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The unsecured Fed term loan rate would act as a ceiling for Libor. Banks would be able to use these loans to reduce their reliance on overnight borrowing, making the system more stable.
Moreover, banks would in theory become more willing to lend spare funds to each other, reviving the private interbank market, since the borrower or lender could turn to the Fed for unsecured loans if it suddenly needed additional liquidity.
The Fed is also actively considering using unsecured lending to shore up the collapsing commercial paper market, in which many corporations as well as financial institutions raise funds.
Last edited by weswelker#83; 10-06-2008 at 04:12 PM..
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However, the US central bank does not believe it has the legal mandate to make unsecured loans on which there is a reasonable likelihood of some loss. So it needs the Treasury to guarantee losses on the loans