Monthly Report on Credit and Liquidity Programs
and the Balance Sheet
|Appendix A||Appendix B|
Information about Closed and Expired Credit and Liquidity Facilities and Programs
During the financial crisis that emerged during the summer of 2007, the Federal Reserve took a number of important steps aimed at providing liquidity to important financial markets and institutions to support overall financial stability. Financial stability is a critical prerequisite for achieving sustainable economic growth, and all of the Federal Reserve's actions were directed toward achieving the Federal Reserve's statutory monetary policy objectives. Specifically, the Federal Reserve implemented a number of programs designed to support the liquidity of financial institutions and foster improved conditions in financial markets, and also extended credit to certain specific institutions and committed to extend credit to support systemically important financial firms.
In light of ongoing improvements in the functioning of financial markets, many of the facilities and programs established to help address the financial crisis have closed or expired. Specifically, on February 1, 2010, the Federal Reserve closed the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). On April 26, 2010, all remaining commercial paper holdings of the CPFF matured, and the CPFF LLC is expected to be dissolved following the payment of expenses and the termination or expiration of existing contractual agreements. Finally, in April 2010, the credit extended through the last Term Auction Facility (TAF) auction in March matured, marking the close of the facility.
The temporary liquidity swap arrangements between the Federal Reserve and other foreign central banks (FCBs) also expired on February 1, 2010. However, the Federal Reserve re-established temporary liquidity swap arrangements with a group of FCBs in May 2010, enabling them to offer U.S. dollar liquidity to financial institutions in their jurisdictions. Information related to these arrangements can be found in the body of this report.
Background information about the TAF, the PDCF, the TSLF, the CPFF, and the AMLF, previously included in the body of this report, as well as information about the support provided to Citigroup and Bank of America is presented in this appendix. Historical data related to these facilities, previously reported on the H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks," which includes the weekly publication of the Federal Reserve's balance sheet, is available through the Data Download Program, available at www.federalreserve.gov/datadownload. The Data Download Program provides interactive access to Federal Reserve statistical data in a variety of formats.
Lending Facilities to Support Overall Market Liquidity
Term Auction Facility (TAF)
On December 12, 2007, the Federal Reserve created the TAF to improve depository institutions' access to term funding. The TAF provided credit through an auction mechanism to depository institutions in generally sound financial condition. The TAF offered 28-day and, beginning in August 2008, 84-day loans.
On September 24, 2009, the Federal Reserve announced that the TAF would be scaled back in response to continued improvements in financial market conditions. The auction amount for the 84-day auctions was reduced in late 2009 and the maturity dates of the 84-day auctions were adjusted over time to align with the maturity dates of the 28-day auctions. Subsequently, the auction amount for the remaining 28-day auctions was tapered, and the final TAF auction was held on March 8, 2010. Credit extended under the March 2010 auction matured on April 8, 2010. All TAF loans were fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate "haircut" applied to the value of the collateral and were repaid in full, with interest, in accordance with the terms of the facility.
Lending to Primary Dealers
On March 16, 2008, the Federal Reserve announced the creation of the PDCF, an overnight loan facility that provided funding to primary dealers and helped foster improved conditions in financial markets more generally. All credit provided under the PDCF was fully secured by collateral with appropriate haircuts--that is, the value of the collateral exceeded the value of the loan extended. Initially, eligible collateral was restricted to investment-grade securities. On September 14, 2008, however, the set of eligible collateral was broadened to closely match the types of instruments that can be pledged in the tri-party repurchase agreement systems of the two major clearing banks. On September 21, 2008, and November 23, 2008, the Federal Reserve authorized the extension of credit to a set of other securities dealers on terms very similar to the PDCF. There was no borrowing at the PDCF after mid-May 2009. The Federal Reserve closed the PDCF on February 1, 2010. All loans extended under this facility were repaid in full, with interest, in accordance with the terms of the facility.
Eligible collateral for loans extended through the PDCF included all assets eligible for tri-party repurchase agreement arrangements through the major clearing banks as of September 12, 2008. The amount of PDCF credit extended to any dealer could not exceed the lendable value of eligible collateral that the dealer provided to the Federal Reserve Bank of New York (FRBNY). The collateral was valued by the clearing banks; values were based on prices reported by a number of private-sector pricing services widely used by market participants. Loans extended under the PDCF were made with recourse beyond the collateral to the primary dealer entity itself.
On March 11, 2008, the Federal Reserve announced the creation of the TSLF. Under the TSLF, the FRBNY lent Treasury securities to primary dealers for 28 days against eligible collateral in two types of auctions. For "Schedule 1" auctions, the eligible collateral consisted of Treasury securities, agency securities, and agency-guaranteed mortgage-backed securities (MBS). For "Schedule 2" auctions, the eligible collateral included Schedule 1 collateral plus highly rated private securities. In mid-2008, the Federal Reserve introduced the Term Securities Lending Facility Options Program (TOP), which offered options to primary dealers to draw upon short-term, fixed-rate TSLF loans from the System Open Market Account (SOMA) portfolio in exchange for program-eligible collateral. The TOP was intended to enhance the effectiveness of the TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates.
Transactions under the TSLF involved lending securities rather than cash: A dealer borrowed Treasury securities from the Federal Reserve and provided another security as collateral. Eligible collateral was determined by the Federal Reserve. Two schedules of collateral were defined. Schedule 1 collateral consisted of Treasury, agency, and agency-guaranteed MBS. Schedule 2 collateral included investment-grade corporate, municipal, mortgage-backed, and asset-backed securities, as well as Schedule 1 collateral. Haircuts on posted collateral were determined by the FRBNY using methods consistent with current market practices.
TSLF Schedule 1 and TOP auctions were suspended effective July 2009 in light of considerably lower use of the facility. Furthermore, in September 2009 the Federal Reserve announced its intention to scale back the size of TSLF auctions held between October 2009 and January 2010. The size of TSLF auctions was reduced to $50 billion in October 2009 and $25 billion in November 2009; offering amounts remained at $25 billion in December 2009 and January 2010. Since mid-August 2009, borrowing from the TSLF had remained unchanged at zero. The January 7, 2010, TSLF Schedule 2 auction was the last auction conducted prior to the closure of the TSLF on February 1, 2010. All loans extended under these facilities were repaid in full, with interest, in accordance with the terms of the facility.
Commercial Paper Funding Facility (CPFF)
The CPFF, which was authorized under Section 13(3) of the Federal Reserve Act, was designed to support liquidity in the commercial paper markets. The CPFF provided a liquidity backstop to U.S. issuers of commercial paper through a specially created limited liability company (LLC) called CPFF LLC. This LLC purchased three-month unsecured and asset-backed commercial paper directly from eligible issuers. The FRBNY provided financing to the LLC, and the FRBNY's loan to the LLC was secured by all of the assets of the LLC, including those purchased with the accumulated upfront fees paid by the issuers. Outstanding assets and liabilities of the CPFF LLC are consolidated onto the balance sheet of the FRBNY.
The CPFF was announced on October 7, 2008, and purchases of commercial paper began on October 27, 2008. The FRBNY administered the program until it was closed on February 1, 2010. The CPFF incurred no losses on its commercial paper holdings, and accumulated nearly $5 billion in earnings primarily from interest income, credit enhancement fees, and registration fees, which has been paid to the FRBNY as Managing Member. The CPFF's holdings of commercial paper, which peaked at $350 billion in January 2009, fell to zero on April 26, 2010, as remaining issuers repaid their commercial paper at maturity. The cash equivalents and other securities held by the CPFF LLC have matured, and the Federal Reserve expects that it will dissolve the LLC following the payment of accrued professional fees and the termination or expiration of existing contractual arrangements.
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)
The AMLF was a lending facility that financed the purchase of high-quality asset-backed commercial paper from money market mutual funds (MMMFs) by U.S. depository institutions and bank holding companies. The program was intended to assist money funds that held such paper in meeting the demand for redemptions by investors and to foster liquidity in the asset-backed commercial paper (ABCP) market and money markets more generally. The loans extended through the AMLF were non-recourse loans; as a result, the Federal Reserve had rights to only the collateral securing the loan if the borrower elected not to repay. To help ensure that the AMLF was used for its intended purpose of providing a temporary liquidity backstop to MMMFs, the Federal Reserve established a redemption threshold for use of the facility. Under this requirement, a MMMF had to experience material outflows--defined as at least five percent of net assets in a single day or at least 10 percent of net assets within the prior five business days--before the ABCP that it sold was eligible collateral for AMLF loans to depository institutions and bank holding companies. Any eligible ABCP purchased from a MMMF that had experienced redemptions at these thresholds could have been pledged to the AMLF at any time within the five business days following the date that the threshold level of redemptions was reached.
The creation of the AMLF, announced on September 19, 2008, relied on authority under Section 13(3) of the Federal Reserve Act. It was administered by the Federal Reserve Bank of Boston, which was authorized to make AMLF loans to eligible borrowers in all 12 Federal Reserve Districts.
AMLF Collateral. Collateral eligible for the AMLF was limited to ABCP that:
- was purchased by the borrower on or after September 19, 2008, from a registered investment company that held itself out as a MMMF and had experienced recent material outflows;
- was purchased by the borrower at the mutual fund's acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by the borrower;
- was not rated lower than A-1, P-1, or F1 at the time it was pledged to the Federal Reserve Bank of Boston (this would exclude paper that is rated A-1/P-1/F1 but was on watch for downgrade by any major rating agency);
- was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
- had a stated maturity that did not exceed 120 days if the borrower is a bank, or 270 days if the borrower is a non-bank.
The qualifying ABCP was transferred to the Federal Reserve Bank of Boston's restricted account at the Depository Trust Company before an advance, collateralized by that ABCP, was approved. The collateral was valued at the amortized cost (as defined in the Letter of Agreement) of the eligible ABCP pledged to secure an advance. Advances made under the facility were made without recourse, provided the requirements in the Letter of Agreement were met.
Since May 8, 2009, there had been no new borrowing through the AMLF, and as of October 13, 2009, all prior outstanding AMLF credit had matured. The AMLF was closed on February 1, 2010. All loans made under the facility were repaid in full, with interest, in accordance with the terms of the facility.
Lending in Support of Specific Institutions
During the financial crisis, the Federal Reserve agreed to provide credit, if necessary, to support Citigroup Inc. (Citigroup) and Bank of America Corporation (Bank of America), two important financial firms, as part of a package of supports for these institutions made available by the Treasury Department, the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve.
On November 23, 2008, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Citigroup in an effort to support financial markets. The terms of the arrangement, under which the government parties had agreed to provide certain loss protections and liquidity supports to Citigroup with respect to a designated pool of $301 billion of assets, are provided on the Federal Reserve website at www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm. The FRBNY did not extend credit to Citigroup under this arrangement.
On December 23, 2009, the Treasury, the Federal Reserve, and the FDIC agreed to terminate the Master Agreement dated January 15, 2009, with Citigroup. In consideration for terminating the Master Agreement, the FRBNY received a $50 million termination fee from Citigroup. Outstanding expenses in connection with the Master Agreement and not yet reimbursed by Citigroup will continue to be reimbursable.
Bank of America
On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government had agreed to provide certain support to Bank of America to promote financial market stability. Information concerning these actions is available on the Federal Reserve website at www.federalreserve.gov/monetarypolicy/bst_supportspecific.htm.
On May 7, 2009, following the release of the results of the Supervisory Capital Assessment Program, Bank of America announced that it did not plan to move forward with a part of the package of supports announced in January 2009--specifically, a residual financing arrangement with the Federal Reserve and the related guarantee protections that would be provided by the Treasury and the FDIC with respect to an identified pool of approximately $118 billion in assets.
In September 2009, Bank of America paid an exit fee in order to terminate the term sheet, which was never implemented, with the Treasury, the Federal Reserve, and the FDIC. The Federal Reserve's portion of the exit fee was $57 million.