New Round of Support Includes $600 Billion for CMBS Lending
The Federal Reserve took additional actions to provide up to $2.3 trillion in loans to support the economy.
The latest action, on Thursday, gives support to sectors in the economy that had not yet been addressed, including for some AAA-rated commercial mortgage-backed securities.
The Fed said it would broaden the range of assets that are eligible to serve as collateral for loans through its Term Asset-Backed Securities Loan Facility, or TALF. Eligible collateral will now include the AAA-rated tranches of both outstanding commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility would remain $100 billion, and TALF would 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.
"The Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible," Federal Reserve Board Chairman Jerome Powell said in a statement announcing the decision.
The additional $2.3 trillion in loans include assistance to households and employers of all sizes, and aim to bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.
The emergency measures the Fed has taken are available only in very unusual circumstances.
"We are deploying these lending powers to an unprecedented extent enabled in large part by the financial backing from the Congress and the Treasury," Powell said Thursday at a webinar sponsored by Brookings, the Washington public policy think tank. "We will continue to use these powers forcefully proactively and aggressively until we're confident that we are solidly on the road to recovery."
He added that "I would stress that these are lending powers, not spending power. The Fed is not authorized to grant money to particular beneficiaries. The Fed can only make secured loans to solid entities with the expectation that the loans will be fully repaid in a social situation we face today. Many borrowers will benefit from these programs as well the overall economy."
Other Fed actions in the latest round of support include the following:
The Fed will supply liquidity to participating financial institutions through term financing backed by the Small Business Administration's Paycheck Protection Program, or PPP, loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll.
The Fed 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 Fed will also support up to $850 billion for corporate credit and backed by $85 billion in credit protection provided by the Treasury.
The Fed will purchase up to $600 billion in loans through the Main Street Lending Program. The Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act, will provide $75 billion in equity to the facility.
The Main Street Lending Program offers four-year loans to companies employing up to 10,000 workers or with revenues of less than $2.5 billion. Principal and interest payments would 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 would retain a 5% share, selling the remaining 95% to the Main Street facility, which would purchase up to $600 billion of loans.
Firms seeking Main Street loans must commit to make reasonable efforts to maintain payroll and retain workers. Borrowers must also follow compensation, stock repurchase and dividend restrictions.
The Fed and the Treasury will also 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.