Federal Reserve Bank Lending Programs Explained

The Federal Reserve Bank lending programs are a key part of the US financial system. They provide emergency loans to banks and other financial institutions to prevent widespread bank failures.

These programs were established in response to the Great Depression, when bank failures led to a loss of public confidence in the banking system. The Federal Reserve Bank created the Discount Rate to provide liquidity to banks.

The Discount Rate is the interest rate at which banks can borrow money from the Federal Reserve Bank. It's used to manage the money supply and prevent inflation. The Federal Reserve Bank can also use open market operations to buy or sell government securities, which affects the money supply.

The Federal Reserve Bank can also use the Term Auction Facility to provide loans to banks. This program was created during the 2008 financial crisis to provide emergency loans to banks. The loans are auctioned off to the banks with the highest bids.

The Federal Reserve Bank offers a variety of lending programs to support small and medium-sized businesses, as well as nonprofit organizations, during times of financial stress. These programs aim to provide liquidity and credit to help these entities maintain their operations and continue to serve their communities.

The Main Street Lending Program is one such initiative, which operated through five facilities to support lending to small and medium-sized businesses and nonprofit organizations. The program provided financing to eligible businesses, allowing them to maintain their operations and continue to serve their communities.

Here are some of the key lending programs offered by the Federal Reserve Bank:

These programs demonstrate the Federal Reserve Bank's commitment to supporting the financial stability of the economy and helping businesses and individuals weather times of financial stress.

The Main Street Program was established by the Federal Reserve to support lending to small and medium-sized businesses and nonprofit organizations in sound financial condition before the pandemic.

The Program operated through five facilities: the Main Street New Loan Facility, the Main Street Priority Loan Facility, the Main Street Expanded Loan Facility, the Nonprofit Organization New Loan Facility, and the Nonprofit Organization Expanded Loan Facility.

These facilities were designed to provide financial assistance to businesses and organizations that were struggling due to the pandemic.

The Federal Reserve Bank plays a crucial role in supporting the flow of credit to households and businesses through various lending programs.

The Commercial Paper Funding Facility (CPFF) was established by the Federal Reserve Board on March 17, 2020, to support the flow of credit to households and businesses.

Commercial paper markets directly finance a wide range of economic activity, supplying credit and funding for auto loans and mortgages as well as liquidity to meet the operational needs of a range of companies.

The Federal Reserve Banks are the operating arms of the central bank, with 12 Reserve Banks serving their respective regions of the country.

Each Reserve Bank serves its region, including banks, the U.S. Treasury, and indirectly, the public.

The Reserve Banks store currency and coin, process checks and electronic payments, supervise commercial banks in their regions, and handle the Treasury's payments.

The Reserve Banks also conduct research on regional, national, and international economic issues, which plays a critical role in bringing broad economic perspectives to the national policymaking arena.

The board of directors oversees the management and activities of each Reserve Bank, imparting a private-sector perspective to the Reserve Bank.

The 12 Federal Reserve Banks are located in the following cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

Here's a list of the 12 Federal Reserve Banks and their locations:

The Primary Dealer Credit Facility (PDCF) was established by the Federal Reserve Board on March 17, 2020, to support the credit needs of American households and businesses.

This facility allowed primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households.

The Temporary FIMA Repo Facility is a temporary repurchase agreement facility established by the Federal Reserve to support the smooth functioning of financial markets, including the U.S. Treasury market. This facility allows FIMA account holders, which include central banks and other international monetary authorities, to temporarily exchange their U.S. Treasury securities for U.S. dollars.

The U.S. dollars made available through this facility can then be used to support institutions in their jurisdictions. The FIMA Repo Facility was established to help maintain the supply of credit to U.S. households and businesses.

Here are the key features of the Temporary FIMA Repo Facility:

The Municipal Liquidity Facility was set up by the Federal Reserve to help state and local governments manage cash flow pressures. This facility can purchase up to $500 billion of short-term notes directly from eligible U.S. states, counties, and cities.

Eligible state-level issuers can use the proceeds to support additional counties and cities. The Federal Reserve will continue to monitor conditions in the primary and secondary markets for municipal securities.

The Municipal Liquidity Facility is designed to help state and local governments continue to serve households and businesses in their communities. This support is crucial during times of economic stress.

Here are the types of issuers eligible for the Municipal Liquidity Facility:

The Federal Reserve established the Primary Market Corporate Credit Facility (PMCCF) on March 23, 2020, to support credit to employers through bond and loan issuances.

The PMCCF provided companies access to credit so that they were better able to maintain business operations and capacity during the period of dislocations related to the pandemic. This facility was open to investment grade companies, as well as certain companies that were investment grade as of March 22, 2020.

The Federal Reserve established a special purpose vehicle (SPV) through which the PMCCF was able to make loans and purchase bonds. The Treasury, using funds appropriated to the ESF through the CARES Act, made an equity investment in the SPV.

The Secondary Market Corporate Credit Facility (SMCCF) was established on the same day as the PMCCF, March 23, 2020, to support credit to employers by providing liquidity to the market for outstanding corporate bonds.

The SMCCF purchased in the secondary market corporate bonds issued by investment grade U.S. companies or certain U.S. companies that were investment grade as of March 22, 2020, as well as U.S.-listed exchange-traded funds whose investment objective is to provide broad exposure to the market for U.S. corporate bonds.

The Treasury, using funds appropriated to the ESF through the CARES Act, made an equity investment in an SPV established by the Federal Reserve for the SMCCF and the Primary Market Corporate Credit Facility.

To borrow from the Federal Reserve, depository institutions must meet certain requirements. They must maintain reservable transaction accounts or nonpersonal time deposits.

Eligibility to borrow is not dependent on the use of Federal Reserve priced services. In fact, U.S. branches and agencies of foreign banks that hold reserves are eligible to borrow under the same terms and conditions as domestic depository institutions.

Depository institutions that are required to maintain reserves under the Board's Regulation D have regular access to the Discount Window. Bankers' banks, corporate credit unions, and other financial institutions that don't maintain reserves may still obtain access to the Discount Window if they voluntarily do so.

The Federal Reserve doesn't require depository institutions to provide reasons for requesting primary credit advances, but they may ask for additional information if the pattern of borrowing or the nature of the request indicates a potential problem.

To secure a loan from the Federal Reserve, you'll need to pledge collateral. This can be a performing or investment-grade asset held by a depository institution, such as a commercial, industrial, or agricultural loan. The Reserve Bank requires a perfected security interest in all collateral pledged to secure Discount Window loans.

The types of collateral accepted by the Federal Reserve include commercial, industrial, or agricultural loans, consumer loans, residential and commercial real estate loans, and corporate bonds and money market instruments. Obligations of U.S. government agencies and government-sponsored enterprises, asset-backed securities, and collateralized mortgage obligations are also accepted.

Here are the most commonly pledged assets to secure Discount Window advances:

Collateral margins are applied to the Federal Reserve's fair market value estimate and are designed to account for risk characteristics of the pledged asset as well as the volatility of the value of the pledged asset over an estimated liquidation period.

Collateral is a crucial aspect of borrowing from the Federal Reserve. It's essentially a guarantee that you'll be able to repay the loan, and it comes in many forms.

The Federal Reserve requires collateral to be secured to their satisfaction, and most performing or investment-grade assets held by depository institutions are acceptable. Reserve Banks require a perfected security interest in all collateral pledged to secure Discount Window loans.

Assets accepted as collateral include commercial, industrial, or agricultural loans, consumer loans, residential and commercial real estate loans, and corporate bonds and money market instruments. These are just a few examples of the many types of assets that can be used as collateral.

Here are some of the most commonly pledged assets to secure Discount Window advances:

The value of collateral is determined by its lendable value, which is the market value or an internally modeled fair market value estimate multiplied by a margin. The margin is applied to account for risk characteristics of the pledged asset as well as the volatility of its value over an estimated liquidation period.

Collateral margins for loans are based on reported cash flow characteristics and proxy credit spreads, while margins for securities are assigned based on asset type and duration.

Loan proceeds are posted to the agreed-upon account, usually the borrowing depository institution's account, after the close of Fedwire.

The advance must be repaid on the maturity date or, at the lending Reserve Bank's discretion, upon demand.

Repayment of principal and accrued interest is charged to the account to which the loan was posted.

Multi-day advances can be prepaid in whole or in part at the borrowing depository institution's option.

To prepay an advance via DWD or by calling your local Reserve Bank, you'll need to provide the following information:

Prepayment amounts will be applied sequentially to the loans that have been outstanding the longest.