March 26, 2020
Treasury’s Exchange Stabilization Fund and COVID-19
As part of the U.S. government’s economic response to the
“being consistent with U.S. obligations in the IMF
coronavirus disease 2019 (COVID-19), the “third” COVID-
regarding orderly exchange arrangements and a stable
19 stimulus package (H.R. 748), as passed by the Senate on
system of exchange rates” was inserted. As a consequence
March 25, would appropriate $500 billion to the U.S.
of this change, the Secretary of the Treasury (with the
Department of Treasury’s Exchange Stabilization Fund
approval of the President) has almost unlimited authority to
(ESF) to support loans, loan guarantees, and investments
“deal in gold, foreign exchange, and other instruments of
for businesses affected by COVID-19. In addition, the
credit and securities.” Decisions of the Treasury Secretary
legislation would temporarily permit the use of the ESF to
are final and may not be reviewed by another government
guarantee money markets, as occurred in the 2008 financial
official. Nevertheless, Treasury is required to provide
crisis. ESF assets have already been pledged in 2020 to
monthly reporting on the ESF’s operations to Congress.
backstop several emergency lending facilities created by the
ESF loans are not open-ended. When Congress expanded
Federal Reserve (Fed) in response to financial turmoil
the scope of the ESF’s authority in 1978, it added a
caused by COVID-19.
restriction that ESF loans could not exceed six months
unless the President notified Congress that “unique or
The original purpose of the ESF was to give the United
exigent circumstances” were present. Such notifications
States adequate financial resources to stabilize the value of
were provided regarding ESF credit exposure to Mexico in
the dollar by buying and selling foreign currencies and
1982 and in 1995 and to Brazil in 1998.
gold. In the exigencies of the 2008 financial crisis, the ESF
was used differently as Treasury sought a source of
“Consistent with the obligations of the Government in
unfettered money to quickly stop a run on money markets
the International Monetary Fund on orderly exchange
that threatened further financial instability. Although
arrangements and a stable system of exchange rates,
legislation subsequently forbid Treasury from using the
the Secretary ... with the approval of the President
ESF for this purpose in the future, the ESF is being looked
may deal in gold, foreign exchange, and other
to today as a tool to address financial unrest.
instruments of credit and securities…” – 31 U.S. Code
§ 5302. Stabilizing exchange rates and arrangements
Background
The ESF was established by Section 10(a) of the Gold
In addition to its initial capitalization ($2 billion), Congress
Reserve Act of January 30, 1934 (31 U.S.C. § 5302) to
allowed the ESF to remain outside annual appropriations
stabilize the exchange value of the dollar. Similar funds of
and imposed no overall size limit. Instead, the ESF retains
European countries were heavily intervening in foreign
all of the earnings from its operations. The main limitation
exchange markets at that time, engaging in competitive
on the ESF’s ability to intervene to impact the value of the
currency devaluations. The ESF was established with $2
dollar is the amount of dollar-denominated assets in its
billion appropriated from profits realized from the Gold
portfolio, which are $22.67 billion as of February 2020. In
Reserve Act’s revaluation of U.S. gold holdings from
order to secure more dollars for foreign exchange
$20.67 per troy ounce to $35.
operations, Treasury could (1) seek an additional
appropriation from Congress; (2) monetize its holdings of
During the 1930s, the ESF was actively used to manage the
IMF special drawing rights (SDR, an international reserve
foreign exchange rate of the U.S. dollar. After World War
asset), valued at $50 billion, by temporarily selling them to
II, when the International Monetary Fund (IMF) was
the Fed; or (3) engage in a currency swap arrangement
established, the ESF was the source of funds for the U.S.
called “warehousing”—in which the ESF sells foreign
contribution. As provided in the Bretton Woods Agreement
currency to the Fed and agrees to repurchase it at a later
Act of 1945 (31 U.S.C. § 5302), $1.8 billion of the ESF’s
date, during which the Fed credits dollar reserves to the
capital of $2 billion was used to make a partial payment on
ESF for the duration of the swap. The limit on warehousing
the U.S. subscription to the IMF. The Bretton Woods
is $5 billion, but this limit was temporarily raised to $10
Agreement Act of 1945 also included permanent authority
billion in 1989 and $20 billion in 1995. The last use of the
for the ESF.
warehousing arrangement was from 1988 to 1992.
In 1973, with the demise of the post-World War II gold
ESF Use Before 2008
standard, where the dollar was pegged to gold and other
The ESF’s primary use until 2008 was to finance short-term
countries’ currencies were pegged to the dollar, the explicit
loans to foreign countries facing a financial crisis, including
purpose of stabilizing the exchange value of the dollar was
stricken from the ESF’s statute
Brazil and Mexico, primarily in Latin American and
, and its purpose was
Caribbean. The ESF has also been used to provide bridge
expanded. Language alluding to “stabilizing the exchange
value of the dollar” was deleted
loans to foreign countries while they were negotiating
, and language referring to
longer-term IMF financing.
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Treasury’s Exchange Stabilization Fund and COVID-19
Since moving to flexible exchange rates, the United States
restrictions until the COVID-19 crisis has ended. There is
stopped intervening in foreign exchange markets, for the
speculation about whether such a guarantee would be
most part, by the mid-1990s. Since then, the United States,
initiated in the current crisis if the law were changed.
in coordination with other countries, has intervened on
three isolated occasions—in 1998, 2000, and 2011.
2020 Federal Reserve Facilities Backed
by the ESF
2008 Money Market Guarantee
The ESF has been pledged again in response to financial
The 2008 financial crisis saw a novel and controversial
turmoil caused by COVID-19. The Fed has created several
pledge of the ESF for purposes that were not directly
emergency credit facilities to support liquidity in the
related to exchange rates or the value of the dollar—a
nonbank parts of the financial system. To create these
money market guarantee.
facilities, the Fed relied on its emergency lending authority
(Section 13(3) of the Federal Reserve Act). Some of these
Money market mutual funds (MMFs) are a type of mutual
facilities resurrect ones created in 2008 in response to the
fund that generally invest in high-quality, short-term assets.
financial crisis, extending the Fed’s role as lender of last
Often the value of a share is held at $1 per share, and fund
resort from the banking system to the overall financial
gains are paid out as dividends mimicking interest
system for the first time since the Great Depression.
payments. Thus, they are seen as largely analogous to bank
deposits but are not guaranteed by the Federal Deposit
Although the Fed did not rely on the ESF in 2008 and no
Insurance Corporation (FDIC).
2008 facility experienced any losses, Treasury has pledged
$10 billion in ESF assets to back five Fed facilities ($50
As part of the market turmoil resulting from the bursting of
billion in total) in 2020. Use of the ESF may be seen to
a nationwide housing bubble on September 16, 2008, an
allow these facilities to meet the Dodd-Frank Act’s (P.L.
MMF called the Reserve Fund “broke the buck,” meaning
111-203) requirement that the Fed’s 13(3) lending is
the value of its shares had fallen below $1. This occurred
secured “sufficient[ly] to protect taxpayers from losses”;
because of losses it had taken on short-term debt issued by
although, given ESF losses would ultimately be borne by
the investment bank Lehman Brothers, which filed for
taxpayers, it is unclear if this requirement is actually being
bankruptcy on September 15, 2008. Money market
met. The following 2020 facilities use the ESF as a
investors had perceived “breaking the buck” to be highly
backstop to absorb future losses.
unlikely, and its occurrence set off a generalized run on
MMFs, as investors simultaneously attempted to withdraw
CPFF. On March 17, 2020, the Fed revived the commercial
an estimated $250 billion of their investments—even from
paper funding facility (CPFF) to purchase commercial
funds without exposure to Lehman Brothers.
paper through a special purpose vehicle (SPV), offsetting a
drop in private demand. Commercial paper is short-term
To stop the run, Treasury announced an optional program to
debt issued by financial firms, nonfinancial firms, and
guarantee deposits in participating money market funds.
entities that securitize asset-backed securities.
Treasury would finance any losses from this guarantee with
assets in the ESF. Treasury announced this program without
MMLF. On March 19, the Fed created the Money Market
seeking specific congressional authorization, justifying the
Mutual Fund Liquidity Facility (MMLF), similar to a
program on the grounds that guaranteeing money market
facility created during the 2008 financial crisis. The facility
funds would protect the value of the dollar. The program
makes loans to financial institutions to purchase assets that
expired after one year in September 2009. Funds utilizing
money market funds are selling to meet redemptions.
the guarantee program paid fees for the guarantee of
between 0.015% and 0.022% of the amount guaranteed by
PMCCF. On March 23, the Fed created the Primary
the program.
Market Corporate Credit Facility (PMCCF) to purchase
newly-issued corporate debt through an SPV.
Over the life of the program, Treasury reported that no
money market fund guarantees were invoked, and $1.2
SMCCF. On March 23, the Fed created the Secondary
billion in fees had been collected. The ESF was small
Market Corporate Credit Facility (SMCCF) to purchase
compared to industry assets. More than $3 trillion of
existing corporate debt on secondary markets through an
deposits were guaranteed and, according to the Bank for
SPV.
International Settlements, 98% of U.S. money market funds
were covered by the guarantee, with most exceptions being
TALF. On March 23, the Fed revived the Term Asset-
funds that invested only in Treasury securities. However, a
Backed Securities Loan Facility (TALF) to make
guarantee was credible as long as the ESF was expected to
nonrecourse loans through an SPV to private investors to
be larger than guaranteed losses.
purchase asset-backed securities backed by various
nonmortgage consumer loans.
The Emergency Economic Stabilization Act of 2008 (P.L.
110-343) included language that directed the Treasury
Marc Labonte, Specialist in Macroeconomic Policy
Secretary to reimburse the ESF for any funds used for the
Baird Webel, Acting Section Research Manager
money market guarantee program and prohibited use of the
Martin A. Weiss, Specialist in International Trade and
ESF in the future for such a program. To date, a similar
Finance
MMF guarantee has not been created in 2020. The Senate-
passed version of H.R. 748 would temporarily remove these
IF11474
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Treasury’s Exchange Stabilization Fund and COVID-19


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https://crsreports.congress.gov | IF11474 · VERSION 1 · NEW

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