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.

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.

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.”

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.