Board of Governors of the Federal Reserve System

The Federal Reserve Board on Tuesday announced that it had agreed with the Treasury Department that it was appropriate for Treasury to reduce from $20 billion to $4.3 billion the credit protection provided for the Term Asset-Backed Securities Loan Facility (TALF) under the Troubled Asset Relief Program (TARP). The Board had authorized up to $200 billion in TALF loans, but when the program closed on June 30, 2010, there were $43 billion in loans outstanding.

Under the TALF, which began operation in March 2009, the Federal Reserve Bank of New York extended loans to investors in highly rated asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS). By encouraging issuance of ABS and CMBS, the TALF was designed to increase credit availability and support economic activity. Although the TALF extended $70 billion in loans, many TALF loans, which have initial maturities of three or five years, have been repaid early, in part because the interest rates on TALF loans were designed to be higher than market rates in the more normal conditions that have come to prevail in a number of securitization markets.

Any losses on the TALF program would first be absorbed by the accumulated excess of the TALF loan interest payments over the Federal Reserve's cost of funds and then by the TARP funds. To date, the TALF program has experienced no losses and all outstanding TALF loans are well collateralized. The Board continues to see it as highly likely that the accumulated excess interest spread will cover any loan losses that may occur without recourse to the dedicated TARP funds.