WASHINGTON, USA – The federal bank regulatory agencies announced two actions to support the US economy and allow banks to continue lending to households and businesses; while the Federal Reserve Board announces the establishment of a Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses
The federal bank actions are – a statement encouraging banks to use their resources to support households and businesses; and a technical change to phase-in, as intended, the automatic distribution restrictions gradually if a firm’s capital levels decline.
The statement notes that banks have more than doubled their capital and liquidity levels over the past decade and are now substantially safer and stronger than they were previously. As a result, the agencies are encouraging banks to use that strength to support households and businesses. The statement is substantially similar to one issued by the Federal Reserve Board earlier this week.
The technical change is an interim final rule that, if a bank’s capital declines by a certain amount, phases in the agencies’ automatic distribution restrictions gradually, as intended. Like the statement, the interim final rule facilitates the use of firms’ capital buffers to promote lending activity to households and businesses.
The Federal Reserve Board Commercial Paper Funding Facility (CPFF) to support the flow of credit to households and businesses, directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.
By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy. The CPFF will provide a liquidity backstop to US issuers of commercial paper through a special purpose vehicle (SPV) that will purchase unsecured and asset-backed commercial paper rated A1/P1 (as of March 17, 2020) directly from eligible companies.
The CPFF program is established by the Federal Reserve under the authority of Section 13(3) of the Federal Reserve Act, with approval of the Treasury Secretary.
The commercial paper market has been under considerable strain in recent days as businesses and households face greater uncertainty in light of the coronavirus outbreak. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market. An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.
The Treasury will provide $10 billion of credit protection to the Federal Reserve in connection with the CPFF from the Treasury’s Exchange Stabilization Fund (ESF). The Federal Reserve will then provide financing to the SPV under the CPFF. Its loans will be secured by all of the assets of the SPV.