Term Securities Lending Facility (TSLF) Explained: 2008 Crisis Tool & Market Impact (Cost & Timeline)

Charlene Rhinehart, CPA and CFE, leads an Illinois CPA Society committee and holds degrees in accounting and finance from DePaul University.

What Is the Term Securities Lending Facility (TSLF)?

The Term Securities Lending Facility (TSLF) was a Federal Reserve program initiated in March 2008 to provide primary dealers with the ability to borrow U.S. Treasury securities on a 28-day term by pledging eligible collateral. This mechanism aimed to alleviate liquidity strains during the financial crisis.

Eligible collateral included high-quality mortgage-backed securities (rated AAA to Aaa and not under downgrade review), municipal securities, investment-grade corporate bonds, and securities available for tri-party repurchase agreements.

Key Highlights

• TSLF allowed primary dealers to borrow Treasury securities for 28 days using eligible collateral.
• Launched in March 2008, it was designed to ease credit market liquidity pressures.
• Accepted collateral ranged from investment-grade corporate bonds to top-rated mortgage-backed securities.
• Primary dealers submitted competitive bids to borrow Treasury bills, notes, bonds, and inflation-indexed securities.
• The TSLF Options Program (TOP) gave dealers the option to draw loans at future dates, enhancing flexibility.

How the Term Securities Lending Facility (TSLF) Operated

Managed by the Federal Reserve’s open market trading desk, the TSLF conducted weekly auctions where primary dealers could bid in $10 million increments for Treasury securities held in the System Open Market Account (SOMA). Borrowing was capped at 20% of the announced offering amount at the Fed’s discretion.

In return for collateral, dealers received a diversified basket of Treasury securities including bills, notes, bonds, and inflation-protected securities. The facility commenced operations on March 11, 2008, with its first auction on March 27, 2008, and concluded on February 1, 2010.

Additional Insight

Another related initiative was the Term Asset-Backed Securities Loan Facility (TALF), which similarly enhanced liquidity and consumer credit availability during the crisis.

Historical Context of the TSLF

Introduced on March 11, 2008, the TSLF aimed to ease liquidity constraints in Treasury securities markets without directly impacting currency supply or security prices. The Federal Reserve initially allocated $200 billion to support this facility, focusing on relieving pressure in mortgage-backed securities markets.

By enabling primary dealers such as Fannie Mae, Freddie Mac, and major banks to exchange less liquid assets for highly liquid Treasury securities, the TSLF significantly improved market liquidity. Liquidity here refers to how quickly assets can be converted into cash without loss of value.

Unlike the Term Auction Facility (TAF), which injected cash directly into the market potentially affecting federal funds rates and the dollar's value, the TSLF offered a bond-for-bond lending alternative that avoided such direct market interventions.

This approach also aligned with the Federal Reserve’s goal to avoid direct purchases of mortgage-backed securities that could distort market prices.

Fast Fact

According to the Congressional Research Service, the TSLF operated without losses and generated $781 million in income over its lifetime.

TSLF Options Program (TOP)

Launched in July 2008, the TSLF Options Program provided primary dealers with the right—but not the obligation—to draw upon TSLF loans at predetermined future dates by submitting eligible collateral. This program was designed to offer additional liquidity during periods of heightened collateral market stress and concluded in October 2009.

Special Considerations and Research Findings

Studies revealed a strong negative correlation between TSLF usage and reliance on other bailout programs like the Troubled Asset Relief Program (TARP) during 2008–2009, indicating that TSLF credit reduced the need for additional bailouts. Furthermore, dealers with higher-paid CEOs tended to borrow more frequently during subsequent TSLF auctions compared to those with lower-paid leadership.

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