Yale School of Management

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CARES Act $454 billion Emergency Fund Could add up to Much More for Businesses, States and Municipalities

April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist business, states, and municipalities dealing with the pandemic. The Fed may do this through (i) purchasing obligations or other interests directly from issuers or other interests; (ii) purchasing obligations or other interests in secondary markets or otherwise; or (ii) making loans, including loans or other advances secured by collateral.

By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions create the possibility that the impact of the fund can  be leveraged up significantly as stated by Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions of dollars being made available to the public. See this YPFS blog post for further discussion on the Treasury backstop.

The legislation creates great possibilities but also raises questions about limitations on the Fed’s authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed program or facility relying on such funds “including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.” We discuss herein the intersection of the Emergency Fund with Section 13(3).

Continue reading “CARES Act $454 billion Emergency Fund Could add up to Much More for Businesses, States and Municipalities”

Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008 TALF

April 1, 2020

Section 4003(b) of the CARES Act appropriates $454 billion for the Treasury to backstop Federal Reserve (Fed) lending programs aimed at supporting credit flows to businesses, states, or municipalities in the midst of the coronavirus pandemic. 

The week before the CARES Act was signed into law, the Treasury had already used $50 billion in total from the Exchange Stabilization Fund (ESF) to backstop five Fed emergency lending programs, including the reintroduced Term Asset-Backed Securities Loan Facility (TALF). In 2008 during the Global Financial Crisis (GFC) the Treasury backstopped the first TALF using funds appropriated by Congress in the Emergency Economic Stabilization Act of 2008 (EESA).   

The Fed has yet to determine the nature of any emergency lending programs (see here for discussion on the Fed’s section 13(3) power) it will launch under this authority, but Fed Chairman Jerome Powell said on March 26 that the Fed's emergency lending powers are dependent on this Treasury backstop: “Effectively, $1 of loss-absorption is worth $10 worth of loans.” The Treasury backstop certainly extended the Fed’s lending power during GFC but what were the Treasury and Fed’s expectations in actually using this backstop? These expectations certainly influenced the design of 2008 TALF and a recent report to Congress includes the Fed’s expectation in the 2020 TALF.

Continue reading “Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008 TALF”

Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to Central Banks that Don’t Have Fed Swap Lines

April 1, 2020

On March 31, the Federal Reserve announced a dollar repo facility that will allow it to lend dollars to foreign central banks in exchange for US Treasury securities.

The temporary repurchase agreement facility for foreign and international monetary authorities, or “FIMA Repo Facility,” will allow foreign central banks to exchange US Treasuries for US dollars through overnight repurchase agreements (repos). They can then make those dollars available to companies in their own jurisdictions. 

Continue reading “Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to Central Banks that Don’t Have Fed Swap Lines”

Authorities Restrict Short Sales during COVID-19 Crisis

April 1, 2020

The COVID-19 pandemic has created extraordinary uncertainty; it is too early to predict how bad it will get or how it will impact the world economy. This uncertainty has substantially elevated the volatility in bond and equity markets. In response, several countries have placed restrictions on short sales. In short sales, an investor sells a security she doesn’t own, hoping to profit when its price falls. Economists generally find that the benefits of short selling to market efficiency and liquidity outweigh the potential costs, most of the time. But authorities argue that short sales amidst extreme uncertainty can excessively deflate market prices and lead to further market contagion in a crisis. We discuss: (i) short-sale restrictions during the COVID-19 crisis, (ii) similar actions in earlier crises, and (iii) key design decisions that authorities face in restricting short sales.

Continue reading “Authorities Restrict Short Sales during COVID-19 Crisis”

Aid to Airlines and other Critical Industries During Crises

April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist business, states, and municipalities dealing with the pandemic. The Fed may do this through (i) purchasing obligations or other interests directly from issuers or other interests; (ii) purchasing obligations or other interests in secondary markets or otherwise; or (ii) making loans, including loans or other advances secured by collateral.

By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions create the possibility that the impact of the fund can  be leveraged up significantly as stated by Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions of dollars being made available to the public. See this YPFS blog post for further discussion on the Treasury backstop.

The legislation creates great possibilities but also raises questions about limitations on the Fed’s authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed program or facility relying on such funds “including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.” We discuss herein the intersection of the Emergency Fund with Section 13(3).

Continue reading “Aid to Airlines and other Critical Industries During Crises”

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.”

Continue reading “US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19 ”

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.

Continue reading “ECB Unveils Pandemic Emergency Purchase Programme”

CARES Act $454 billion Emergency Fund Could add up to Much More for Businesses, States and Municipalities

April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist business, states, and municipalities dealing with the pandemic. The Fed may do this through (i) purchasing obligations or other interests directly from issuers or other interests; (ii) purchasing obligations or other interests in secondary markets or otherwise; or (ii) making loans, including loans or other advances secured by collateral.

By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions create the possibility that the impact of the fund can  be leveraged up significantly as stated by Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions of dollars being made available to the public. See this YPFS blog post for further discussion on the Treasury backstop.

The legislation creates great possibilities but also raises questions about limitations on the Fed’s authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed program or facility relying on such funds “including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.” We discuss herein the intersection of the Emergency Fund with Section 13(3).

Continue reading “CARES Act $454 billion Emergency Fund Could add up to Much More for Businesses, States and Municipalities”

Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008 TALF

April 1, 2020

Section 4003(b) of the CARES Act appropriates $454 billion for the Treasury to backstop Federal Reserve (Fed) lending programs aimed at supporting credit flows to businesses, states, or municipalities in the midst of the coronavirus pandemic. 

The week before the CARES Act was signed into law, the Treasury had already used $50 billion in total from the Exchange Stabilization Fund (ESF) to backstop five Fed emergency lending programs, including the reintroduced Term Asset-Backed Securities Loan Facility (TALF). In 2008 during the Global Financial Crisis (GFC) the Treasury backstopped the first TALF using funds appropriated by Congress in the Emergency Economic Stabilization Act of 2008 (EESA).   

The Fed has yet to determine the nature of any emergency lending programs (see here for discussion on the Fed’s section 13(3) power) it will launch under this authority, but Fed Chairman Jerome Powell said on March 26 that the Fed's emergency lending powers are dependent on this Treasury backstop: “Effectively, $1 of loss-absorption is worth $10 worth of loans.” The Treasury backstop certainly extended the Fed’s lending power during GFC but what were the Treasury and Fed’s expectations in actually using this backstop? These expectations certainly influenced the design of 2008 TALF and a recent report to Congress includes the Fed’s expectation in the 2020 TALF.

Continue reading “Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008 TALF”

Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to Central Banks that Don’t Have Fed Swap Lines

April 1, 2020

On March 31, the Federal Reserve announced a dollar repo facility that will allow it to lend dollars to foreign central banks in exchange for US Treasury securities.

The temporary repurchase agreement facility for foreign and international monetary authorities, or “FIMA Repo Facility,” will allow foreign central banks to exchange US Treasuries for US dollars through overnight repurchase agreements (repos). They can then make those dollars available to companies in their own jurisdictions. 

Continue reading “Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to Central Banks that Don’t Have Fed Swap Lines”

Authorities Restrict Short Sales during COVID-19 Crisis

April 1, 2020

The COVID-19 pandemic has created extraordinary uncertainty; it is too early to predict how bad it will get or how it will impact the world economy. This uncertainty has substantially elevated the volatility in bond and equity markets. In response, several countries have placed restrictions on short sales. In short sales, an investor sells a security she doesn’t own, hoping to profit when its price falls. Economists generally find that the benefits of short selling to market efficiency and liquidity outweigh the potential costs, most of the time. But authorities argue that short sales amidst extreme uncertainty can excessively deflate market prices and lead to further market contagion in a crisis. We discuss: (i) short-sale restrictions during the COVID-19 crisis, (ii) similar actions in earlier crises, and (iii) key design decisions that authorities face in restricting short sales.

Continue reading “Authorities Restrict Short Sales during COVID-19 Crisis”

Aid to Airlines and other Critical Industries During Crises

April 1, 2020

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist business, states, and municipalities dealing with the pandemic. The Fed may do this through (i) purchasing obligations or other interests directly from issuers or other interests; (ii) purchasing obligations or other interests in secondary markets or otherwise; or (ii) making loans, including loans or other advances secured by collateral.

By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions create the possibility that the impact of the fund can  be leveraged up significantly as stated by Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions of dollars being made available to the public. See this YPFS blog post for further discussion on the Treasury backstop.

The legislation creates great possibilities but also raises questions about limitations on the Fed’s authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed program or facility relying on such funds “including requirements relating to loan collateralization, taxpayer protection, and borrower solvency.” We discuss herein the intersection of the Emergency Fund with Section 13(3).

Continue reading “Aid to Airlines and other Critical Industries During Crises”

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.”

Continue reading “US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19 ”

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.

Continue reading “ECB Unveils Pandemic Emergency Purchase Programme”