The Federal Reserve is deploying its emergency lending powers to “an unprecedented extent,” Federal Reserve Chairman Jerome Powell said in a speech this morning. Powell’s remarks came shortly after the announcement a new round of lending facilities that would add $2.3 trillion in the Fed’s capacity to support the economy during the pandemic using its authority under Section 13(3) of the Federal Reserve Act.
These new facilities included:
- Main Street Lending Program. Initially announced on March 23, two Fed facilities will purchase up to $600 billion in loans for companies with up to 10,000 employees or revenues of less than $2.5 billion. The Fed will purchase 95% participations in eligible loans of at least $1 million from U.S. depository institutions, bank holding companies and S&L holding companies. To be eligible, a loan must be originated starting April 8 and have a four-year term with interest deferred for a year; loan caps vary based on the facility purchasing the loan. Firms taking out Paycheck Protection Program loans may also take out Main Street loans.
- PPP Lending Facility. As covered in Newsbytes yesterday, the Fed will lend to PPP lenders on a non-recourse basis, with Small Business Administration PPP loans as collateral at face value.
- Municipal Liquidity Facility. The Fed will purchase up to $500 billion in notes issued by eligible states, counties and cities.
The Fed also announced that it will broaden the range of assets eligible for purchase by three existing Fed facilities. The Term Asset-Backed Securities Loan Facility, or TALF, will now purchase triple-A-rated tranches of outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The Fed expanded the scale of two facilities to support large employers—the Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility—to support up to $850 billion in credit.
“Our emergency measures are reserved for truly rare circumstances, such as those we face today,” Powell said, adding that “when the economy is well on its way back to recovery, and private markets and institutions are once again able to perform their vital functions of channeling credit and supporting economic growth, we will put these emergency tools away.”
American Bankers Association President and CEO Rob Nichols welcomed this unprecedented action by the Fed to help ease the economic strain caused by the coronavirus. While ABA is reviewing the details of these new programs, “we already know that the Fed’s actions will allow more banks to help more small businesses by providing additional liquidity to the thousands of institutions participating in the Paycheck Protection Program,” Nichols said. He added that “America’s banks are again being asked to play a critical role in [the launch of the Main Street Lending Program], and I have no doubt they will step up to do so at this critical time for the nation.”