The three US federal banking agencies have taken additional steps to enable the financial system to continue functioning during the pandemic.

By Alan W. Avery and Pia Naib

The three US federal banking agencies — the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) — have taken additional measures to protect the public and private sectors from “severe disruptions” to the US financial system following a series of actions last week addressing COVID-19-related risks. In a statement released yesterday, the Federal Reserve expressed its commitment to use “its full range of tools to support households, businesses and the US economy overall”. These latest economic relief measures, which are intended to enhance the steps taken last week, include:

  • Establishment of Two Facilities to Provide Credit Support to Large Employers: To provide companies that are struggling to maintain business operations and capacity due to COVID-19 with access to credit to continue payments to employees and suppliers, the Federal Reserve has established the Primary Market Corporate Credit Facility (PMCCF). This bond purchasing and loan issuance facility will be structured as a special purposes vehicle (SPV) and will (i) make loans to eligible borrowers and (ii) purchase qualifying bonds from eligible issuers. The facility will provide bridge financing with terms or maturities of up to four years. US companies headquartered in the US and with material operations in the US that are not expected to receive financial assistance under pending federal legislation are eligible to participate in the PMCCF, and such companies must be rated at least BBB-/Baa3 to be eligible. Borrowers or issuers may defer interest and principal payments for the first six months of the loan or bond, subject to extension by the Federal Reserve.  The Federal Reserve will finance the SPV, and the Treasury Department’s Exchange Stabilization Fund (ESF) will make an initial US$10 billion equity investment in the SPV.

The Federal Reserve has also established the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds by purchasing in the secondary market corporate bonds issued by eligible US companies and certain US-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for US investment grade corporate bonds. The SMCCF eligibility requirements for issuers and bonds is similar to the requirements for the PCMCCF. This facility will also be structured as an SPV, and the ESF will make an initial US$10 billion equity investment in the SPV.

  • Establishment of Term-Asset Backed Securities Loan Facility (TALF): To provide credit support to consumers and businesses, the Federal Reserve has established the TALF through which it will lend on a non-recourse basis to holders of certain AAA-rated asset-based securities (ABS) backed by newly and recently originated consumer and small business loans, including student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). The Federal Reserve will lend an amount equal to the market value of the ABS, less a haircut, that will be secured at all times by the ABS. The facility will be structured as an SPV, and the ESF will make an initial US$10 billion equity investment in the SPV. The terms and conditions for the TALF are expected to be based off of the terms and conditions used for the 2008 TALF.
  • Expansion of Money Market Mutual Fund Liquidity Facility (MMLF): The Federal Reserve will expand the MMLF program, which was established last week, to facilitate the flow of credit to municipalities. The expansion of the MMLF will permit a wider range of securities to be posted as collateral for loans made by the Federal Reserve Bank of Boston, through the MMLF, to eligible financial institutions. Such securities will include municipal variable rate demand notes and bank certificates of deposit.
  • Expansion of Commercial Paper Funding Facility (CPFF): The Federal Reserve is expanding last week’s newly established CPFF to facilitate the flow of credit to municipalities by allowing high-quality, tax-exempt commercial paper to be treated as eligible securities that can be purchased by the facility. In addition, the pricing of the facility has been reduced.
  • Main Street Business Lending Program: The Federal Reserve is expected to introduce a program to support lending to eligible small-and-medium sized businesses, which would complement actions taken by the SBA.
  • Revisions to Short-Term Investment Fund (STIF) Rule: The OCC released an interim final rule on March 22, 2020 to revise its STIF rule for OCC-supervised banks acting in a fiduciary capacity. The interim final rule allows the OCC to authorize banks to temporarily extend maturity limits of STIFs if it determines that sudden disruptions in the financial markets negatively affect the ability of banks to operate in compliance with the maturity limits required by the STIF rule. The amendment to the STIF rule would allow, for a limited period, national banks to operate STIFs that are impacted by the disruptions in market conditions caused by COVID-19 with increased maturity limits while such conditions persist. The interim final rule is currently effective, and the period to receive comments will close within 45 days following publication in the Federal Register. In conjunction with the interim final rule, the OCC also issued an order to temporarily extend the maturity limits for STIFs affected by the market effects of COVID-19. The order will terminate on July 20, 2020, unless revised by the OCC prior to the termination date.

In addition to the above, the federal banking agencies — along with the Consumer Financial Protection Bureau (CFPB), the National Credit Union Administration (NCUA), and the Conference of State Banking Supervisors (CSBS) — released an interagency statement on March 22, 2020, to encourage banks to work prudently with borrowers who may be unable to meet contractual payment obligations as a result of the pandemic. The statement provides that any loan modification programs established by financial institutions would be viewed favorably as such programs would further the agencies’ “longstanding practice of encouraging financial institutions to assist borrowers in times of natural disaster and other extreme events”. Importantly, the statement notes that financial institutions will not be criticized by the agencies for assisting borrowers in this regard, nor will supervised institutions be automatically required to categorize all COVID-19-related loan modifications as troubled debt restructurings (TDRs). In particular, “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief” would not be considered TDRs.