In late 2008, when secondary market spreads had spiked and risk aversion was high, investors were uncertain as to when and how the market would stabilize. Non-recourse lending helped place a floor on investor losses, thus increasing market confidence broadly and facilitating the return of structured product investors. 2  Source: Morgan Markets. Note: This includes securitizations of auto loans and leases, credit card account balances, student loans, dealer floorplan loans, and business equipment loans and leases. Second, TALF loans have considerably longer maturities than the lending from the Federal Reserve’s discount window and its other temporary liquidity facilities. The term of the loans, which were either three or five years, was intended to more closely match the maturity of the underlying securities, as needed to encourage investors to return to the market. In addition, loans with longer terms were viewed as more effective, as financing would extend well beyond the expected end of the recession. The combination of these two elements – non-recourse loans and long maturities – was critical to the success of program. Without one or the other, investors would have had exposure to short-term swings in risk premiums in a time of extreme volatility, which would have likely limited participation and thus reduced the program’s effectiveness. A third notable feature of the TALF was that it was available to a wide set of market participants beyond the Federal Reserve’s traditional bank counterparties. This feature reflected the program’s broad focus on a financial market rather than a particular set of financial firms.

Second, investors have increasingly worried about the exposures of European financial institutions to these countries and to European growth prospects more broadly. These uncertainties have led to sharp declines in the share prices of those financial  1  The views and opinions expressed are mine alone and do not necessarily represent the views of the Federal Open Market Committee or the Federal Reserve System. institutions and have affected the ability of many of them to fund themselves in short-term credit markets. The successful resolution of these problems ultimately rests on European policy actions. Those actions will determine the degree of fiscal adjustment that is required over time, the amount of fiscal support and risk sharing among European countries that is appropriate, and the extent to which European financial institutions are supported. The Federal Reserve had only a limited and supportive role in the policy response, taking steps to allow the European Central Bank and other foreign central banks to respond more fully to emerging liquidity pressures. The liquidity pressures that have emerged stem from the balance sheets of European financial institutions. Those institutions still hold large amounts of dollar-denominated assets and finance a sizable portion of those holdings in short-term dollar-denominated funding markets. In the presence of concerns about the status of these institutions, investors have become more reluctant to extend term funding to many of them, putting upward pressure on term funding rates and forcing the firms to change their funding patterns.