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The Qatar Centre for Global Banking & Finance is delighted to welcome Dr. Egon Zakrajšek from the Bank for International Settlements to present this research seminar on The Fed Takes on Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF.
We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the U.S. corporate bond market during the Covid-19 pandemic. The Fed announced the SMCCF on March 23, 2020, and expanded the program on April 9.
Our results show that the two announcements significantly lowered credit and bid-ask spreads, the former almost entirely through a reduction in credit risk premia. The announcements had a differential effect on the program-eligible bonds relative to their ineligible counterparts, but this difference is not due to program eligibility per se, according to our results. Rather, the announcements restored the “normal” upward-sloping profile of the term structure of credit spreads by substantially reducing spreads at the short end of the maturity spectrum relative to spreads at the long end.
Using an IV approach, we also document important announcement-induced spillovers across all bonds outstanding for issuers whose bonds were likely to be purchased by the facility. Finally, we show that the Fed’s actual purchases had negligible effects on credit and bid-ask spreads.
Our results highlight the extraordinary power of modern central banks: when markets have trust in the central bank’s ability to deliver on its promise, as exemplified by the iconic “whatever it takes” remark by Mario Draghi, the central bank needs to do less (if anything) to deliver on its promise.
About the Speaker
Egon Zakrajšek is a Senior Adviser in the Monetary and Economic Department at the Bank for International Settlements (BIS). A native of Slovenia, he joined the BIS in August 2019 after nearly 25 years with the US Federal Reserve System.
Egon started his career in the research department of the Federal Reserve Bank of New York and later joined the division of Monetary Affairs at the Board of Governors of the Federal Reserve System in Washington DC. In Monetary Affairs, Egon served as the Chief of the Banking Analysis section and in 2007 was appointed to the Board's official staff. Between 2007 and 2019, he held a succession of senior executive roles in the division, most recently as a Senior Adviser.
Egon’s policy and research interests focus on macro-finance, inflation dynamics and monetary policy, and his research on the role of financial factors in economic fluctuations has been published in leading academic journals, including the American Economic Review and the Quarterly Journal of Economics. Egon is a CEPR Research Fellow, a Research Fellow at the Centre for Finance, Credit and Macroeconomics at the University of Nottingham and serves as the editor of BIS Working Papers.
In addition to his extensive policy experience, he has also taught economics at Columbia University and Johns Hopkins University. Egon holds a PhD in economics from New York University.