In its attempt to provide relief to corporate America, the Board of Governors of the Federal Reserve System (the “Fed”) did not neglect lenders in all of the commotion. The Fed recently instituted several programs meant to provide liquidity to economic markets through lending directly to financial institutions, altering capital requirements and relaxing Fed examinations of financial institutions.
The program most directly related to the CARES Act is the Paycheck Protection Program Lending Facility, which allows PPP lenders to borrow money using PPP loans as collateral. The Term Asset-Backed Securities Loan Facility was used in 2008 as a response to the housing collapse, and allows financial institutions to take out loans secured by certain asset-backed securities. As of now, there seem to be no restrictions on lenders availing themselves of any number of these facilities.
The other programs listed below most likely won’t affect a wide margin of lenders, but they are certainly worth mentioning. The following is an outline of each of the programs, with links to each of their terms sheets or announcements.
Paycheck Protection Program Lending Facility (https://www.federalreserve.gov/newsevents/pressreleases/monetary20200409a.htm)
- Under this facility, the Fed will lend to eligible borrowers, taking PPP loans as collateral.
- Eligible Borrowers
- All depository institutions that originate PPP Loans are eligible to borrow under the Facility.
- The Fed is working to expand eligibility to other lenders that originate PPP Loans in the near future.
- Eligible borrowers participate in the Facility through the Reserve Bank in whose District the eligible borrower is located.
- The maturity date of an extension of credit under the Facility will equal the maturity date of the PPP Loan pledged to secure the extension of credit.
- Acceleration of extension of credit:
- if the underlying PPP Loan goes into default and the eligible borrower sells the PPP Loan to the SBA to realize on the SBA guarantee; or
- to the extent of any loan forgiveness reimbursement received by the eligible borrower from the SBA.
- PPP Loans pledged as collateral to secure extensions of credit under the Facility will be valued at the principal amount of the PPP Loan.
- The principal amount of an extension of credit under the Facility will be equal to the principal amount of the PPP Loan pledged as collateral to secure the extension of credit.
- Under section 1102 of the CARES Act, a PPP Loan will be assigned a risk weight of zero percent under the risk-based capital rules of the federal banking agencies.
- On April 9, 2020, the Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued an interim final rule to allow banking organizations to neutralize the effect of PPP Loans financed under the Facility on leverage capital ratios.
Term Asset-Backed Securities Loan Facility (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200409a1.pdf)
- The TALF will serve as a funding backstop to facilitate the issuance of eligible ABS on or after March 23, 2020 and will make up to $100 billion of loans available.
- All U.S. companies that own eligible collateral and maintain an account relationship with a primary dealer are eligible to borrow under the TALF.
- The loans will have a term of three years, will be nonrecourse to the borrower and will be fully secured by eligible ABS.
- Loans made under the TALF will be pre-payable in whole or in part at the option of the borrower, but substitution of collateral during the term of the loan generally will not be allowed.
- Eligible Collateral
- U.S. dollar denominated cash (that is, not synthetic) ABS that have investment-grade credit ratings.
- All or substantially all of the credit exposures underlying eligible ABS must have been originated by a U.S. company.
- Eligible ABS must be issued on or after March 23, 2020, with the exception of commercial mortgage-backed securities (“CMBS”).
- For CMBS, the underlying credit exposures must be to real property located in the U.S. or one of its territories.
- Underlying credit exposure must be one of the following:
- Auto loans and leases;
- Student loans;
- Credit card receivables (both consumer and corporate);
- Equipment loans;
- Floorplan loans;
- Insurance premium finance loans;
- Certain small business loans that are guaranteed by the Small Business Administration;
- Leverage loans; or
- Commercial mortgages.
- Single-asset single-borrower CMBS and commercial real estate collateralized loan obligations will not be eligible collateral
- Collateral valuation will be based on haircut schedule posted online (link provided above).
- CLOs - 150 basis points over the 30-day average secured overnight financing rate (“SOFR”)
- SBA Pool Certificates (7(a) loans) - top of the federal funds target range plus 75 basis points.
- SBA Development Company Participation Certificates (504 loans) - 75 basis points over the 3-year fed funds overnight index swap (“OIS”) rate.
- For all other eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 125 basis points over the 2-year OIS rate for securities with a weighted average life less than two years, or 125 basis points over the 3-year OIS rate for securities with a weighted average life of two years or greater.
- The facility will assess an administrative fee equal to 10 basis points of the loan amount on the settlement date for collateral.
- A FAQ sheet provided for the TALF program instituted in 2008 can be found here: https://www.newyorkfed.org/markets/talf/talf_faq_100509.html#3. Please note the while the current TALF program will be similar to 2008, it will not be the same.
Money Market Mutual Fund Liquidity Facility (https://www.federalreserve.gov/newsevents/pressreleases/files/monetary20200323b4.pdf)
- The facility will lend to eligible borrowers, taking as collateral certain types of assets purchased by the borrower from Money Market Mutual Funds.
- The facility will open on March 23, 2020. The Facility will generally take eligible collateral that:
- If purchased after March 23, 2020, is pledged concurrently with the borrowing; or
- If purchased on or after March 18, 2020, but on or before March 23, 2020, is pledged expeditiously starting on March 23, 2020.
- For negotiable certificates of deposit and variable rate demand notes, a borrower may purchase these assets on or after March 23, 2020, and pledge them on or after March 25, 2020
- All U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks are eligible to borrow under the Facility.
- Eligible collateral:
- U.S. Treasuries & Fully Guaranteed Agencies
- Securities issued by U.S. Government Sponsored Entities
- Asset-backed commercial paper, unsecured commercial paper, or a negotiable certificate of deposit that is issued by a U.S. issuer
- U.S. municipal short-term debt with maturity not exceeding 12 months
- Variable rate demand notes that allows holders to tender note at their option within 12 months
- Additionally, the facility may accept receivables from certain repurchase agreements.
- Each advance shall be in a principal amount equal to the value of the collateral pledged to secure the advance.
- Rates are dependent upon the underlying collateral.
Change to Total Loss Absorbing Capacity (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200323a1.pdf)
- The TLAC rule applies to the largest and most systemic U.S. banking organizations (U.S. GSIBs) and the U.S. operations of the largest and most systemic foreign banking organizations (covered IHCs).
- Banking organizations subject to the capital rule must maintain a minimum amount of regulatory capital and maintain a capital buffer above the minimum capital requirements in order to avoid restrictions on capital distributions and discretionary bonus payments.
- Change to “eligible retained income”
- The greater of (1) a covered company’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of a covered company’s net income over the preceding four quarters.
- The changes adds the optional (2) listed above, which removes the scenarios where a firm faces severe distribution limitations due to falling below buffer requirements due to a company making capital distributions with the majority of their net income.
Temporary Reduction of Examinations of Financial Institutions (https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200324a1.pdf)
- The Fed is reducing its focus on examinations and inspections at this time. Any examination activities will be conducted off-site until normal operations are resumed at the bank and Reserve Banks.
- For supervised institutions with less than $100 billion in total consolidated assets, the Fed generally intends to cease all regular examination activity, except where the examination work is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need.
- In this instance, “critical” could include exams of less-than-satisfactorily rated state member banks or institutions where a Reserve Bank is aware of liquidity, asset quality, consumer protection, or other issues that are an immediate threat to an institution’s ability to operate or to consumers.
- The Fed is extending the time periods for remediating existing supervisory findings by 90 days, unless the Fed notifies the firm that a more timely remediation would aid the firm in addressing a heightened risk or help consumers.
 Amherst Pierpont Securities LLC; Bank of Nova Scotia, New York Agency; BMO Capital Markets Corp.; BNP Paribas Securities Corp.; Barclays Capital Inc.; BofA Securities, Inc.; Cantor Fitzgerald & Co.; Citigroup Global Markets Inc.; Credit Suisse AG, New York Branch; Daiwa Capital Markets America Inc.; Deutsche Bank Securities Inc.; Goldman Sachs & Co. LLC; HSBC Securities (USA) Inc.; Jefferies LLC; J.P. Morgan Securities LLC; Mizuho Securities USA LLC; Morgan Stanley & Co. LLC; NatWest Markets Securities Inc.; Nomura Securities International, Inc.; RBC Capital Markets, LLC; Societe Generale, New York Branch; TD Securities (USA) LLC; UBS Securities LLC.; Wells Fargo Securities, LLC