The coronavirus (COVID-19) has created significant economic and financial disruption. 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 information on the Fed's monetary policy actions in response to COVID-19, see CRS Insight IN11330, Federal Reserve: Monetary Policy Actions in Response to COVID-19, by Marc Labonte.
In a March 15 announcement, the Fed encouraged banks (insured depository institutions) 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.
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 overall 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 only operate 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:
Some programs were announced with an overall size limit (see Table 1), although in 2008, actual activity typically 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 well 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 typically 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 typically charges an interest rate that would be above-market in normal conditions and fees to compensate for risk. To varying degrees, the Fed is protected from losses by limiting eligibility to highly rated borrowers and requiring collateral to be pledged in case of default. Although there were no losses from these facilities after the 2008 financial crisis, assets from the Treasury's Exchange Stabilization Fund (ESF) have been pledged to backstop any losses on several of the facilities today. Title IV of the CARES Act appropriated $500 billion to the ESF, of which at least $454 billion is available to support Fed programs. To date, $215 billion 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.
Announced-Size Limit |
CARES Act 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.