Yale School of Management

Program on Financial Stability

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Systemic Risk Blog

US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19

March 31, 2020

On March 27, the US acted to delay the implementation of a new accounting rule to ease its impact on banks whose borrowers have been affected by COVID-19.

The new accounting standard, known as “current expected credit losses” (CECL), had been set to take effect this year for the largest US banks and over the next two years for other banks. It requires banks to provision for all “expected” losses over the life of a loan. The previous “incurred loss” standard, which is still in place as banks transition to the new standard, requires them to recognize losses only when they become “probable.”

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ECB Unveils Pandemic Emergency Purchase Programme

March 31, 2020

On March 18, the ECB unveiled a temporary program to purchase up to €750 billion in public and private-sector securities until the “crisis phase” of the COVID-19 crisis is over, but at least until the end of 2020.

The Pandemic Emergency Purchase Programme (PEPP) is an expansion of the ECB’s Asset Purchase Programme (APP), a package of asset-purchase measures that the ECB initiated in 2014 to support monetary policy. The PEPP, like the earlier APP, includes programs to buy sovereign debt, covered bonds, asset-backed securities , corporate bonds, and commercial paper. As with the APP, the ECB will make available for lending any securities that it purchases under the PEPP.

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Federal Reserve Supports Corporate Bond Markets

March 30, 2020

On March 23, the Federal Reserve introduced two new facilities to support credit to large US companies. One will purchase newly issued bonds and loans on the primary market and the other will purchase outstanding corporate bonds and exchange-traded funds (ETFs) on the secondary market. The Fed used its emergency authority under section 13(3) of the Federal Reserve Act to create these programs.

Under both facilities, the Federal Reserve Bank of New York will lend to a special purpose vehicle (SPV) on a recourse basis. These loans will be secured by all assets of the SPV.  The US Treasury, using the Exchange Stabilization Fund (ESF), will provide $20 billion in equity—$10 billion for each SPV.

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CARES Act Provides Mortgage Forbearance

March 30, 2020

The $2 trillion CARES Act, signed by the President on March 27, 2020, provides consumer credit and mortgage forbearance to keep people in their homes while the coronavirus lockdown continues.

For homeowners and renters, Title IV of the CARES Act includes mortgage forbearance and renter protection, a foreclosure moratorium, eviction protection, easing accounting standards for borrowers who miss payments, and changes to credit reporting requirements.

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Senate Bill Temporarily Restores Treasury, FDIC Guarantee Authority Eliminated Post-GFC

March 27, 2020

The coronavirus rescue bill that the US Senate passed unanimously on March 25 temporarily restores the ability of the Treasury Department and the Federal Deposit Insurance Corporation (FDIC) to guarantee money funds, transaction accounts, and senior bank debt, a reversal of the elimination of these authorities by Congress following the Global Financial Crisis (GFC).

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Flight from Maturity during the Coronavirus Crisis

March 26, 2020

The coronavirus crisis has caused significant turmoil in funding markets in recent weeks. Although the Fed unveiled an alphabet soup of aggressive lending programs across many markets, a flight from maturity continues across many money markets, including interbank Eurodollar funding and commercial paper (CP). Although the current crisis is a pandemic—not yet a financial crisis like 2008—short-term debt holders are ready to run, should something appear to threaten issuers’ ability to pay. 

Unlike a flight to quality—in which lenders entirely shift to the highest quality safe assets like Treasurys—a flight from maturity occurs when lenders preserve the option to exit quickly by lending at shorter maturities. Risk builds and funding structures grow precarious as lenders place a larger and larger premium on the exit option.

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Countries Implement Broad Forbearance Programs for Small Businesses, Sometimes with Taxpayer Support

March 26, 2020

The government-mandated lockdowns in many countries responding to the coronavirus pandemic have threatened the financial health of small businesses, who typically have sufficient cash on hand to cover just one month of fixed cash-flow needs. Banks, utilities, landlords, and other creditors responded early with temporary payment holidays and other forbearance efforts, often at the urging of regulators. Creditors can grant limited forbearance to assist debtors in normal times. As the lockdown continues, however, private-sector creditors won’t be able to afford forbearance alone. To avoid widespread nonpayment from sparking a systemic financial crisis, governments are turning to taxpayers to help small businesses meet their fixed-cost obligations.

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