CITIC Securities Co., Ltd.: Insights on Temporary Monetary Policy During the U.S. Crisis

According to the Wise Finance APP, CITIC Securities released a research report stating that on October 18, 2024, the Swap Facility for Supporting Capital Market Development (SFISF) was officially launched. Although there are significant differences between China and the United States, the experience of creating monetary policy tools during historical crises still has certain reference significance. From the perspective of policy creation logic, it aims to provide liquidity to financial institutions at home and abroad; target relief for different market situations; and lower long-term interest rates through expectation management and purchasing long-term bonds to improve market liquidity. In terms of tool implementation, publicizing policy details and effectively communicating with the market can guide market expectations and enhance the effectiveness of tool usage.

The People's Bank of China has officially launched the Securities, Funds, and Insurance Companies Swap Facility (SFISF).

On September 24, 2024, Pan Gongsheng, Governor of the People's Bank of China, announced during a press conference at the State Council Information Office that new monetary policy tools would be created, including the Securities, Funds, and Insurance Companies Swap Facility (SFISF), to support eligible securities, funds, and insurance companies in obtaining liquidity from the central bank through asset pledging. This tool started accepting applications on October 10 and officially launched on October 18.

Although there are significant differences between China and the United States, the experience of creating monetary policy tools during crises is still worth learning from:

To address the 2008 financial crisis, the Federal Reserve mainly created three types of temporary monetary policy tools:

1. Providing short-term liquidity to banks, depository institutions, and other financial institutions. The Federal Reserve created multiple tools to ensure that financial institutions could access sufficient short-term credit, including establishing new credit auction facilities, allowing primary dealers and banks to borrow at the Fed's discount window, etc. Additionally, the Fed also created tools to provide dollar liquidity to non-US central banks. Specific tools include Term Auction Facility (TAF), Primary Dealer Credit Facility (PDCF), Term Securities Lending Facility (TSLF), and Central Bank Liquidity Swaps.

2. Providing liquidity directly to borrowers and investors in key credit markets. Despite traditional financial institutions having liquidity, concerns about asset quality and credit risk during the crisis still limited intermediaries' willingness to provide credit. Therefore, the Fed created a second type of tool to provide liquidity directly to borrowers and investors in key credit markets, including Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor Funding Facility (MMIFF), Term Asset-Backed Securities Loan Facility (TALF).

3. Expanding traditional open market operations. By communicating with the market to manage expectations, downward pressure on long-term interest rates was exerted to stimulate overall demand. Based on expectation management, the Fed supported credit markets by purchasing long-term securities to lower long-term interest rates and help improve financial conditions.

All three types of policy tools utilized the Fed's balance sheet. With the federal funds rate nearing the lower bound of 0, these tools allowed the Fed to continue lowering rates and easing credit conditions in specific markets. Lessons from the temporary monetary policy during the U.S. crisis: Providing liquidity to the market and specific sectors through a package of monetary policies, and enhancing the efficiency of tool utilization through effective market communication.

From the perspective of policy design, firstly, providing liquidity to financial institutions at home and abroad; secondly, providing targeted relief to different markets facing challenges; thirdly, lowering long-term interest rates and improving market liquidity through expectation management and purchasing long-term bonds. In terms of tool implementation, detailed regulations and market communication can not only improve the efficiency of tool implementation but also shape and strengthen market expectations to enhance the effectiveness of tool utilization.

Risk factors:

Stock market fluctuations exceeding expectations; effectiveness of swap facilities falling short of expectations