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The years immediately preceding the financial crisis of 2007 witnessed an explosive growth in the supplies both of the long-term securities issued by the shadow banking entities, the asset-backed securities (ABSs) and collateralized debt obligations (CDOs), and of the short-term securities issued by these entities, notably asset-backed commercial paper (ABCP). Although there is now some acknowledgment that the search for yield was the major driver of ABS and CDO growth in the United States, the same is not true of the U.S. ABCP market where other factors such as regulatory arbitrage on the part of banks or the safety and liquidity concerns of institutional investors are seen as having been the more important growth driving force. This article argues that the search for yield did play a crucial role in U.S. ABCP growth between 2004 and 2007. To back up this argument, the article points to four variables that were closely correlated with this growth: the federal funds rate; U.S. money market mutual funds asset holdings; the change in the geographical breakdown of the institutions supplying ABCP; and, finally, the change in the program breakdown of the ABCP market.

PurposeThe purpose of this paper is to examine programs designed to support the commercial paper market during the financial crisis.Design/methodology/approachThe paper analyzes the participants in the two programs to determine why domestic financial institutions chose one program over the other.FindingsDomestic financial institutions chose the Temporary Liquidity Guarantee Program over the Commercial Paper Funding Facility (CPFF) while foreign financial institutions chose the CPFF.Practical implicationsThe analysis is intended to support future policy debate on how to address a liquidity crisis in the money markets.Originality/valueThe authors are the first paper to examine the participants in these two programs. The value is the policy implications of this study.

Investors value the liquidity and safety of US Treasuries. We document this by showing that changes in Treasury supply have large effects on a variety of yield spreads. As a result, Treasury yields are reduced by 73 basis points, on average, from 1926 to 2008. Both the liquidity and safety attributes of Treasuries are driving this phenomenon. We document this by analyzing the spread between assets with different liquidity (but similar safety) and those with different safety (but similar liquidity). The low yield on Treasuries due to their extreme safety and liquidity suggests that Treasuries in important respects are similar to money.

This paper documents \"runs\" on asset-backed commercial paper (ABCP) programs in 2007. We find that one-third of programs experienced a run within weeks of the onset of the ABCP crisis and that runs, as well as yields and maturities for new issues, were related to program-level and macro-financial risks. These findings are consistent with the asymmetric information framework used to explain banking panics, have implications for commercial paper investors' degree of risk intolerance, and inform empirical predictions of recent papers on dynamic coordination failures.

While the role of laws and regulations in structuring markets is well established, it is less understood how rule evasion affects the evolution of markets or how the interaction between regulators and the regulated about the meaning of compliance influences this effect. The authors study this issue by looking at the development of the asset-backed commercial paper (ABCP) market in France, Germany, and the Netherlands from 1999 to 2009. In all three countries, this market involved financial innovations designed to evade regulations. The authors identify diverging trends in the ABCP market that are a result of whether and how regulators were embedded in the different interpretive communities that defined regulatory compliance, such embeddedness being dependent on their discretionary and sanctioning power as well as their expertise. Focusing on these regulatory networks that embed institutions in markets, they propose a synthesis of relational and institutional accounts of the embeddedness of markets.

The Commercial Paper Funding Facility (CPFF) bought commercial paper from highly rated issuers of U.S. dollar commercial paper during the financial crisis of 2008 to 2009. This is the only study to analyze the accounting characteristics of both financial and non-financial firms participating and not participating in this $738 billion Federal Reserve program. In logistic regressions, CPFF participants and non-participants differed little in solvency or liquidity ratios. Thus, there is little evidence of adverse selection by financial firms. Nevertheless, CPFF participants were significantly more likely to receive capital injections from the TARP bailout, to pose greater systemic risks and be based in North America.

We analyze why firms use nonintermediated short-term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start-up financing for capital investment. Firms' CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long-term bond issuance to reduce rollover risk.

The events following Lehman's failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short-term credit markets and the role of central banks as back-stop liquidity providers. The Federal Reserve's response to financial disruptions in the United States importantly included the creation of liquidity facilities. Using a differences-in-differences approach, we evaluate one of the most unusual of these interventions—the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. We find that this facility helped stabilize asset outflows from money market funds and reduced asset-backed commercial paper yields significantly.

Fragility is affected by how the balance sheet composition of financial intermediaries, the precision of information signals, and market stress parameters all influence the extent of strategic complementarity among investors' strategies. A solvency and a liquidity ratio are required to control the likelihood of insolvency and illiquidity. The solvency requirement must be strengthened in the face of increased competition, whereas the liquidity requirement must be strengthened under more conservative fund managers and higher penalties for fire sales. Greater disclosure may aggravate fragility and require an increase in the liquidity ratio, so regulators should establish prudential and disclosure policies in tandem.