INSIGHTi
Federal Reserve: Emergency Lending in
Response to COVID-19
Updated June 15, 2020
The Coronavirus Disease 2019 (COVID-19) has created significant economic and financial disruptions.
In response, the Federal Reserve (Fed) has taken a number of actions to promote economic and financial
stability. This Insight covers actions taken by the Fed in its “lender of last resort” role—actions intended
to provide liquidity directly to firms to ensure they have continued access to needed funding. The Fed
finances this assistance by expanding its balance sheet. For more detail, see CRS Report R46411, The
Federal Reserve’s Response to COVID-19: Policy Issues, by Marc Labonte. For information on
regulatory changes made by the Fed, see CRS Insight IN11278, Bank and Credit Union Regulators’
Response to COVID-19, by Andrew P. Scott and David W. Perkins.
Discount Window
In a March 15 announcement, the Fed encouraged insured depository institutions (e.g., banks) to borrow
from the Fed’s discount window to meet their liquidity needs. This is the Fed’s traditional tool in its
lender of last resort function. Discount window lending is negligible in normal conditions but has surged
since March. The Fed also encouraged banks to use intraday credit available through the Fed’s payment
systems as a source of liquidity.
Emergency Credit Facilities
In 2008, the Fed created a series of emergency credit facilities to support liquidity in the nonbank
financial system. This extended the Fed’s traditional role as lender of last resort from the banking system
to the overal financial system for the first time since the Great Depression. To create these facilities, the
Fed relied on its emergency lending authority (Section 13(3) of the Federal Reserve Act). This authority,
amended by the Dodd-Frank Act (P.L. 111-203), places a number of restrictions on the Fed, including that
the facilities can operate only in “unusual and exigent circumstances.”
Emergency authority was not used again until 2020. To date, the Fed has created nine emergency
facilities—some new, and some reviving 2008 facilities—in response to COVID-19:
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On March 17, the Fed announced it would revive the Commercial Paper Funding Facility
(CPFF) to purchase commercial paper, which is an important source of short-term
funding for financial firms, nonfinancial firms, and asset-backed securities (ABS).
On March 17, the Fed announced it would revive the Primary Dealer Credit Facility
(PDCF), which is akin to a discount window for primary dealers. Like banks, primary
dealers are heavily reliant on short-term lending markets in their role as securities market
makers. Unlike banks, they cannot access the discount window. Like the discount
window, the PDCF provides short-term, fully collateralized loans to primary dealers.
On March 19, the Fed announced it would create the Money Market Mutual Fund
Liquidity Facility (MMLF), similar to a facility created to stop a run on money markets in
2008. The MMLF makes loans to financial institutions to purchase assets that money
market funds are sel ing to meet redemptions.
On March 23, the Fed announced two new facilities to support corporate bond markets—
the Primary Market Corporate Credit Facility (PMCCF) to purchase newly issued
corporate debt and the Secondary Market Corporate Credit Facility (SMCCF) to purchase
existing corporate debt on secondary markets.
On March 23, the Fed announced it would revive the Term Asset-Backed Securities Loan
Facility (TALF) to make nonrecourse loans to private investors to purchase ABS backed
by various nonmortgage consumer loans.
On April 6, the Fed announced the Payroll Protection Program Lending Facility (PPPLF)
to provide credit to depository institutions (e.g., banks) making loans under the CARES
Act (H.R. 748/P.L. 116-136) Payroll Protection Program. Because banks are not required
to hold capital against these loans, this facility increases lending capacity for banks facing
high demand to originate these loans. The PPP provides low-cost loans to smal
businesses to pay employees. These loans do not pose credit risk to the Fed because they
are guaranteed by the Smal Business Administration.
On April 9, the Fed announced the Main Street Lending Program (MSLP), which
purchases loans from depository institutions. The loans can be made to businesses with
up to 15,000 employees or up to $5 bil ion in revenues. The loans to businesses would
defer principal and interest repayment for two years, and the businesses would have to
make a “reasonable effort” to retain employees.
On April 9, the Fed announced the Municipal Liquidity Facility (MLF) to purchase state
and municipal debt in response to higher yields and reduced liquidity in that market. The
facility wil only purchase debt of larger counties and cities, but al states and at least two
designated municipalities per state are eligible.
Some programs were announced with an overal size limit (see Table 1), although in 2008, actual activity
typical y did not match the announced size. These facilities go beyond the scope of the 2008 facilities to
assist nonfinancial businesses and states and municipalities, as wel as nonbank financial firms. In some
programs, the Fed purchases securities in affected markets directly. In other programs, the Fed makes
loans to financial institutions or investors to intervene in affected markets; these loans are typical y made
on attractive terms to incentivize activity, including by shifting the credit risk to the Fed.
Many of these facilities are structured as Fed-controlled special purpose vehicles because of restrictions
on the types of securities that the Fed can purchase. The Fed typical y charges an interest rate that is
higher than benchmark rates or fees to compensate for risk. Although there were no losses from these
facilities after the 2008 financial crisis, some of the 2020 facilities pose greater risk, and assets from
Treasury’s Exchange Stabilization Fund (ESF) have been pledged to backstop losses on several of the
facilities today. Title IV of the CARES Act appropriated an additional $500 bil ion to the ESF, of which at
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least $454 bil ion is available to support Fed programs. To date, $215 bil ion has been pledged to these
programs (see Table 1). The CARES Act places certain restrictions on the Fed programs, such as conflict
of interests and oversight requirements.
Table 1. Federal Reserve Emergency Programs
(bil ions of dol ars)
Announced-Size Limit
ESF Funds Pledged
CPFF
n/a
$10
PDCF
n/a
$0
MMLF
n/a
$10
PMCCF/SMCCF
$750
$75
TALF
$100
$10
PPPLF
n/a
$0
MSLP
$600
$75
MLF
$500
$35
Total
n/a
$215
Source: Congressional Research Service.
Note: See text for details.
Author Information
Marc Labonte
Specialist in Macroeconomic Policy
Disclaimer
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