Board of Governors of the Federal Reserve System

Recent Developments

The most notable changes in the Federal Reserve's assets over the period from mid-March to August 12, 2020, were

• a large expansion in the Federal Reserve's securities holdings to restore market functioning in Treasury and agency MBS markets and to promote effective transmission of monetary policy;
• an increase in liquidity—through central bank liquidity swap lines, overnight and term repos, and discount window credit—to address pressures in dollar funding markets; and
• the establishment and use of several emergency lending programs aimed at supporting the flow of credit to households, businesses, nonprofits, and state and local governments.

On the liabilities side of the balance sheet, the largest increases were in the TGA and in depository institutions' reserve balances at the Federal Reserve.

In addition to this report, the Federal Reserve also provides extensive, monthly information on the use of some of its emergency lending programs through its Reports to Congress Pursuant to Section 13(3) of the Federal Reserve Act in response to COVID-19.² (See this report's appendix for an overview of the Federal Reserve's disclosure requirements and other provisions of the Dodd-Frank and CARES Acts.) In addition, outstanding levels of the Federal Reserve's securities holdings and take-up at its liquidity and lending programs are released weekly on the Federal Reserve's H.4.1 statistical release, available at https://www.federalreserve.gov/releases/h41/.

Securities Holdings

• On March 15, 2020, to support the smooth functioning of the markets for Treasury securities and agency MBS, the Federal Open Market Committee (FOMC) announced that it would increase its holdings of Treasury securities by at least $500 billion, increase its holdings of agency MBS by at least $200 billion, and reinvest all principal payments from its holdings of agency debt and agency MBS in agency MBS.
• On March 23, 2020, the FOMC announced that it would purchase Treasury securities and agency MBS in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and would include agency commercial MBS in its purchases of agency MBS.
• Weekly purchase amounts, though initially large in late March, were gradually reduced in subsequent weeks as market conditions improved. The weekly amounts of purchases peaked at approximately $350 billion and $180 billion for Treasury securities and agency MBS, respectively, in late March; the pace of purchases was gradually reduced over subsequent weeks to the mid-August weekly amounts of around $20 billion and $26 billion, respectively.

• On August 12, securities holdings stood near $6.26 trillion, an increase of $2.36 trillion since mid-March.

  • Treasury security holdings stood at $4.3 trillion.
  • Agency security holdings stood at $1.9 trillion, with agency commercial MBS holdings of about $9 billion.
  • Securities holdings represented about 90 percent of total Federal Reserve assets.
  • The Federal Reserve's Treasury securities holdings, as a share of the all outstanding Treasury debt, increased from 15 to 22 percent.

Repurchase Agreements

• In March 2020, the Federal Reserve implemented two forms of repo operations: it expanded its traditional repo operations and introduced the new, temporary foreign and international monetary authorities (FIMA) repo facility.

Traditional Repos

• In mid-March, in response to strains in short-term U.S. dollar funding markets resulting from the COVID-19 pandemic, the Federal Reserve Bank of New York's (FRBNY's) Trading Desk increased the size and frequency of its overnight and term repo operations with primary dealers.
• On March 17, outstanding total repos peaked at $496 billion amid strains in both term and overnight Treasury financing markets. Subsequently, take-up declined as market rates moved down as stresses receded, with the amount of take-up depending, in part, on the spread between the Federal Reserve's offering rate and market rates.
• Given the improvement in funding market conditions over time, the Trading Desk announced several changes to its repo operations. On April 13, the Trading Desk announced a reduction in the frequency of the overnight and term repo operations; on May 13, it reported a discontinuation of its three-month term operations; on June 11, it announced adjustments to the minimum bid rate and timing of its remaining repo operations.
• As of the second week of July, the outstanding level of traditional repos dropped to zero.

Temporary FIMA Repo Facility

• On March 31, to support the smooth functioning of both Treasury and dollar funding markets, the Federal Reserve established the temporary FIMA Repo Facility.
• Usage of this facility has been minimal.

Loans

Discount Window Credit

• On March 15, 2020, the Board of Governors of the Federal Reserve System, along with other federal banking agencies, issued a statement encouraging depository institutions to make use of the discount window to help meet demands for credit from households and businesses. In support of this guidance, the Board narrowed from 50 basis points to 0 basis points the spread between the primary credit rate and the top of the target range for the federal funds rate. Additionally, it announced that depository institutions may borrow primary credit not only overnight but also for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
• In the weeks after the changes in the primary credit program were instituted, borrowing in overnight unsecured funding markets above the primary credit rate declined notably, from $67 billion (35 percent of total unsecured market borrowing) in mid-March to $6 billion (roughly 3 percent of total unsecured borrowing) in mid-April.

• Program usage was widespread between mid-March and mid-August.

  • Over 900 unique borrowers borrowed under the primary credit program.
  • Smaller institutions (with assets less than $10 billion) were the most frequent borrowers.
  • Midsized institutions (with assets ranging from $50 to $250 billion) borrowed the most in aggregate.
• As of August 12, outstanding discount window credit stood at approximately $3 billion, down from the peak of about $51 billion in late March as short-term funding market conditions stabilized.

Primary Dealer Credit Facility

• On March 17, 2020, to help restore normal market functioning, the Board authorized the FRBNY to implement and operate the Primary Dealer Credit Facility (PDCF) under section 13(3) of the Federal Reserve Act.³

• The amount of PDCF loans outstanding increased steeply in the initial days of the facility, peaking at around $37 billion at the end of March.

  • Collateral securing PDCF loans during peak usage included investment-grade debt securities (31 percent), commercial paper (19 percent), municipal bonds (16 percent), asset-backed securities (ABS) (8 percent), and other eligible securities (26 percent).
• As market functioning improved, usage of the facility declined, with a sharp drop at the beginning of May and continued gradual decreases in the following months.
• As of August 12, loans outstanding were under $1 billion.

Money Market Mutual Fund Liquidity Facility

• On March 18, 2020, under section 13(3) of the Federal Reserve Act, the Board authorized the Federal Reserve Bank of Boston to implement and operate the Money Market Mutual Fund Liquidity Facility (MMLF).
• From March 23 to 27 (the first week of operations), 568 loans were extended to six financial institutions that purchased assets from 102 different money market mutual funds totaling $45 billion. During this week, collateral securing MMLF loans included mainly certificates of deposit (30 percent), asset-backed commercial paper (51 percent), and commercial paper (16 percent).
• Take-up for the MMLF slowed considerably after the first week as redemptions from money funds slowed, reducing liquidity pressures.
• The MMLF has not made any new loans since April 23.
• As of August 12, the MMLF had $11.5 billion in loans outstanding, representing 151 loans to seven financial institutions that purchased assets from 55 different money market mutual funds. At this time, collateral securing MMLF loans included certificates of deposit (52 percent), commercial paper (30 percent), asset-backed commercial paper (15 percent), and municipal debt and variable rate demand notes (3 percent).

Paycheck Protection Program Liquidity Facility

• On April 9, 2020, under section 13(3) of the Federal Reserve Act, the Federal Reserve established the PPPLF to bolster the effectiveness of the Small Business Administration's (SBA's) Paycheck Protection Program (PPP).
• On April 30, 2020, the PPPLF was expanded to allow not only depository institutions but also SBA-approved nondepository institutions to participate. In addition, while eligible collateral was initially restricted to borrower-originated PPP loans, the program was expanded to include acceptance of purchased PPP loans as collateral.
• On May 5, 2020, the federal bank regulatory agencies announced an interim final rule that neutralizes the liquidity coverage ratio impact associated with the nonrecourse funding provided by the PPPLF.
• The facility began operations on April 16, 2020, and experienced steady increases in credit demand from a wide range of community banks. Meanwhile, low money market rates and strong deposit inflows may have allowed many other banks to fund their PPP loans without accessing the PPPLF.
• As of August 12, PPPLF credit outstanding stood at $68 billion.

• Transaction-specific disclosure data are released on the Board's website.⁴ As of mid-August

  • PPPLF credit was extended across about 10,552 loans and more than 647 borrowers,
  • nearly 95 percent of borrowers were community banks,
  • 80 minority depository institutions and community development financial institutions borrowed under the facility,
  • 50 nondepository institutions accessed the facility and have about $8.4 billion in PPPLF balances, and
  • there is at least one PPPLF borrower in each of the 50 states.

Limited Liability Companies

Some of the liquidity and credit market facilities established by the Federal Reserve involve special purpose vehicles (SPVs), structured as limited liability companies (LLCs), to conduct program-related transactions. The dollar amounts reported in the LLCs on the Federal Reserve's balance sheet include not only the assets purchased by the Federal Reserve but also short-term receivables, interest and dividend receivables, and other assets of the facility.⁵ In addition, the LLC includes the portion of the Treasury contributions to the facilities that is held as investments in nonmarketable Treasury securities (see box "U.S. Department of the Treasury Support for Liquidity and Credit Market Facilities" for more details).⁶

Commercial Paper Funding Facility

• On March 17, 2020, under section 13(3) of the Federal Reserve Act, the Board established the Commercial Paper Funding Facility (CPFF), and expanded it on March 23, 2020, to support the functioning of the issuance market for short-term debt and support businesses and state and local governments in managing their short-term revenue and expense fluctuations.
• On April 14, the facility conducted its first operation.
• Within the first few weeks of operation, usage peaked at $4.3 billion.
• In recent months, reflecting improvements in market functioning and liquidity conditions, highly-rated issuers have been able to fund three-month commercial paper in the market at or below the CPFF's purchase price. As a result, the CPFF saw limited further usage, with no usage since mid-July.
• On July 23, the Board expanded the set of counterparties through whom eligible issuers may sell commercial paper to the facility.
• As of August 12, the facility held only minimal amounts of commercial paper, as past holdings matured.

Primary and Secondary Market Corporate Credit Facilities

• On March 23, 2020, under section 13(3) of the Federal Reserve Act, the Board approved the establishment of the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) to support the credit needs of corporations and their employment and spending.

• On April 9, 2020, the Federal Reserve announced an expansion of the size and scope of the facilities.

  • The PMCCF added to the list of eligible issuers to include firms recently downgraded to double-B.
  • The SMCCF expanded the list of bonds and added exchange-traded funds (ETFs) to include eligible bonds of firms recently downgraded to double-B as well as high-yield ETFs.
• On May 12, the SMCCF became operational.
• On June 15, the Federal Reserve announced the SMCCF would begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers.
• On June 29, the PMCCF became operational. In addition, the Federal Reserve released new term sheets, including pricing information, for this facility.
• On July 23, the Board broadened the range of counterparties for the SMCCF.
• As of August 12, the SMCCF purchases totaled a bit over $12 billion.

• Transaction-specific disclosure data for the SCCMF are released on the Board's website.⁷ As of mid-August

  • eligible bond ETFs were 70 percent of purchases and corporate bonds were 30 percent;
  • 90 percent of the purchases were investment grade, while 10 percent were high yield.

Main Street Facilities (Main Street Lending Program)

• On March 23, 2020, the Federal Reserve indicated that it was establishing a Main Street Lending Program (Main Street) to support lending to eligible small and medium-sized businesses, complementing efforts by the SBA.
• On April 9, the Federal Reserve released initial term sheets for the Main Street New Loan Facility (MSNLF) and Main Street Expanded Loan Facility (MSELF) and announced that it would purchase up to $600 billion of qualifying loan participations.
• On April 30, the Federal Reserve announced revisions to the MSNLF and MSELF term sheets and released an additional term sheet for the Main Street Priority Loan Facility (MSPLF).
• On May 27, the Federal Reserve released the legal forms and agreements for the MSNLF, MSPLF, and MSELF, including a form loan participation agreement, lender certifications and covenants, and borrower certifications and covenants.
• On June 8, the Federal Reserve expanded the program to enable more small and medium-sized businesses to be able to access Main Street. It lowered the minimum loan amount, raised the maximum loan size, adjusted the principal repayment schedule to begin after two years, and extended the term of the loans to five years to provide borrowers with greater flexibility in repaying the loans.
• On June 15, lender registration began, and the Board announced it would seek public feedback on the proposal to expand Main Street to provide access to credit for small and medium-sized nonprofit organizations.
• On July 6, Main Street began purchasing participations in eligible loans.
• On July 17, the Federal Reserve released term sheets for the Nonprofit Organization New Loan Facility (NONLF) and Nonprofit Organization Expanded Loan Facility (NOELF), thereby expanding access to the program to include nonprofit organizations such as educational institutions, hospitals, and social service organizations.
• As of early August, the for-profit facilities (MSNLF, MSPLF, and MSELF) were fully operational; the nonprofit facilities (NONLF and NOELF) were not yet purchasing participations in loans.

• Transaction-specific disclosure data are released for the MSNLF, MSPLF, and MSELF on the Board's website.⁸ As of early August

  • More than 500 lenders had registered to participate in the program, representing more than half of U.S. banking assets.
  • Main Street had purchased participations in 32 loans. These loans totaled more than $250 million. An additional 55 loans worth more than $600 million had been submitted and are under review.

Municipal Liquidity Facility

• On April 9, 2020, under section 13(3) of the Federal Reserve Act, the Board announced the establishment of the Municipal Liquidity Facility (MLF) to help state and local governments manage cash-flow stresses caused by the COVID-19 pandemic; the facility will offer up to $500 billion in lending to states and municipalities.
• On April 27, the Federal Reserve expanded the set of eligible issuers to include smaller cities and counties and extended the duration of the facility.
• On June 3, the State of Illinois became the first borrower, issuing $1.2 billion of 12-month general obligation notes to the facility at a rate of 3.82 percent.
• On June 3, the Federal Reserve again expanded the number and type of entities eligible to directly use the MLF. All U.S. states are able to have at least two cities or counties eligible to use the facility, and state governors can designate two issuers in their jurisdictions whose revenues are generally derived from operating government activities to also be eligible.
• On August 11, the Board announced revised pricing on loans, reducing the interest rate spread on tax-exempt notes for each credit rating category by 50 basis points and reducing the amount by which the interest rate for taxable notes is adjusted relative to tax-exempt notes.
• Transaction-specific disclosure data are released on the Board's website.⁹ As of mid-August, the loan to the State of Illinois was the only outstanding loan.

Term Asset-Backed Loan Facility

• On March 23, 2020, under section 13(3) of the Federal Reserve Act, the Board announced the establishment of the Term Asset-Backed Loan Facility (TALF) to support the flow of credit to U.S. consumers and businesses; the facility will make up to $100 billion of loans available.
• On April 9, the Federal Reserve broadened the range of assets that are eligible as collateral.
• On May 12, the Federal Reserve provided additional information regarding borrower and collateral eligibility criteria.
• On June 17, the TALF had its first subscription, which provided $252 million in loans, including $145 million for commercial MBS.
• Starting in July, the TALF began holding two subscriptions per month.
• On July 23, the Board expanded the set of counterparties through whom eligible borrowers may apply for TALF funds.
• As of August 12, the TALF held four subscriptions.
• Loan settlements as of August 12 totaled $1.6 billion and, with the fourth subscription settlement on August 13, the total increased to $2.3 billion.

• Transaction-specific disclosure data are released on the Board's website.¹⁰ As of mid-August

  • approximately one-half of the requests for small business ABS were collateralized by SBA-guaranteed loans and the remainder for commercial MBS (35 percent), premium finance loans (5 percent) and student loans (11 percent).

Central Bank Liquidity Swaps

• During the week of March 15, 2020, as offshore dollar funding markets came under stress, existing swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank were modified. In particular, the swap fee was reduced—from a rate of the U.S. dollar overnight index swap (OIS) rate plus 50 basis points to the OIS rate plus 25 basis points—the frequency of seven-day maturity operations increased from weekly to daily, and 84-day maturity swaps began to be offered.
• Swap lines were expanded to temporarily include nine additional central banks: the Reserve Bank of Australia, the Banco Central do Brasil, Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank (Norway), the Monetary Authority of Singapore, and the Sveriges Riksbank (Sweden).
• Early auctions were met with strong demand, especially for the 84-day operations.
• In late May, outstanding central bank liquidity swaps reached a peak of nearly $450 billion, with the Bank of Japan holding $223 billion of the outstanding amount and the European Central Bank holding $145 billion; other central banks usage was more limited. Nearly all of the swaps outstanding at the peak were in 84-day allotments.
• Reflecting improvements in offshore dollar funding markets, outstanding central bank liquidity swaps began to diminish in mid-June, as the first wave of 84-day swaps began to mature.
• Effective July 1, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank reduced the frequency of their seven-day maturity operations to three times a week.
• As of August 12, central bank liquidity swaps stood at $100 billion, with the Bank of Japan holding $80 billion of the outstanding amount and European Central Bank holding $9 billion. Swaps continued to be concentrated in the 84-day allotments.

Reserve Balances and Other Liabilities

• Deposits of depository institutions, which consist nearly entirely of reserve balances, increased by $1 trillion since early March 2020 to stand at about $2.8 trillion on August 12.¹¹ This increase primarily reflects the Federal Reserve's actions to support market functioning and the flow of credit to households and businesses.
• Federal Reserve notes in circulation increased from $1.8 trillion in March to almost $2 trillion on August 12, primarily reflecting a boost in demand for cash from domestic households and businesses, but also a surge in U.S. currency shipments to international destinations and a sizable increase in banks' vault cash early in the period.
• The TGA expanded from about $370 billion in early March to over $1.6 trillion in mid-August. This increase primarily reflects the cash proceeds of Treasury securities issuance needed to finance fiscal spending related to the CARES Act. The proceeds from the debt issuance are placed in the TGA until the Treasury uses the funds.
• Treasury's contributions to the liquidity and credit facilities—new funds on the Federal Reserve's balance sheet—stood at $114 billion on August 12, reflecting the amount of Treasury's equity investments in the LLCs created pursuant to establishing the facilities.

References