incentive of a gain because they're well paid (by us taxpayers) and benefited (by us taxpayers) employees of the government.
  - tripletao 4y ago
    > If the public sector manages the finances, as is the case with this scheme, I think the program might not work like you think? Beyond the initial decision to create the program, no one at the Fed exercises significant discretion. It's open to essentially all American banks, most of which are private businesses with the usual profit motives, whose managers decide when to borrow and how to use the proceeds. If such a bank gets in trouble, then its managers now have slightly greater incentive and ability to try gambling their way out, since their shareholders get all the upside and the Fed gets some of the downside. https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20230312a1.pdf https://www.federalreserve.gov/newsevents/pressreleases/file...