Board of Governors of the Federal Reserve System

Background on Selected Assets

The Federal Reserve is using its full range of policy tools to support the U.S. economy during this period of constrained economic activity and to ensure that the eventual recovery is as vigorous as possible. This section provides background information on key assets and liabilities that have been influenced by recent events.

On the asset side of the Federal Reserve's balance sheet, information reviewed includes the authority of the Federal Reserve to use each of its tools, a discussion of how each tool works, and an inclusion of links for more information.¹² On the liability side of the balance sheet, the information reviewed primarily reflects the definition of the line item and key factors that influence its level.

Selected Assets

The Federal Reserve holds a range of assets on its balance sheet. The discussion below summarizes some of the key components of the asset side of the balance sheet.

Securities Holdings and Repurchase Agreements

The Federal Reserve conducts permanent and temporary purchases of Treasury securities, government-sponsored enterprise debt securities, and agency MBS in the open market. These open market operations (OMOs) are a traditional tool of the Federal Reserve. The authority to conduct OMOs is granted under section 14 of the Federal Reserve Act, and the range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. OMOs are conducted by the Federal Reserve Bank of New York's Trading Desk, which acts as agent for the FOMC. The Trading Desk's traditional counterparties for OMOs are primary dealers.

Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve's portfolio. Traditionally, permanent OMOs are used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet—primarily the trend growth of currency in circulation. However, larger-sized purchases have also been used during times of severe stress to aid in smooth market functioning, assist in the transmission of monetary policy, or lower longer-term interest rates.

Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. Operations are either repurchase agreements (repos)—a Federal Reserve asset—or reverse repurchase agreements (reverse repos or RRPs)—a Federal Reserve liability. Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan by the Federal Reserve, in which the difference between the purchase and sale prices reflects interest.

The Federal Reserve has traditionally conducted repos with primary dealers, though in 2020 a temporary repo facility was created to engage in these transactions with its FIMA customers. Beginning on March 31, FIMA customers could enter into repos with the Federal Reserve through this facility, thus gaining access to a reliable source of dollar liquidity. Many of the countries that have access to this facility do not have access to the Federal Reserve's central bank liquidity swap arrangements, discussed below. When using the facility, FIMA account holders temporarily exchange their U.S. Treasury securities held with the Federal Reserve for U.S. dollars, which can then be made available to institutions in their respective jurisdictions. This temporary facility will be in place at least until March 31, 2021.

The following are resources to learn more about the Federal Reserve's OMOs.

• The FRBNY publishes details on traditional OMOs:

  • permanent open market operations at https://www.newyorkfed.org/markets/pomo_landing.html
  • temporary open market operations at https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements
• FIMA repo facility FAQs can be found at https://www.federalreserve.gov/newsevents/pressreleases/fima-repo-facility-faqs.htm
• The Federal Reserve's H.4.1 statistical release includes information on types of securities holdings and repo operations (available at https://www.federalreserve.gov/releases/h41/H.4.1 statistical release). Securities holdings include various maturities of Treasury securities, federal agency debt securities, and agency MBS. Repos are reported for those conducted with primary dealers as well as FIMA customers. The FIMA Repo Facility's outstanding repo is reported in the line item "Foreign official" under "Repurchase agreements" in table 1.
• The FRBNY publishes a detailed explanation of OMOs each year in its Annual Report.¹³

Loans

The Federal Reserve—like many central banks—is empowered to function as a "lender of last resort," and can provide loans in this role. The Federal Reserve can loan funds to depository institutions using its standard, traditional tool of discount window lending. Under section 13(3) of the Federal Reserve Act, the Federal Reserve also has authority to provide liquidity to nondepository institutions in "unusual and exigent circumstances" so long as the loan programs have "broad-based eligibility," have been established with the approval of the Secretary of the Treasury, and meet a few other criteria.

In response to the COVID-19 pandemic, the Federal Reserve has made available a series of lending programs to key sectors of the economy. These programs are providing stability to the financial system and directly support the flow of credit in the economy—for households, for businesses of all sizes, and for state and local governments. These programs benefit the economy by providing financing where it is not otherwise available. In addition, by serving as a backstop to key credit markets, the programs can improve market functioning by increasing the willingness of private lenders to extend credit.

Discount Window Credit

Federal Reserve lending to depository institutions (the "discount window") plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

Much of the statutory framework that governs lending to depository institutions is contained in section 10B of the Federal Reserve Act, as amended. The general policies that govern discount window lending are set forth in the Board's Regulation A. Depository institutions have, since 2003, had access to three types of discount window credit—primary credit, secondary credit, and seasonal credit. All discount window loans must be fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate haircut applied to the collateral; in other words, the value of the collateral exceeds the value of the loan.

Primary Credit

Primary credit is a lending program that serves as the principal safety valve for ensuring adequate liquidity in the banking system. It is available to depository institutions that are in generally sound financial condition; there are no restrictions on the use of funds borrowed under primary credit, and minimal information is required from a primary credit borrower. The primary credit rate is determined by the Board, and credit under this program is extended for periods as long as 90 days.

Secondary Credit

Secondary credit is a lending program available to depository institutions that are not eligible for primary credit. It is extended on a very short-term basis, typically overnight, and at a rate 50 basis points above the rate applicable for primary credit. In contrast to primary credit, there are restrictions on the uses of secondary credit extensions. Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return by the borrower to a reliance on market sources of funding or the orderly resolution of a troubled institution. Secondary credit may not be used to fund an expansion of the borrower's assets.

Moreover, the secondary credit program entails a higher level of Reserve Bank administration and oversight than the primary credit program—the Reserve Bank must obtain the reason for borrowing and any additional information necessary to confirm that borrowing is consistent with the objectives of the program. Reserve Banks typically apply higher haircuts on collateral pledged to secure secondary credit, closely monitor the liquidity position of secondary credit, and are in close contact with the borrower's primary federal regulator.

Seasonal Credit

Seasonal credit is a lending program that is available to assist small depository institutions with demonstrated liquidity pressures of a seasonal nature and will not normally be available to institutions with deposits of $500 million or more. Institutions that experience and can demonstrate a clear pattern of recurring intra-yearly fluctuations in deposits and loans—caused by construction, college, farming, resort, municipal financing, and other seasonal types of business—frequently qualify for the seasonal credit program; eligible institutions are usually located in agricultural or tourist areas.

To become eligible for seasonal credit, an institution must establish a seasonal qualification with its Reserve Bank. Eligible depository institutions may qualify for term funding for up to nine months of seasonal need during the calendar year, enabling them to carry fewer liquid assets during the rest of the year and, thus, allowing them to make more funds available for local lending. The interest rate applied to seasonal credit is a floating rate based on market rates.

For more information on the discount window, see

• https://www.federalreserve.gov/monetarypolicy/discountrate.htm
• https://www.frbdiscountwindow.org/
• https://www.frbdiscountwindow.org/pages/general-information/the%20discount%20window

Primary Dealer Credit Facility

The PDCF, authorized under section 13(3) of the Federal Reserve Act and with the approval of the Secretary of the Treasury, provides overnight and term financing up to 90 days to primary dealers in exchange for a broad range of collateral. The interest rate charged is the primary credit rate at the time the loan is made. The facility allows primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.

This facility will remain available to primary dealers until December 31, 2020, unless the Board and the Department of the Treasury extend the PDCF. For more information on the PDCF, visit https://www.newyorkfed.org/markets/primary-dealer-credit-facility/primary-dealer-credit-facility-faq.

Money Market Mutual Fund Liquidity Facility

The MMLF, authorized under section 13(3) of the Federal Reserve Act, makes loans available to eligible financial institutions secured by high-quality assets they purchased from prime, single-state or other tax-exempt money market mutual funds. Pricing varies by the collateral pledged. The facility assists money market mutual funds in meeting demands for redemptions by investors and also provides confidence to investors that they can access their cash if and when they need it, relieving the pressure to sell out of the funds in the first place. Overall, the facility is aimed to foster liquidity in short-term funding markets.

The facility will be operational through December 31, 2020, unless the MMLF is extended by the Board and the Department of the Treasury. For more information on the purpose and design, borrower information, collateral requirements, and other terms, visit https://www.federalreserve.gov/monetarypolicy/files/mmlf-faqs.pdf.

Paycheck Protection Program Liquidity Facility

The PPPLF, authorized under section 13(3) of the Federal Reserve Act, strengthens the effectiveness of the Small Business Administration's PPP by supplying liquidity to participating financial institutions against PPP loans. The facility lends to eligible financial institutions that originate or purchase PPP loans from the SBA on a nonrecourse basis using the PPP loans as collateral at face value. Increasing the capacity of PPP lenders to lend to small businesses allows more small businesses to keep their staff on their payroll.

No new extensions of credit will be made under the PPPLF after December 31, 2020, unless the Board and the Department of the Treasury determine to extend the PPPLF. For additional information, visit https://www.frbdiscountwindow.org.

Net Portfolio Holdings of Commercial Paper Funding Facility II LLC

The CPFF, authorized under section 13(3) of the Federal Reserve Act, provides a liquidity backstop to U.S. issuers of commercial paper through a specially created limited liability company, the CPFF II LLC. This LLC purchases highly rated, U.S. dollar-denominated, three-month commercial paper from businesses, municipals, and issuers of asset-backed commercial paper. The Federal Reserve provides financing to the LLC, which is secured by all of the assets of the LLC. This facility enhances the liquidity of the commercial paper market by increasing the availability of term commercial paper funding to issuers and by providing greater assurance to both issuers and investors that firms and municipalities will be able to roll over their maturing commercial paper. By ensuring the smooth functioning of this market, particularly in times of strain, the Federal Reserve is providing credit that will support families, businesses, and jobs across the economy.

This facility will cease purchasing commercial paper on March 17, 2021, unless the Board extends the facility. For additional information, visit https://www.newyorkfed.org/markets/commercial-paper-funding-facility/commercial-paper-funding-facility-faq.

Net Portfolio Holdings of Corporate Credit Facilities LLC

The Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility, authorized under section 13(3) of the Federal Reserve Act, support the credit needs of corporations, and the employment and spending that they undertake. The two corporate credit facilities operate through a single common SPV, the Corporate Credit Facilities LLC (CCF LLC).

The PMCCF is aimed to help large employers access credit by directly providing bridge financing so that they are better able to maintain business operations and capacity. Under the PMCFF, the CCF LLC, when approached by qualified businesses, will purchases bonds and portions of syndicated loans with maturities of no more than four years at interest rates informed by market conditions plus a 100 basis point fee. Borrowers either must currently be investment grade or were investment grade on March 22, 2020, and are now the highest below-investment-grade rating.

Meanwhile, the SMCCF is geared to purchase corporate bonds issued by U.S. companies and U.S.-listed exchange-traded funds (ETFs) in the secondary market, thereby providing liquidity for outstanding corporate bonds. Under the SMCCF, the CCF LLC purchases in the secondary market, at fair market value, individual corporate bonds with, at most, five-year remaining maturity issued by a broad set of U.S. corporations. The facility also may purchase U.S.-listed corporate bond ETFs. In order to prevent an unusually large gap from opening up between borrowing costs faced by investment-grade and high-yield businesses, the SMCCF may purchase a limited amount of shares in ETFs that target high-yield bonds. The facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially exceed the estimated net asset value of the underlying portfolio.

The CCFs will cease purchasing eligible corporate bonds, eligible syndicated loans, and eligible ETFs no later than December 31, 2020, unless the CCFs are extended by the Board and the Department of the Treasury. For additional information on the purpose and design, eligible issuers and sellers, eligible assets and other terms, visit https://www.newyorkfed.org/markets/primary-and-secondary-market-faq/corporate-credit-facility-faq.

Net Portfolio Holdings of MS Facilities LLC (Main Street Lending Program)

The Main Street Lending Program, authorized under section 13(3) of the Federal Reserve Act, supports lending to small and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic. The program consists of five facilities—the Main Street New Loan Facility (MSNLF), the Main Street Priority Loan Facility (MSPLF), the Main Street Expanded Loan Facility (MSELF), the Nonprofit Organization New Loan Facility (NONLF) and the Nonprofit Organization Expanded Loan Facility (NOELF)—that operate through a single common SPV, the Main Street Facilities LLC (MS Facilities LLC).

The MS Facilities LLC purchases 95 percent participations in eligible loans originated by eligible lenders to eligible borrowers. Lenders retain 5 percent of the loans. To be eligible to participate in Main Street, a borrower must, in addition to meeting other criteria, (i) have 15,000 employees or fewer, or (ii) 2019 revenues of $5 billion or less. Eligible lenders may originate new loans (under MSNLF, MSPLF, and NONLF), or increase the size of (or "upsize") existing loans made (under MSELF and NOELF), to eligible borrowers. Any loan issued under Main Street has a five-year maturity, principal payments are deferred for two years, and interest payments on the loans are deferred for one year.

The MS Facilities LLC will cease purchasing loan participations on December 31, 2020, unless the program is extended by the Board and the Treasury Department.

To learn about the differences between the various for-profit and nonprofit facilities as well as other program information, see https://www.bostonfed.org/mslp-faqs and https://www.bostonfed.org/-/media/Documents/special-lending-facilities/mslp/legal/frequently-asked-questions-faqs-nonprofit.pdf, respectively.

Net Portfolio Holdings of Municipal Liquidity Facility LLC

The Municipal Liquidity Facility, authorized under section 13(3) of the Federal Reserve Act, provides a liquidity backstop to state and local governments through a specially created LLC, the Municipal Liquidity Facility LLC. This LLC purchases up to $500 billion of short-term notes directly from U.S. states (including the District of Columbia), certain U.S. counties, certain U.S. cities, certain multistate issuers and revenue bond issuers, and limited revenue bond issuers that are designated by governors of U.S. states and the mayor of the District of Columbia.

The LLC will cease purchasing eligible notes on December 31, 2020, unless the Board and the Treasury Department extend the facility. For additional information on the purpose and design, eligible issuers, eligible notes, disclosures, methods of sale and process, and other terms, visit https://www.newyorkfed.org/markets/municipal-liquidity-facility/municipal-liquidity-facility-faq.

Net Portfolio Holdings of TALF II LLC

The TALF, authorized under section 13(3) of the Federal Reserve Act, supports the flow of credit to consumers and businesses by facilitating the issuance of new ABS and supporting liquidity in secondary markets for existing ABS. The facility operates through a specially created LLC, the TALF II LLC.

The TALF II LLC makes loans available to investors (including asset managers, mutual funds, insurance companies, and hedge funds) to encourage them to purchase certain ABS with underlying credit exposures of auto, student, and credit card loans as well as some small business loans guaranteed by the SBA, and certain other assets. The loans are nonrecourse, have a principal amount equal to the market value of the ABS less a haircut, and are secured at all times by the ABS.

No new credit extensions will be made after December 31, 2020, unless the program is extended by the Board and the Department of the Treasury. For additional information, visit https://www.newyorkfed.org/markets/term-asset-backed-securities-loan-facility/term-asset-backed-securities-loan-facility-faq.

Central Bank Liquidity Swaps

The Federal Reserve's swap lines are designed to improve liquidity conditions in dollar funding markets in the United States and abroad by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions during times of market stress. Under the dollar liquidity swap arrangements, the Federal Reserve provides U.S. dollars to a foreign central bank in exchange for the equivalent amount of funds in the foreign central bank's currency based on the market exchange rate at the time of the transaction.

This "swap" provides the foreign central bank with dollars that it can supply to financial institutions in its jurisdictions. The Federal Reserve and the foreign central bank agree to swap back the same quantities of their two currencies at a specified date in the future. Because the terms of this second transaction are set in advance and the Federal Reserve's counterparty is another central bank, these swap operations carry no exchange rate or counterparty risk.

In the years leading up to the COVID-19 pandemic, the Federal Reserve had standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. As of March 19, 2020, swap lines have temporarily been expanded to include nine additional central banks. These arrangements serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad. The U.S. dollar liquidity arrangements with the expanded set of central banks will be in place at least through March 31, 2021. For more information on central bank liquidity swap arrangements, visit https://www.newyorkfed.org/markets/international-market-operations/central-bank-swap-arrangements.

Selected Liabilities

The major items on the liability side of the Federal Reserve balance sheet are Federal Reserve notes (U.S. paper currency), the deposits that depository institutions hold (termed "reserve balances"), and the U.S. Treasury's General Account. This section reviews these items as well as a few other selected liabilities.

Federal Reserve Notes, Net of Federal Reserve Bank Holdings

Historically, Federal Reserve notes have been the largest liability on the Federal Reserve's balance sheet. A U.S. depository institution, when it needs more currency to meet its customers' needs, asks a Reserve Bank to send it more Federal Reserve notes. The Reserve Bank ships the currency to the institution and debits the institution's Federal Reserve account by the amount shipped. Thus, an increase in Federal Reserve notes outside of the Reserve Banks is matched by a reduction in the quantity of deposits that banks and other depository institutions hold in their Federal Reserve accounts.

Similarly, a depository institution that finds that it has more Federal Reserve notes on hand than it needs to meet its customers' demands generally returns the extra currency to a Reserve Bank; the Reserve Bank credits the institution's account so the liability side of the Federal Reserve's balance sheet shows a reduction in Federal Reserve notes outstanding and a matching increase in deposits held by depository institutions.

Reverse Repurchase Agreements

The Federal Reserve conducts reverse repurchase agreements (reverse repos or RRPs) by selling Treasury securities, federal agency debt securities, and agency MBS to counterparties who agree to sell the securities back to the Federal Reserve on a stated future date. Reverse repos are temporary OMOs (see Securities Holdings and Repurchase Agreements above for the discussion of OMOs) and are the economic equivalent of collateralized borrowing by the Federal Reserve. More information about this operation can be found at https://www.newyorkfed.org/markets/rrp_faq.html.

As part of normal operations, the Federal Reserve has a standing overnight reverse repo facility that helps put a floor on select overnight money market interest rates and helps keep the effective federal funds rate from falling below the target range set by the FOMC. More information about this policy tool can be found at https://www.federalreserve.gov/monetarypolicy/overnight-reverse-repurchase-agreements.htm.

In addition, every business day, the Federal Reserve conducts overnight reverse repos with foreign central banks that hold dollars in their accounts at the FRBNY. These transactions are one of the services that central banks provide one another to facilitate their international operations. In particular, this repo operation is a short-term liquid, U.S. dollar investment option for account holders and supports daily cash management needs to clear and settle securities. This investment service has been a standard provision to foreign public-sector account holders for many years and is separate from monetary policy operations.

More information on reverse repos with foreign official and international accounts can be found at https://www.newyorkfed.org/aboutthefed/fedpoint/fed20.

Reserve Balances of Depository Institutions

More than 5,500 depository institutions maintain accounts at the Federal Reserve Banks. They hold balances in those accounts to make and receive payments. The total amount of balances in their accounts is shown in the line "other deposits held by depository institutions" under "Deposits" in the H.4.1 statistical release, available at https://www.federalreserve.gov/releases/h41/H.4.1 statistical release.

The Federal Reserve can change the total amount of balances available to the banking system through its lending programs or through OMOs. The Treasury's transactions that move funds into and out of the TGA, discussed below, are also a significant factor that affects the supply of reserve balances held by depository institutions.

When the Federal Reserve lends, all else equal, the total amount of reserves of depository institutions increases. When a depository institution borrows directly from the Federal Reserve, the amount the institution borrows is credited to its Federal Reserve account. When the Federal Reserve lends to a borrower that does not have an account at a Reserve Bank, the Federal Reserve credits the funds to the account of the borrower's bank at the Federal Reserve. When a borrower of either type repays the Federal Reserve, the process is reversed, and total balances in depository institutions' accounts at the Reserve Banks decline. This type of lending occurs through many of the lending facilities discussed above.

An increase in the Federal Reserve's holdings of securities also raises the level of reserves of depository institutions. When the Federal Reserve buys securities, either outright or via a repurchase agreement, the Federal Reserve credits the account of the clearing bank used by the primary dealer from whom the security is purchased. Conversely, the Federal Reserve's sales of securities decrease the level of reserves of depository institutions. These OMOs were discussed above.

U.S. Treasury General Account

The Federal Reserve is the fiscal agent of the U.S. Treasury. Major outlays of the Treasury are paid from the TGA at the Federal Reserve.

The Treasury's receipts and expenditures affect not only the balance the Treasury holds at the Federal Reserve but also the balances in the accounts that depository institutions maintain at the Reserve Banks. When the Treasury makes a payment from its General Account, funds flow from the TGA into the account of a depository institution either for that institution or for one of the institution's customers. As a result, all else equal, a decline in the balances held in the TGA results in an increase in the reserves of depository institutions.

Conversely, funds that flow into the TGA drain balances from the reserves of depository institutions. These changes do not rely on the nature of the transaction. A tax payment to the Treasury's account reduces the reserves of depository institutions in the same way that the transfer of funds does when a private citizen purchases Treasury debt. Both actions result in funds flowing from a depository institution's account into the Treasury's account.

The U.S. Treasury reports its balance in its Federal Reserve account daily on its Daily Treasury Statement at https://www.fiscal.treasury.gov/reports-statements/dts/index.html.

Treasury Contributions to Credit Facilities

The U.S. Treasury is providing support to certain of the Federal Reserve's liquidity and credit market facilities. (see box "U.S. Department of the Treasury Support for Liquidity and Credit Market Facilities" for more details.) The support is available as credit protection for loans extended by the Reserve Banks for each facility. The support for all facilities is a liability item of the Federal Reserve's balance sheet, "Treasury contribution to credit facilities." At the termination of each facility, any residual funds will be distributed in accordance with the terms of program agreements.

References