of its normal lending to banks and, now, to primary dealers. in the case of currency swaps, the foreign central banks are responsible for repayment, not the financial institutions that ultimately receive the funds ; moreover, as further security, the federal reserve receives an equivalent amount of foreign currency in exchange for the dollars it provides to foreign central banks. liquidity provision by the central bank reduces systemic risk by assuring market participants that, should short - term investors begin to lose confidence, financial institutions will be able to board of governors of the federal reserve ( 2008 ), " fomc statement and board approval of discount rate requests of the federal reserve banks of new york, cleveland, richmond, atlanta, minneapolis, and san francisco, " press release, december 16. primary dealers are broker - dealers that trade in u. s. government securities with the federal reserve bank of new york. the new york fed's open market desk engages in trades on behalf of the federal reserve system to implement monetary policy. meet the resulting demands for cash without resorting to potentially destabilizing fire sales of assets. moreover, backstopping the liquidity needs of financial institutions reduces funding stresses and, all else equal, should increase the willingness of those institutions to lend and make markets. on the other hand, the provision of ample liquidity to banks and primary dealers is no panacea. today, concerns about capital, asset quality, and credit risk continue to limit the willingness of many intermediaries to extend credit, even when liquidity is ample. moreover, providing liquidity to financial institutions does not address directly instability or declining credit availability in critical nonbank markets, such as the commercial paper market or the market for asset - backed securities, both of which normally play major roles in the extension of credit in the united states. to address these issues, the federal reserve has developed a second set of policy tools, which involve the provision of liquidity directly to borrowers and investors in key credit markets. notably, we have introduced facilities to purchase highly rated commercial paper at a term of three months and to provide backup liquidity for money market mutual funds. in addition, the federal reserve and the treasury have jointly announced a facility that will lend against aaa - rated asset - backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the small business administration. the federal reserve's credit risk exposure in the latter facility will be minimal, because the collateral will be subject

to a " haircut " and the treasury is providing $ 20 billion of capital as supplementary loss protection. we expect this facility to be operational next month. the rationales and objectives of our various facilities differ, according to the nature of the problem being addressed. in some cases, as in our programs to backstop money market mutual funds, the purpose of the facility is to serve, once again in classic central bank fashion, as liquidity provider of last resort. following a prominent fund's " breaking of the buck " – that is, a decline in its net asset value below par – in september, investors began to withdraw funds in large amounts from money market mutual funds that invest in private instruments such as commercial paper and certificates of deposit. fund managers responded by liquidating assets and investing at only the shortest of maturities. as the pace of withdrawals increased, both the stability of the money market mutual fund industry and the functioning of the commercial paper market were threatened. the federal reserve responded with several programs, including a facility to finance bank purchases of highquality asset - backed commercial paper from money market mutual funds. this facility effectively channeled liquidity to the funds, helping them to meet redemption demands without having to sell assets indiscriminately. together with a treasury program that provided partial insurance to investors in money market mutual funds, these efforts helped stanch the cash outflows from those funds and stabilize the industry. the federal reserve's facility to buy high - quality ( a1 - p1 ) commercial paper at a term of three months was likewise designed to provide a liquidity backstop, in this case for investors and borrowers in the commercial paper market. as i mentioned, the functioning of that market deteriorated significantly in september, with borrowers finding financing difficult to obtain, and then only at high rates and very short ( usually overnight ) maturities. by serving as a backup source of liquidity for borrowers, the fed's commercial paper facility was aimed at reducing investor and borrower concerns about " rollover risk, " the risk that a borrower could not raise new funds to repay maturing commercial paper. the reduction of rollover risk, in turn, should increase the willingness of private investors to lend, particularly for terms longer than overnight. these various actions appear to have improved the functioning of the commercial paper market, as rates and risk spreads have come down and the average maturities of issuance have increased. in contrast, our forthcoming asset -