fairly straightforward, and our approach minimized its footprint on financial markets. the federal reserve adjusted the liquidity it provided to the banking system through daily operations with a relatively small set of broker - dealers against a very narrow set of collateral – treasury and agency securities. these transactions had the effect of changing the aggregate quantity of reserve balances that banks held at the federal reserve, and that liquidity was distributed by interbank funding markets through the banking system in the united states and around the world. in addition, the federal reserve stood ready to lend directly to commercial banks and other depository institutions at the “ discount window, ” where, at their discretion, banks could borrow overnight at an above - market rate against a broad range of collateral when they had a need for very short - term funding. ordinarily, however, little credit was extended through the the views expressed are my own and not necessarily those of my colleagues on the federal open market committee. james clouse and fabio natalucci of the board ’ s staff contributed to these remarks. discount window. banks were able to obtain their funding and reserves in the open market and generally turned to the window only to cover very short - term liquidity shortfalls arising from operational glitches or transitory marketwide supply shortfalls, as opposed to more fundamental funding problems. during the financial crisis, however, market participants became highly uncertain about the financial strength of their counterparties, the future value of assets ( including any collateral they might be lending against ), and how their own needs for capital and liquidity might evolve. they fled to the safest and most liquid assets, and as a result, interbank markets stopped functioning as an effective means to distribute liquidity, increasing the importance of direct lending through the discount window. at the same time, however, banks became extremely reluctant to borrow from the federal reserve for fear that their borrowing would become known and thus cast doubt on their financial condition. importantly, the crisis also involved major disruptions of important funding markets for other institutions. commercial paper markets no longer channeled funds to lenders or to nonfinancial businesses, investment banks encountered difficulties borrowing even on a short - term and secured basis as lenders began to have doubts about some of the underlying collateral, banks overseas could not rely on the foreign currency swap market to fund their dollar assets beyond the very shortest terms, investors pulled out from money market mutual funds, and most securitization markets shut down. these disruptions to financing markets

. while the overall improvement in the economic outlook has no doubt contributed to the improvement in abs markets, it does appear that the talf helped to buoy the availability of credit to firms and households and thus supported economic activity. indeed, following the kick - start from the talf, a number of these markets are now operating without any governmental backing. another example is the reduction in pressures in u. s. dollar funding markets ( as evidenced by the sharp narrowing of spreads between libor ( london interbank offered rates ) and ois ( overnight index swap ) rates and the decline in premiums paid for u. s. dollars in foreign exchange swap markets ). these developments followed the establishment of the term auction facility ( which auctioned discount window credit to depository institutions ) and also of liquidity swaps between the federal reserve and foreign central banks, which enabled those banks to lend dollars to commercial banks in their jurisdictions. our willingness to lend in support of the commercial paper and asset - backed commercial paper markets helped to stem the runs on money market funds and other nonbank providers of short - term credit. of note, usage of these emergency liquidity facilities declined markedly as conditions in financial markets improved, indicating that they were indeed priced at a penalty to more normal market conditions. they were successfully closed, suggesting that market participants had not become overly reliant on these programs and were able to regain access to funding markets. except for the talf and the special bear stearns and aig loans, all were repaid without any losses to the federal reserve. the funding markets evidently remain somewhat vulnerable, however. just this week, with the reemergence of strains in u. s. dollar short - term funding markets in europe, the federal reserve reestablished temporary u. s. dollar liquidity swap facilities with the bank of canada, the bank of england, the european central bank, the bank of japan, and the swiss national bank. 4 lessons for handling future liquidity disruptions what lessons can be drawn from the federal reserve ’ s experience in the financial crisis when designing a toolbox for dealing with future systemic liquidity disruptions? first, the crisis has demonstrated that, in a financial system so dependent on securities markets and not just banks for the distribution of credit, our ability to preserve financial stability may be enhanced by making sure the federal reserve has authority to lend against good collateral to other classes of sound, regulated financial institutions that are central to our financial markets – not on a