The Board of Governors of the Federal Reserve System (the “Fed”) has implemented monetary policy and federal programs in response to COVID-19. The policies and programs primarily affect financial institutions in the business of lending, but an understanding of the policies will aid all borrowers in knowing the constraints of their lenders and the process by which they will receive funds.

All of the policies and programs listed below are intended to facilitate lending and liquidity in the financial markets and greater economy by providing vehicles pursuant to the Fed’s powers under Federal Reserve 13(3) under which the government can allocate funds pursuant to the CARES Act.

Federal Reserve 13(3) is a tool that can be used in times of crisis to help mitigate pressure in financial markets that would otherwise have severe adverse consequences for households, businesses, and the U.S. economy. In lieu of allowing the government to lend directly to corporations, the Secretary of the Treasury can authorize the Fed to implement temporary emergency programs during financial crises.

Below is a brief summary of the Fed’s actions in response to the COVID-19 outbreak.

Please note that the Main Street Business Lending Program, which will likely have the greatest effect on small businesses, has not yet been promulgated, but news reports indicate that “it is likely to involve the Fed buying small business loans made by banks.”

Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility

  • The Fed can now be a direct purchaser of corporate debt, either in primary issuance or debt that is trading in secondary market.
  • Only available to companies with investment grade credit.
  • The SMCCF is essentially the same as the PMCCF, but allows the Fed to purchase corporate debt in the secondary market and doesn’t authorize direct loans to issuers.
  • Eligible issuers are U.S. companies headquartered in the United States and with material operations in the United States. The scope of eligible issuers may be expanded in the future. Eligible issuers do not include companies that are expected to receive direct financial assistance under pending federal legislation.
  • Additionally the PMCCF can provide loans directly to eligible issuers.
    • PMCCF will provide bridge financing up to four years and borrowers may elect to defer interest and principal payments during the first six (6) months of the loan, extendable at the Fed’s discretion.

Term Asset-Back Securities Lending Facility (TALF)

  • The TALF will serve as a funding backstop to facilitate the issuance of eligible asset-backed securities 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.
  • Enables the issuance of asset-backed securities backed by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration, and certain other assets.
  • The Fed will lend an amount equal to the market value of asset-backed securities (ABS) and will be secured by ABS.

Expansion of Money Market Mutual Fund Liquidity Facility

  • The Fed has the ability to lend to eligible borrowers that have assets typical of money market funds.
  • 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.
  • Now includes wider range of securities, including muni variable rate demand notes and bank CDs.

Commercial Paper Funding Facility

  • The Fed will be able to purchase from eligible issuers certain commercial paper through the primary dealers of the Federal Reserve Bank of New York.
  • Includes high-quality, tax-exempt commercial paper as eligible securities with reduced pricing.
  • Eligible issuers are U.S. issuers of commercial paper, including municipal issuers and U.S. issuers with a foreign parent company.

Change to Definition Found in Total Loss Absorbing Capacity (TLAC) Requirements

  • TLAC is an additional cushion of capital and long-term debt that could be used to recapitalize a bank if it is in distress. The change will facilitate the use of firms' buffers to promote lending activity to households and businesses.
  • The revised definition of eligible retained income will make any automatic limitations on capital distributions that could apply under the TLAC rule more gradual and aligns to recent action taken by the Board and the other federal banking agencies in the capital rule.

Temporary Reduction of Examinations of Financial Institutions

  • To minimize disruption and to focus on outreach and monitoring, the Federal Reserve will temporarily reduce its examination activities, with the greatest reduction in activities occurring at the smallest banks.
  • To allow firms to focus on heightened risks in this current environment and assist consumers, additional time will be granted for resolving non-critical existing supervisory findings.