Fed to create emergency backstop for commercial debt market
WASHINGTON — The Federal Reserve said it will use emergency authority to provide a liquidity backstop for commercial debt issuers as the coronavirus scare has raised concerns about the flow of credit.
The central bank said Tuesday that it was establishing the Commercial Paper Funding Facility to "support the flow of credit to households and businesses." The facility resembles a backstop the Fed created for the commercial paper market in the 2008 financial crisis.
“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,” the Fed said in a press release.
The CPFF will act as a liquidity backstop to U.S. issuers of commercial paper through a special-purpose vehicle that will in turn purchase unsecured and asset-backed commercial paper from eligible companies, the Fed said.
The Treasury Department is providing $10 billion of credit protection to the Fed from the department’s Exchange Stabilization Fund. The Federal Reserve Bank of New York also has committed lending to the facility on a recourse basis.
“By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, this facility should encourage investors to once again engage in term lending in the commercial paper market,” the Fed said. “An improved commercial paper market will enhance the ability of businesses to maintain employment and investment as the nation deals with the coronavirus outbreak.”
The special-purpose vehicle will stop purchasing commercial paper March 17, 2021, unless the Fed decides to extend the facility.
The Fed's latest action came amid calls from several market observers for the central bank to do more to prop up markets in the face of the virus scare. Some commentators raised the concerns that recent interest rate cuts and other actions from the central bank will not directly reach those who most need help from economic stabilization efforts.
The Fed said the commercial paper facility will be created under authority granted by Section 13(3) of the Federal Reserve Act.
“By providing short-term credit, the CPFF will help American businesses manage their finances through this challenging period," Treasury Secretary Steven Mnuchin said in a statement. "The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers.”