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✦

2012
✦

Volume 18, Number 3

IN ECONOMICS AND FINANCE

current issues

FEDERAL RESERVE BANK OF NEW YORK

The Evolution of Treasury Cash
Management during the Financial Crisis
Paul J. Santoro
The U.S. Treasury and the Federal Reserve System have long
enjoyed a close relationship, each helping the other to carry
out certain statutory responsibilities. This relationship proved
beneficial during the 2008-09 financial crisis, when the
Treasury altered its cash management practices to facilitate
the Fed’s dramatic expansion of credit to banks, primary
dealers, and foreign central banks.

L

ike most households and businesses, the U.S. Treasury maintains a cash
balance to buffer short-run fluctuations in receipts and disbursements.
Unlike most households, however, the Treasury’s cash balance is highly
volatile: between January 1, 2006, and December 31, 2010, it varied from as little
as $3.1 billion to as much as $188.6 billion (Chart 1).1
The Treasury divides its cash balance between two types of accounts: a
Treasury General Account (TGA) at the Federal Reserve and Treasury Tax and
Loan Note accounts (TT&L accounts) at private depository institutions.2 The
behavior of the respective account balances changed dramatically in the fall of
2008. As shown in Chart 2, prior to the financial crisis that followed the collapse
of Lehman Brothers on September 15, 2008 (hereafter, “the crisis”), the TGA
mostly fluctuated in a narrow band around $5 billion while TT&L balances
varied more widely.3 In contrast, since the fall of 2008, TT&L balances have
fluctuated in a narrow band around $2 billion and the TGA has varied widely.

1 We define the Treasury’s cash balance as the difference between the Total Operating Balance and
the Supplementary Financing Program Account as shown on the Daily Treasury Statement.
2 The Federal Reserve maintains the TGA as part of

its statutory obligation to serve as fiscal agent
of the United States (Manypenny and Bermudez 1992). The TGA has existed since January 1916
(1916 Treasury Annual Report, p. 6); TT&L accounts, originally named “Liberty Loan deposit
accounts,” have existed since May 1917 (Treasury Circular no. 79, May 16, 1917, reprinted
in 1917 Treasury Annual Report, p. 131; Treasury Circular no. 81, May 29, 1917, reprinted in
1917 Treasury Annual Report, p. 124).

3 While the start date of

the financial crisis is debatable and may have been as early as 2007, the
effect of the crisis on Treasury cash management coincided with the rapid expansion of the Federal
Reserve’s balance sheet after the collapse of Lehman Brothers in September 2008.

CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 18 Number 3

Chart 1

Treasury Cash Balances
Billions of dollars
200
160

120

80

40
0
2006

2007

2008

2009

2010

Sources: U.S. Department of the Treasury, Daily Treasury Statement; authors’ calculations.
Note: Cash balances are computed as the difference between the Total Operating Balance and the Supplementary Financing Program Account as shown on the Daily
Treasury Statement.

Chart 2

Balances in the Treasury General Account and Treasury Tax and Loan Note Accounts
Billions of dollars
200
Treasury General Account
160
Treasury Tax and Loan Note accounts

120

80

40
0
2006

2007

2008

2009

2010

Source: U.S. Department of the Treasury, Daily Treasury Statement.

This edition of Current Issues, one of a group of articles
describing Federal Reserve responses to the crisis,4 explains
how a change in Federal Reserve credit policy during the crisis
was associated with the change in Treasury cash manage4 See also Armantier, Krieger, and McAndrews (2008), Adrian, Burke, and
McAndrews (2009), Fleming, Hrung, and Keane (2009), Garbade, Keane, Logan,
Stokes, and Wolgemuth (2010), Adrian, Kimbrough, and Marchioni (2011),
Gagnon, Raskin, Remache, and Sack (2011), and Goldberg, Kennedy,
and Miu (2011).

2

ment practices shown in Chart 2. Understanding the relationship between Federal Reserve credit policy and Treasury cash
management is important because the relationship illuminates
an important but sometimes unappreciated interface between the
Treasury and the Fed. It also underscores the symbiotic relationship between the two institutions, in which each assists the other
in fulfilling its statutory responsibilities.
Subsequent sections of this article will detail the changes
in Federal Reserve operating procedures and Treasury cash

management during the crisis. The first section, however, presents
a framework for the analysis by reviewing the core missions of
the Treasury and the Federal Reserve and explaining how each
institution seeks to fulfill its mandate.

The Missions of the U.S. Treasury and the Federal Reserve
The Treasury
A principal mission of the U.S. Treasury is collecting income
taxes and other taxes prescribed by statute and funding the
financial commitments of the U.S. government.5 In the course
of fulfilling this mandate, the Treasury undertakes a variety of
debt management operations, including refinancing maturing
debt with new issues, selling additional debt when expenditures
exceed revenues, and retiring debt when the reverse is true. As
noted earlier, the Treasury maintains accounts at the Federal
Reserve and at private depository institutions to buffer day-to-day
fluctuations in cash flows that cannot be accommodated
efficiently with debt management operations.
The Federal Reserve
A principal mission of the Federal Reserve System is managing
the U.S. money supply and credit market conditions to promote
maximum employment with stable prices and moderate longterm interest rates.6 Prior to the fall of 2008, the Fed sought to
carry out this mandate primarily by (1) targeting the interest rate
on overnight loans in the federal funds market and (2) managing
the supply of reserves available to the banking system to stabilize
the federal funds rate at the target rate. Officials purchased
(sold) Treasury securities, either outright or through repurchase
agreements,7 when they wanted to add (drain) reserves to keep
the funds rate from rising above (falling below) the target.
In the course of responding to the crisis, the Fed provided
unprecedented quantities of central bank credit to banks,
primary dealers, foreign central banks, and others. The increase
in assets on the Fed’s balance sheet generated a corresponding
increase in central bank liabilities. Currency in circulation
expanded modestly, from $835 billion on September 10, 2008,
to $890 billion at the end of the year, but deposits at the central
bank ballooned from $38 billion to $1.2 trillion,8 far beyond what
depository institutions were required to hold. As described below,
the Fed and the Treasury adopted a variety of novel procedures
5 See “Duties and Functions of the U.S. Department of the Treasury,” available
at www.treasury.gov/about/role-of-treasury/Pages/default.aspx.
6 See Board of

Governors of the Federal Reserve System (2005, p. 1).

7 A repurchase agreement is a sale of

securities coupled with an agreement to
repurchase the same securities at a specified price on a later date. Repurchase
agreements are also called “repos.”
8 Deposits at the central bank include reserve balances of depository institutions,
U.S. Treasury deposits, foreign official deposits, and service-related deposits
(including required clearing balances and adjustments to compensate for float).

to prevent the expanding quantity of reserves from driving the
federal funds rate to zero.

The Interface between the Federal Reserve and the Treasury
At first impression, the Federal Reserve and Treasury mandates
might seem sufficiently distinct that the two institutions should
be able to function independently of each other. However, the
Treasury funnels most of its receipts into, and it disburses most
of its payments from, the TGA. Thus, there is a continuous flow of
funds from private depository institutions to the TGA and back
again. During fiscal year 2010, $11.6 trillion flowed into, and then
out of, the TGA.
Flows of funds between the TGA and private depository
institutions were important prior to the crisis because the TGA
is maintained on the books of the Federal Reserve; increases in
TGA balances stemming from Treasury net receipts drained
reserves from the banking system and, in the absence of offsetting actions, put upward pressure on the federal funds rate.
Conversely, decreases in TGA balances resulting from Treasury
net expenditures added reserves to the banking system and,
absent offsetting actions, put downward pressure on the funds
rate. This dynamic created an important interface between
Treasury and Federal Reserve operations. The sections that
follow describe first how Treasury and Federal Reserve officials
cooperated to manage the interface before the crisis, and then
how the interface has changed since the onset of the crisis and
the expansion of the Fed’s balance sheet.

Treasury Cash Management before the Crisis
If, in the pre-crisis regime, the Treasury had deposited all of
its receipts in the TGA as soon as they came in, and if it had
held the funds in the TGA until they were disbursed, the supply
of reserves available to the banking system—and hence the
overnight federal funds rate—would have exhibited undesirable volatility. To dampen the volatility, the Fed would have had
to conduct frequent and large-scale open market operations,
draining reserves when TGA balances were declining and adding reserves when TGA balances were rising.9 A more efficient
strategy, and the one used by the Treasury in its Tax and Loan
program, was to seek to maintain a stable TGA balance.

The Treasury Tax and Loan Program
Prior to the onset of the crisis, the Treasury Tax and Loan
program had three principal objectives: processing federal tax
9 This actually happened between 1974 and 1978. During this period, the TGA

experienced large fluctuations when the Treasury sought to limit aggregate TT&L
balances to about $1.5 billion (Lovett 1978, p. 43), and the Federal Reserve was
obliged to conduct correspondingly large and frequent open market operations
(Brockschmidt 1975; McDonough 1976). The need for aggressive intervention
ended in 1978 following a major reorganization of the TT&L program (Lovett
1978; Lang 1979).

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CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 18 Number 3

receipts, stabilizing the TGA balance, and generating interest
income for the Treasury.10
Collecting Federal Tax Receipts
A private depository institution could participate in the TT&L
program in any of three ways: as a collector institution, as a
retainer institution, or as an investor institution.
A collector institution was a tax collection conduit. It accepted
tax payments from businesses (primarily withholdings of personal income taxes, corporate income taxes, and social security
contributions) in electronic form and at its teller windows and
transferred the payments to the TGA.
A retainer institution also accepted tax payments but, subject
to a limit specified by the institution and pledge of sufficient
collateral, retained the payments in an interest-bearing “Main
Account” until called for by the Treasury. If a Main Account
balance exceeded the institution’s limit, or if it exceeded the
collateral value of the assets pledged by the institution, the
excess was transferred promptly to the TGA.
An investor institution did everything a retainer institution did
and, as described below, also accepted direct investments from
the Treasury.11 The investments were credited to the institution’s
Main Account and had to be collateralized.
Stabilizing the TGA Balance
Before the onset of the crisis, the Treasury typically aimed to
maintain a $5 billion balance in the TGA.12 The Treasury used
well-timed cash calls13 and direct investments to maintain the
actual balance close to the target most of the time (see Chart 2).
Each morning Treasury cash managers and analysts at the
Federal Reserve Bank of New York estimated the current day’s
receipts and disbursements. During a telephone conference call
at 9 a.m., they combined the estimates with the previous day’s
closing TGA balance, scheduled payments of principal and
interest, scheduled proceeds from sales of new securities, and
other similar items to produce an estimate of the current day’s
closing balance. If the estimated closing balance exceeded the
target, the Treasury would invest the excess at investor institutions

that had sufficient free collateral and room under their balance
limits to accept additional funds.14 If the estimated balance was
below target, the Treasury would call for funds from retainer and
investor institutions to make up the shortfall.
Earning Interest on TT&L Balances
The Treasury had three ways to earn interest on TT&L balances.
Conventional Main Account balances earned interest at the
federal funds rate less 25 basis points. In addition, the Treasury
could, at its discretion, make overnight investments in repurchase agreements (repos) and term investments through its Term
Investment Option (TIO) program.
The relationship between the rate on Main Account balances
and the federal funds rate was set in 1978, in the course of a
major overhaul of the TT&L program. A market-linked rate equal
to the funds rate less 25 basis points was deemed appropriate
for collateralized TT&L balances because, at the time, it was
approximately equal to the rate on overnight repurchase agreements on Treasury collateral. However, by the late 1990s, the
spread between the federal funds rate and the repo rate had
narrowed to 5 basis points and the Treasury began to consider
alternatives to obtain a higher rate of return on investments.
The first alternative, the TIO program, was introduced on
an experimental basis in April 2002 and made permanent in
November 2003.15 A TIO auction was similar to a Treasury bill
auction, but in reverse. The Treasury offered to invest (rather
than borrow) a specified amount of money for a specified term
and participating institutions bid on the money. On average from
March 2006 to March 2007, institutions were willing to pay about
18 basis points more for TIO balances than they had to pay on
Main Account balances,16 in part because TIO balances would
remain with the institution for a specified term rather than
being subject to daily calls.
In March 2006, the Treasury initiated a pilot program of
investing excess funds through overnight repurchase agreements.
During the pilot program, the Treasury invested an average of
$2.7 billion per day in repurchase agreements against Treasury
collateral. Daily offerings ranged between $500 million and
$6 billion.17 On average from March 2006 to March 2007,

10 Garbade, Partlan, and Santoro (2004) describe in more detail the Treasury Tax

and Loan program as it operated before the crisis. The Treasury is presently in
the midst of a major revamping of its cash management systems. See Financial
Management Service, “Collections and Cash Management Modernization
(CCMM),” available at www.fms.treas.gov/ccmm/index.html.
11 A direct investment was a Treasury-directed transfer of

funds from the TGA

to Treasury’s TT&L accounts at investor banks.
12 The target balance, established in 1988, had to be large enough to provide a

high degree of confidence that the TGA would not be overdrawn at the end of a
business day since the Fed was not authorized to lend directly to the Treasury.
The target balance was sometimes bumped up to $7 billion when cash flows
were unusually heavy, such as the intervals around tax payment dates.
13 Cash calls are Treasury-directed transfers from TT&L accounts to the TGA.

4

14 Occasionally, net flows into the TGA were so large that the Treasury exhausted
the capacity of investor institutions to accept additional funds and TGA balances
rose above the target level by more than several billion dollars. For more on
stabilizing the TGA and the timing of direct investments and calls, see, for
example, the discussion of the April 2000 tax payments in Garbade, Partlan, and
Santoro (2004, p. 6).
15 See, Garbade, Partlan, and Santoro (2004) and Hrung (2007).
16 Government Accountability Office (2007, p. 13, Table 2).
17 U.S. Department of the Treasury, Financial Management Service, “Repurchase
Agreement (Repo) Program,” available at http://www.fms.treas.gov/tip/repo/
index.html.

Chart 3

Allocation of Treasury Tax and Loan Balances among Term Investment Option Balances, Coventional Main Account
Balances, and Repurchase Agreements prior to September 15, 2008
Billions of dollars
150

120

Term Investment Option balances
Conventional Main Account balances
Repurchase agreements

90
60
30
0
2006

2007

2008

Sources: U.S. Department of the Treasury, Daily Treasury Statement; authors’ calculations.

institutions were willing to pay about 21 basis points more for
repo balances than they had to pay on Main Account balances,18
in part for the enhanced certainty of obtaining and retaining
funds until the next business day.
Chart 3 shows how TT&L balances were divided among
conventional Main Account balances, TIO investments, and
repo investments prior to the crisis.

Treasury Cash Management following the Onset
of the Crisis: The Initial Structure
It quickly became clear during the week of September 15, 2008,
that the United States was heading into a major financial crisis.
On Tuesday, September 16, a $63 billion money market mutual
fund “broke the buck” and turned what had been a slow leakage
of shareholder balances into a full-scale run.19 Later the same
day, the Board of Governors of the Federal Reserve System, acting
“with the full support of the Treasury Department,” authorized
the Federal Reserve Bank of New York to lend up to $85 billion
to American International Group, Inc. (AIG).20

18 Government Accountability Office (2007, p. 13, Table 2).
19

Investment Company Institute (2009). A money market mutual fund is said to
break the buck when its net asset value falls below $0.995 per share. In that case,
the fund has to begin to redeem its shares at net asset value or otherwise act to
ensure fair treatment of its shareholders.
20 Board of

Governors of the Federal Reserve System, press release, September 16,
2008; U.S. Department of the Treasury, “Statement by Secretary Henry M. Paulson,
Jr., on Federal Reserve Actions surrounding AIG,” press release, September 16, 2008.

By the close of business on Wednesday, September 17,
AIG had borrowed $28 billion, primary dealers had borrowed
$60 billion (through the Primary Dealer Credit Facility21), and
depository institutions had added $10 billion to their discount
window borrowings. In all, Federal Reserve credit expanded by
$100 billion in just two days, and there was more to come.22
As a result of the Fed’s mushrooming loan portfolio, reserve
balances of depository institutions increased from $25 billion on
September 10 to $82 billion on September 17. It was clear that,
in the absence of profound institutional change, reserve balances
were going to be vastly in excess of requirements for the foreseeable future and federal funds were going to trade well below the
target rate of 2 percent.23
21 Adrian, Burke, and McAndrews (2009) explain the origins and operation
of the Primary Dealer Credit Facility.
22 On September 18, the Board of Governors announced that it had agreed
to expand its swap lines with foreign central banks by $180 billion (Board of
Governors of the Federal Reserve System, press release, September 18, 2008).
Several counterparties promptly expanded their draws of U.S. dollars by
$64 billion (Board of Governors of the Federal Reserve System, press release,
December 1, 2010). On September 19, the Board announced the formation of the
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
(Board of Governors of the Federal Reserve System, press release, September 19,
2008). The facility opened for business on Monday, September 22, and within
three days lent $73 billion.
23 The Federal Reserve Bank of New York’s annual report of domestic open
market operations in 2008, prepared by the Bank’s Markets Group, notes that
“after September 15, [2008], the magnitude of liquidity added to the system
through various programs exceeded the Federal Reserve’s ability to offset with
draining operations” (Federal Reserve Bank of New York 2009, p. 6).

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CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 18 Number 3

The Supplementary Financing Program
The first Treasury cash management change following the onset
of the crisis involved the sale of Treasury bills by the U.S. Treasury
and the deposit of the proceeds with the Federal Reserve—actions
that drained reserves from the banking system and reduced the
volume of excess reserves. On Wednesday, September 17, the
Treasury announced the initiation of “a temporary Supplementary Financing Program [SFP] at the request of the Federal
Reserve.”24 The announcement stated that the program would
“consist of a series of Treasury bills, apart from Treasury’s current
borrowing program, which will provide cash for use in the
Federal Reserve [lending and liquidity] initiatives.” 25 The
Treasury announced three SFP sales that day for a total of
$100 billion. The proceeds from the sales were deposited in a
newly created SFP account at the Fed, thereby draining approximately $100 billion of reserves from the banking system.

Chart 4

By Friday, October 3, two weeks and two days after the start of
the Supplementary Financing Program, the Treasury had issued
eleven SFP bills (one of which was to refinance a maturing SFP
bill) and the program had drained about $355 billion of reserve
balances. SFP bills peaked at $560 billion between October 20
and November 12 (Chart 4).

Source: U.S. Department of the Treasury.

On October 6, the Federal Reserve announced that it would
begin to pay interest on reserve balances effective Thursday,
October 9. This new feature of monetary policy was expected to
allow the Fed to continue to use its lending program to address
conditions in credit markets while also maintaining the funds rate
close to the target level, even in the absence of the SFP program. 26

24 U.S. Department of

the Treasury, “Treasury Announces Supplementary
Financing Program,” press release, September 17, 2008. Emphasis added.
25 The novelty of

the SFP program led to some confusion in describing the
program. The New York Times, for example, reported the first sale of SFP bills
by stating, “In a sign of how short the Fed’s available reserves had become, the
Treasury Department sold tens of billions of dollars of special ‘supplementary’
Treasury bills on September 17 to provide the Fed with extra cash” (“A New Role
for the Fed: Investor of Last Resort,” New York Times, September 18, 2008, p. A1).
In fact, the Federal Reserve can emit currency and create bank reserves at will
and thus did not need any “extra cash.” What it could not fashion from its existing
authorities was a way to drain massive quantities of reserves from the banking
system. The Wall Street Journal got it right when it stated that the Treasury was
“carrying out [a reserve] draining function in place of the Fed” (“U.S. Moves to
Bolster Fed Balance Sheet – Treasury Auctions $40 Billion of Debt; More Sales
on Tap,” Wall Street Journal, September 18, 2008, p. A3).
26 See Board of

Governors of the Federal Reserve System, press release, October 6,
2008: “The payment of interest on excess reserves will permit the Federal Reserve
to expand its balance sheet as necessary to provide the liquidity necessary to
support financial stability while implementing the monetary policy that is
appropriate in light of the System’s macroeconomic objectives of maximum
employment and price stability.” See also Federal Reserve Bank of New York
(2009, p. 4): “In theory, the payment of interest on excess reserve balances allows
the Federal Reserve to continue to use its lending programs to address conditions
in the credit markets while also maintaining the fed funds rate close to the target
established by the FOMC.”

6

SFP Bills Outstanding
Through December 29, 2009
Principal amount (billions of dollars)
600
500
400
300
200
100
0

2008

2009

Notes: SFP is Supplementary Financing Program. The first vertical dashed line in the
chart marks the November 17, 2008, announcement by the Treasury that it would be
reducing the size of the SFP program. The second vertical dashed line marks the
September 16, 2009, announcement by the Treasury that it would begin to redeem,
rather than refinance, maturing SFP bills.

On November 17 the Treasury announced that it was
trimming the size of the SFP program.27 By the end of 2008,
there were $260 billion of SFP bills outstanding. The program
stabilized at $200 billion in early March 2009 and remained at
that level until late September 2009, when the Treasury began to
redeem maturing bills for cash in anticipation of a debt ceiling
constraint.28 The last SFP bill issued in the course of the original
program was redeemed on December 29, 2009.29
The tenor—or term to maturity—of SFP bills issued in 2008
and 2009 ranged from just 7 days to as many as 101 days in the
first two months of the program, but stabilized at 70 days in
2009 when the overall size of the program firmed at $200 billion
(Chart 5). Most SFP bills were issued to refinance maturing SFP
bills; in only two instances in 2009 was an SFP bill issued for new
27 U.S. Department of the Treasury, “Treasury Issues Debt Management Guidance
on the Temporary Supplementary Financing Program,” press release, November 17,
2008.
28 See U.S. Department of the Treasury, “Treasury Issues Debt Management
Guidance on the Supplementary Financing Program, press release, September 16,
2009; “U.S. Treasury to Scale Back Fed Program to Avoid Debt Ceiling,” Bloomberg
.com, September 16, 2009; and “Treasury to Shrink Financing Program,” Wall
Street Journal, September 16, 2009, p. A3.
29 On December 28, 2009, Congress raised the debt ceiling by $290 billion.
Armed with enlarged issuance authority, the Treasury revived the Supplementary
Financing Program. The revived program ran from the end of 2009 to mid-2011,
when it was allowed to run down in the face of another debt ceiling constraint. For
most of that time, the Treasury regularly and predictably auctioned $25 billion
of eight-week SFP bills every week.

Chart 5

Chart 7

Tenor of SFP Bills Issued in 2008 and 2009

Target Federal Funds Rate, IOER Rate,
and Federal Funds Rate

Number of days
120

Percent
3.0
Federal funds rate

90

2.5

Target federal funds rate
(or upper end of target range)

2.0

60

IOER rate
(when different from target
federal funds rate)

1.5

30

1.0
0.5

23
No
vem
ber
6
No
vem
ber
20
De
cem
ber
4
De
cem
ber
18
Jan
uar
y1

Note: SFP is Supplementary Financing Program.

tob
er

Source: U.S. Department of the Treasury.

9

Au
gu
st 2
8
Sep
tem
ber
11
Sep
tem
ber
25

0

Oc

2009
Date of issue

tob
er

2008

Oc

0

2008

2009

Sources: Board of Governors of the Federal Reserve System; Federal Reserve Bank
of New York.
Chart 6

Size of SFP Bills Issued in 2008 and 2009
Principal amount (billions of SFP dollars)
75

50

25

0
2008

Date of issue

2009

Source: U.S. Department of the Treasury.
Note: SFP is Supplementary Financing Program.

cash. The size of the SFP bills issued in 2008 and 2009 initially
ranged from $30 billion to $60 billion, but stabilized at $30 billion
to $35 billion in 2009 (Chart 6).

Treasury Cash Management after the Fed Began
Paying Interest on Reserves
On October 6, 2008, when the Federal Reserve announced that
it would begin to pay interest on reserves, it stated that it would

Notes: IOER is the interest rate on excess reserves. Days marked on the horizontal axis
denote the beginnings of reserve maintenance periods.

pay the average target federal funds rate over a reserve maintenance period, less 10 basis points, on required reserves and
the lowest target rate over a maintenance period, less 75 basis
points, on excess reserves.30 Following several changes in the
target funds rate and the rate paid on required reserve balances
and excess balances, the FOMC established (on December 16,
2008) a target range of zero to 25 basis points for the funds rate,
and the Board of Governors announced a rate of 25 basis points
on reserve balances.31 (The rate of interest on excess reserves is
commonly known as the “IOER rate.”) Charts 7 and 8 show that
the federal funds rate was persistently below the IOER rate from
late 2008 through 2010.

Consequences for Treasury Cash Management
The structure of interest rates after December 2008 prompted
the Treasury to make a second change in its cash management
practices since it now had an economic incentive to keep its
cash balances in the Treasury General Account rather than in
Treasury Tax and Loan Note accounts. When the overnight
federal funds rate fell below 25 basis points, the TT&L rate
on Main Account balances went to zero and the likely rates of
30 Board of Governors of the Federal Reserve System, press release, October 6, 2008.
31 Board of Governors of the Federal Reserve System, press release, December 16,
2008.

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CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 18 Number 3

Chart 8

did reduce the size of the program, but it did not eliminate it
entirely (Chart 4).

IOER Rate and Federal Funds Rate
Percent
0.35
0.30
IOER rate

0.25
0.20
0.15
0.10

Federal funds rate

0.05
0
2009

2010

Sources: Board of Governors of the Federal Reserve System; Federal Reserve Bank
of New York.
Note: The IOER rate is the interest rate on excess reserves.

interest on TIO balances and Treasury repurchase agreements fell
below 25 basis points. In that environment, it was more remunerative for the Treasury to keep its money in the TGA. Shifting
Treasury balances to private depositories would have increased
the reserve balances of depository institutions and required the
Fed to pay interest on those reserve balances (at the IOER rate
of 25 basis points per annum). This would have reduced Federal
Reserve payments to the Treasury (of Federal Reserve earnings
in excess of expenses) by more than what the Treasury could earn
from the depositories.32 In addition, a large TGA balance limited
the risk that the Treasury might overdraw the account at a time
when expenditures were extraordinarily volatile.
At the same time, the volatile swings in TGA balances associated with the decision to keep essentially all of the Treasury’s
operating cash balances in the TGA (see Chart 2) did not cause
a problem for the Fed because the swings did not result in any
comparable volatility in the federal funds rate. In particular,
expanding TGA balances did not reduce the quantity of reserves
available to the banking system to a level at all close to what
banks wanted or were required to hold and thus did not put
upward pressure on the funds rate.

Consequences for the Supplementary Financing Program
In principle, paying interest on reserves could have led the
Treasury to terminate the Supplementary Financing Program.
Adhering to its November 17, 2008, announcement, the Treasury
32 However, the Treasury continued to keep $2 billion in TT&L accounts until

December 29, 2011, to ensure that the functionalities of the TT&L program
remained intact in the event that the Fed returned to the pre-crisis structure of
monetary policy. By 2012, collector and retainer designations were eliminated, and
the TT&L investment program was shut down. Treasury indicated that it planned
on implementing a new investment program when market conditions warranted
and that more details would be announced when they became available.

8

There were several reasons for not eliminating the Supplementary Financing Program at the end of 2008. First, SFP bills
soaked up a nontrivial quantity of excess reserves.33 Second,
higher SFP balances, like higher TGA balances, reduced the
volume of reserves on which the Federal Reserve had to pay
interest and were, therefore, fiscally beneficial to the Treasury.
And third, the Supplementary Financing Program provided
market participants with additional quantities of a short-term,
credit risk–free instrument that was unusually attractive in
the midst of the crisis.34

Conclusion
The Treasury Tax and Loan Note program has long been an
exemplar of cooperation between the Federal Reserve and the
Treasury, with the Fed serving as the Treasury’s fiscal agent
in maintaining the Treasury General Account and with the
Treasury issuing cash calls and making direct investments to
stabilize the TGA at a specified target level. The 2008-09 crisis
triggered a further deepening of the close relationship between
the two institutions. When the Fed’s balance sheet ballooned
in September 2008 as the crisis deepened, the Treasury
announced, at the Fed’s request, the Supplementary Financing Program to soak up excess reserves and to keep the federal
funds rate from being driven down to zero. The subsequent
introduction of interest on reserves left the Treasury free to
abandon those aspects of the TT&L program aimed at stabilizing the TGA and allowed it to pursue cash management
practices that, in light of the new monetary regime, were in
the best interest of taxpayers.
The Treasury’s cash management and investment strategy
continues to evolve, guided by the goals of earning a fair return
on investment, ensuring that the funds available in the TGA are
sufficent to avoid an overdraft, and avoiding interference with the
implementation of monetary policy. When the interest rates that
the Treasury receives on investments are higher, it may resume
investing its surplus funds with the private sector, as it did prior
to 2009. However, if short-term interest rates remain close to current levels and there is no need to target the TGA, then Treasury
investments are likely to remain low or nonexistent since holding
funds in the TGA is more remunerative than investing funds with
the private sector.
Nevertheless, a significant decline in excess reserves resulting
from a shift in monetary policy may once again make it necessary
to target a more stable TGA, so that TGA volatility does not cause

33 Bernanke (2009) observed that “issuance of [SFP] bills effectively drains
reserves from the banking system, improving monetary control.”
34 Hrung and Seligman (2011, p. 7) noted that “an incidental by-product” of

SFP program “was that it increased the amount of high-quality collateral
available in the market, helping to alleviate . . . supply-side stresses in the
money markets. . . .”

the

undesirable federal funds rate volatility and interfere with the
implementation of monetary policy.
The author thanks Kenneth Garbade for his many substantive
contributions to the preparation of this article. He also thanks
David Monroe, Warren Hrung, John Partlan, Gregory Till, and
Chris Burke for helpful comments on earlier versions.

References
Adrian, Tobias, Christopher Burke, and James McAndrews. 2009. “The Federal
Reserve’s Primary Dealer Credit Facility.” Federal Reserve Bank of New York
Current Issues in Economics and Finance 15, no. 4 (August).
Adrian, Tobias, Karin Kimbrough, and Dina Marchioni. 2011. “The Federal
Reserve’s Commercial Paper Funding Facility.” Federal Reserve Bank of New York
Economic Policy Review 17, no. 1 (May): 25-39.
Armantier, Olivier, Sandra Krieger, and James McAndrews. 2008. “The Federal
Reserve’s Term Auction Facility.” Federal Reserve Bank of New York Current Issues
in Economics and Finance 14, no. 5 (July).
Bernanke, Ben. 2009. The Crisis and the Policy Response. Stamp Lecture,
London School of Economics, London, England, January 13.
Board of Governors of the Federal Reserve System. 2005. The Federal Reserve
System: Purposes and Functions.
Brockschmidt, Peggy. 1975. “Treasury Cash Balances.” Federal Reserve Bank
of Kansas City Monthly Review 60, no. 7 (July-August): 12-20.
Federal Reserve Bank of New York. 2009. Domestic Open Market Operations
during 2008. Available at www.newyorkfed.org/markets/omo/omo2008.pdf.
Fleming, Michael, Warren Hrung, and Frank Keane. 2009. “The Term Securities
Lending Facility: Origin, Design, and Effects.” Federal Reserve Bank of New York
Current Issues in Economics and Finance 15, no. 2 (February).
Gagnon, Joseph, Matthew Raskin, Julie Remache, and Brian Sack. “Large-Scale
Asset Purchases by the Federal Reserve: Did They Work?” Federal Reserve Bank
of New York Economic Policy Review 17, no. 1 (May): 41-59.

Garbade, Kenneth, Frank Keane, Lorie Logan, Amanda Stokes, and Jennifer
Wolgemuth. 2010. “The Introduction of the TMPG Fails Charge for U.S. Treasury
Securities.” Federal Reserve Bank of New York Economic Policy Review 16, no. 2
(October): 45-71.
Garbade, Kenneth, John Partlan, and Paul Santoro. 2004. “Recent Innovations in
Treasury Cash Management.” Federal Reserve Bank of New York Current Issues
in Economics and Finance 10, no. 11 (November).
Goldberg, Linda, Craig Kennedy, and Jason Miu. 2011. “Central Bank Dollar Swap
Lines and Overseas Dollar Funding Costs.” Federal Reserve Bank of New York
Economic Policy Review 17, no. 1 (May): 3-20.
Government Accountability Office. 2007. Debt Management: Treasury Has
Improved Short-Term Investment Programs, but Should Broaden Investments
to Reduce Risks and Increase Returns. GAO-07-1105.
Hrung, Warren. 2007. “An Examination of Treasury Term Investment Interest
Rates.” Federal Reserve Bank of New York Economic Policy Review 13, no. 1
(March): 19-32.
Hrung, Warren, and Jason Seligman. 2011. “Responses to the Financial Crisis,
Treasury Debt, and the Impact on Short-Term Money Markets.” Federal Reserve
Bank of New York Staff Reports, no. 481, January.
Investment Company Institute. 2009. Report of the Money Market Working Group.
Lang, Richard. 1979. “TTL Note Accounts and the Money Supply Process.”
Federal Reserve Bank of St. Louis Review 61, no. 1 (October): 3-14.
Lovett, Joan. 1978. “Treasury Tax and Loan Accounts and Federal Reserve Open
Market Operations.” Federal Reserve Bank of New York Quarterly Review 3,
no. 2 (summer): 41-6.
Manypenny, Gerald D., and Michael L. Bermudez. 1992. “The Federal Reserve
Banks as Fiscal Agents and Depositories of the United States.” Federal Reserve
Bulletin 78, no. 10 (October): 727-37.
McDonough, William. 1976. “New Policy Prompts Increased Defensive
Operations by Federal Reserve.” Federal Reserve Bank of Dallas Business
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Report to the Congress, February 6.

ABOUT THE AUTHORS
Paul J. Santoro is a senior financial/economic analyst in the Market Operations, Monitoring, and Analysis Function of the
Federal Reserve Bank of New York’s Markets Group.
Current Issues in Economics and Finance is published by the Research and Statistics Group of the Federal Reserve Bank of New York.
Linda Goldberg and Thomas Klitgaard are the editors.
Editorial Staff: Valerie LaPorte, Mike De Mott, Michelle Bailer, Karen Carter, Anna Snider
Production: Carol Perlmutter, David Rosenberg, Jane Urry
Subscriptions to Current Issues are free. Send an e-mail to Research.Publications@ny.frb.org or write to the Publications Function,
Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y. 10045-0001. Back issues of Current Issues are available
at http://www.newyorkfed.org/research/current_issues/.

The views expressed in this article are those of the authors and do not necessarily reflect the position
of the Federal Reserve Bank of New York or the Federal Reserve System.

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9

CURRENT ISSUES IN ECONOMICS AND FINANCE ❖ Volume 18 Number 3

RELATED READINGS FROM THE FEDERAL RESERVE BANK OF NEW YORK’S RESEARCH GROUP

Articles and Papers
The Federal Reserve’s Commercial Paper Funding Facility
Tobias Adrian, Karin Kimbrough, and Dina Marchioni
Economic Policy Review, vol. 17, no. 1, May 2011
Established in the wake of Lehman Brothers’ bankruptcy to
stabilize severe disruptions in the commercial paper market, the
Commercial Paper Funding Facility allowed the Federal Reserve
to act as a lender of last resort for issuers of commercial paper,
thereby effectively addressing temporary liquidity distortions
and alleviating the severe funding stress that threatened to
further exacerbate the financial crisis. In doing so, the facility
proved to be a noteworthy model of liquidity provision in a
market-based financial system, where maturity transformation
occurs outside of the commercial banking sector. This study
examines the creation and performance of the facility, while
outlining the evolution and importance of the commercial
paper market.
The Federal Reserve’s Primary Dealer Credit Facility
Tobias Adrian, Christopher Burke, and James McAndrews
Current Issues in Economics and Finance, vol. 15, no. 4, August 2009
As liquidity conditions in the “repo market”—the market where
broker-dealers obtain financing for their securities—deteriorated following the near-bankruptcy of Bear Stearns in March
2008, the Federal Reserve took the step of creating a special
facility to provide overnight loans to dealers that have a trading
relationship with the Federal Reserve Bank of New York. Six
months later, in the wake of new strains in the repo market, the
Fed expanded the facility by broadening the types of collateral
accepted for loans. Both initiatives were designed to help restore
the orderly functioning of the market and to prevent the spillover of distress to other financial firms.
The Term Securities Lending Facility: Origin, Design,
and Effects
Michael Fleming, Warren Hrung, and Frank Keane
Current Issues in Economics and Finance, vol. 15, no. 2, February 2009
The Federal Reserve launched the Term Securities Lending
Facility (TSLF) in 2008 to promote liquidity in the funding
markets and improve the operation of the broader financial
markets. The facility increases the ability of dealers to obtain
cash in the private market by enabling them to pledge securities
temporarily as collateral for Treasuries, which are relatively easy
to finance. The TSLF thus reduces the need for dealers to sell
assets into illiquid markets and lessens the likelihood of a loss
of confidence among lenders.

10

The Federal Reserve’s Term Auction Facility
Olivier Armantier, Sandra Krieger, and James McAndrews
Current Issues in Economics and Finance, vol. 14, no. 5, July 2008
As liquidity conditions in the term funding markets grew increasingly
strained in late 2007, the Federal Reserve began making funds available directly to banks through a new tool, the Term Auction Facility
(TAF). The TAF provides term funding on a collateralized basis, at
interest rates and amounts set by auction. The facility is designed to
improve liquidity by making it easier for sound institutions to borrow
when the markets are not operating efficiently.
Large-Scale Asset Purchases by the Federal Reserve:
Did They Work?
Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack
Economic Policy Review, vol. 17, no. 1, May 2011
This study reviews the Federal Reserve’s experience in implementing large-scale asset purchases between late 2008 and
March 2010. The authors show that by reducing the net supply
of assets with long maturities, the purchases led to economically meaningful and long-lasting reductions in longer term
interest rates on a range of securities. The reductions primarily
reflect lower risk premiums, including term premiums. The asset
purchase programs had an especially powerful effect on longer
term interest rates on agency debt and agency mortgage-backed
securities by improving market liquidity and removing assets
with high prepayment risk from private portfolios.
The Introduction of the TMPG Fails Charge
for U.S. Treasury Securities
Kenneth Garbade, Frank Keane, Lorie Logan, Amanda Stokes,
and Jennifer Wolgemuth
Economic Policy Review, vol. 16, no. 2, October 2010
The TPMG fails charge for U.S. Treasury securities provides that
a buyer of Treasury securities can claim monetary compensation from the seller if the seller fails to deliver the securities
on a timely basis. The charge was introduced in May 2009 and
replaced an existing market convention of simply postponing—without any explicit penalty and at an unchanged invoice
price—a seller’s obligation to deliver Treasury securities of the
seller fails to deliver the securities on a scheduled settlement
date. This article explains how a proliferation of settlement
fails following the insolvency of Lehman Brothers Holdings Inc.
in September 2008 led the Treasury Market Practices Group
(TPMG), a group of market professionals committed to supporting the integrity and efficiency of the U.S. Treasury market,
to promote a change in the existing market convention. The
change—the introduction of the fails charge—was significant

because it mitigated an important dysfunctionality in the
secondary market for U.S. Treasury securities and because it
stands as an example of the value of cooperation between the
public and private sectors in responding to altered market
conditions in a flexible, timely, and innovative fashion.
Recent Innovations in Treasury Cash Management
Kenneth Garbade, John Partlan, and Paul Santoro
Current Issues in Economics and Finance, vol. 10, no. 11,
November 2004
The Treasury Tax and Loan program, a joint undertaking of
the Treasury and the Federal Reserve, is designed to manage
federal tax receipts and stabilize the supply of reserves in the
banking system. Three recent innovations—electronic collection of business taxes, real-time investment of excess Treasury
balances, and competitive bidding for Treasury deposits—have
materially enhanced the ability of the two agencies to achieve
these objectives.
An Examination of Treasury Term Investment Interest Rates
Warren Hrung
Economic Policy Review, vol. 13, no. 1, March 2007
In November 2003, the Term Investment Option (TIO) program
became an official cash management tool of the U.S. Treasury
Department. Through TIO, the Treasury lends funds to banks
for a set number of days at an interest rate determined by a
single-rate auction. One reason why the Treasury introduced
TIO was to try to earn a market rate of return on its excess cash
balances. This article studies 166 TIO auctions from November
2003 to February 2006 to determine how TIO interest rates have
compared with market rates. The author investigates the spread
between TIO rates and rates on mortgage-backed-security
repos, a close benchmark for TIO rates. He finds that aside from
offerings with very short-term lengths, the Treasury receives an
interest rate on TIO auctions comparable to market rates. He
also documents a negative relationship between an auction’s
size and the spread between TIO and repo rates. Furthermore,
the Treasury’s announcement and auctioning of funds on the
same day does not adversely affect rate spreads, a finding that
suggests that banks are indifferent to more advance notice of
TIO auctions.
Responses to the Financial Crisis, Treasury Debt, and
the Impact on Short-Term Money Markets
Warren Hrung and Jason Seligman
Staff Reports, no. 481, January 2011

Financing Program, increases in Treasury issuance, and open
market operations—and their impacts on the overnight Treasury
general collateral repo rate, a key money market rate. The authors’
contribution is to consider each policy in light of the others, both
to help guide policy responses to future crises and to emphasize policy interactions. Only the TSLF was designed to directly
address stresses in short-term money markets by temporarily
changing the supply of Treasury collateral in the marketplace.
We find that the TSLF is uniquely effective relative to other
policies and that, while changes in Treasury collateral do affect
repo rates, the impacts are not equivalent across sources of
Treasury collateral.
Central Bank Dollar Swap Lines and Overseas Dollar
Funding Costs
Linda Goldberg, Craig Kennedy, and Jason Miu
Economic Policy Review, vol. 17, no. 1, May 2011
In the decade prior to the financial crisis, foreign banks’ exposure
to U.S.-dollar-denominated assets increased dramatically. When
the crisis hit in 2007, the banks’ access to dollar funding came
under severe constraints. The Federal Reserve responded in
December 2007 by establishing temporary reciprocal currency
swap lines with foreign central banks designed to ameliorate the
dollar funding stresses overseas. Drawing on rigorous analysis
of the swaps, as well as insights of other economic studies and
anecdotal accounts of market participants, this article concludes
that the lines were effective in reducing both dollar funding costs
abroad and stresses in the money markets.

Liberty Street Economics Blog Posts
Innovations in Treasury Debt Instruments
Kenneth Garbade
April 9, 2012
Will “Quantitative Easing” Trigger Inflation?
Kenneth Garbade
June 8, 2011
Will the Federal Reserve’s Asset Purchases Lead to
Higher Inflation?
Jamie McAndrews
May 18, 2011

Several programs have been introduced by U.S. fiscal and
monetary authorities in response to the financial crisis. This
study examines the responses involving Treasury debt—the
Term Securities Lending Facility (TSLF), the Supplemental

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