By Steven K. Beckner
(MaceNews) – The Federal Reserve’s aggressive credit easing measures since early March have steadied financial markets, though not the economy, but not content to rest on its laurels, the Fed continues to innovate and explore the full extent of its emergency lending powers.
The Fed, in conjunction with the U.S. Treasury, announced another large stimulus package Thursday that will collectively provide a $2.3 trillion in credit to firms, households and municipalities.
In particular, the Fed launched a long-awaited Main Street Business Lending Program and a Municipal Liquidity Facility.
The facilities were established under the authority of Section 13(3) of the Federal Reserve Act, with approval of Treasury Secretary Steve Mnuchin.
The Fed said “this funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.”
In addition to previously announced commercial paper, money market fund, primary dealer and dollar funding facilities, the Fed announced new wrinkles which Fed Chairman Jerome Powell said are designed “to provide as much relief and stability as we can during this period of constrained economic activity” and to “help ensure that the eventual recovery is as vigorous as possible.”
The Fed announced that it will:
* “bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.”
The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
* “ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program.”
The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility.
* “increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF).”
The Fed said these three programs “will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury.”
* “help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities.”
The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.
The Main Street Lending Program “will enhance support for small and mid-sized businesses that were in good financial standing before the crisis by offering 4-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion,” the Fed said.
Principal and interest payments will be deferred for one year. Eligible banks may originate new Main Street loans or use Main Street loans to increase the size of existing loans to businesses. Banks will retain a 5%t share, selling the remaining 95 percent to the Main Street facility, which will purchase up to $600 billion of loans.
Firms seeking Main Street loans must commit to make “reasonable efforts” to maintain payroll and retain workers, the Fed said. And borrowers must also follow compensation, stock repurchase, and dividend restrictions that apply to direct loan programs under the CARES Act.
Firms that have taken advantage of the PPP may also take out Main Street loans, the Fed said.
In their announcement, the Fed and the Treasury proclaimed that they “recognize that businesses vary widely in their financing needs, particularly at this time, and, as the program is being finalized, will continue to seek input from lenders, borrowers, and other stakeholders to make sure the program supports the economy as effectively and efficiently as possible while also safeguarding taxpayer funds.”
Comments are being accepted until April 16.
The Feed also announced that it will further facilitate credit flows to households and businesses by broadening the range of assets that are eligible collateral for TALF.
TALF-eligible collateral will now include the triple-A rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility will remain $100 billion, and TALF will continue to support the issuance of asset-backed securities that fund a wide range of lending, including student loans, auto loans, and credit card loans.
In another action, the Fed said its Municipal Liquidity Facility will help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities.
This facility will purchase up to $500 billion of short term notes directly from U.S. states (including the District of Columbia), U.S. counties with a population of at least two million residents, and U.S. cities with a population of at least one million residents.
Eligible state-level issuers may use the proceeds to support additional counties and cities. In addition to the actions described above, the Federal Reserve will continue to closely monitor conditions in the primary and secondary markets for municipal securities and will evaluate whether additional measures are needed to support the flow of credit and liquidity to state and local governments.
The Fed renewed its commitment to “using its full range of tools to support the flow of credit to households and businesses to counter the economic impact of the coronavirus pandemic and promote a swift recovery once the disruptions abate.”
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Contact this reporter: steve@macenews.com