Senate GOP bill also includes a number of financial services stimulus provisions

On March 23, the Federal Reserve (the Fed) announced multiple new initiatives to bolster the US economy and shore up markets reeling from the global coronavirus pandemic, including a pledge to buy as much government debt as it deems necessary and new lending facilities to ease the flow of credit to both large and small companies and to state and local governments. The programs follow a series of moves the Fed had already taken last week.

The Fed outlined its actions, with links to fact sheets on the specific programs, in a statement posted here. That statement is also attached with this alert.

"The coronavirus pandemic is causing tremendous hardship across the United States and around the world," the central bank said in a statement. "While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate."

Three new lending facilities. The Fed said it will start three new lending facilities that will support "the flow of credit to employers, consumers and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing." These programs will:

• Purchase corporate bonds and provide loans through a Primary Market Corporate Credit Facility, in an effort to revive the stalled corporate debt market, which has effectively come to a standstill. This facility is open to investment-grade companies and will provide bridge financing of four years.
• Purchase previously issued corporate debt through a second program called the Secondary Market Corporate Credit Facility, which will buy previously issued corporate debt, with both programs backed by $10 billion from Treasury to offset losses. For both these programs, a borrower can opt to defer interest payments for six months, but if so they may not pay dividends or do stock buybacks during the period the company is not paying interest. The programs' purchases will include exchange-traded funds that invest in corporate debt.
• Purchase asset-backed securities through a revival of the financial crisis-era TALF (Term Asset-Backed Lending Facility), which will buy securities backed by consumer assets like auto and real estate loans, credit card loans, student loans and certain small-business loans. The Fed said the Treasury will provide $10 billion to that program to offset any losses.

The Fed also said it will purchase an unlimited amount of Treasury bonds and mortgage-backed securities (MBS) in an effort to hold down borrowing rates and ensure those markets function properly. The central bank will buy Treasuries "in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy." The Fed will also buy agency commercial mortgage-backed securities.

Recipients of Congressional stimulus excluded. Notably, the Fed said that any companies "that are expected to receive direct financial assistance under pending federal legislation will not be eligible to participate in the corporate lending programs." Airlines and other industries are likely targets for assistance under legislation Congress is considering now. For the Fed to purchase a company's bonds, their debt must be rated at investment grade. They can defer payments for up to six months; if they do suspend payment, they may not buy back their shares or pay dividends, according to the Fed.

Expand money market liquidity program. The central bank also said it would expand the Money Market Mutual Fund Liquidity Facility it revived last week to include a wider range of securities, including municipal variable-rate demand notes. The Fed also said it will expand its existing Commercial Paper Funding Facility, another financial crisis-era program revived last week, to include high-quality municipal debt. Both steps essentially expand the range of municipal bonds the Fed had said it would buy last week, in a bid to help struggling states and cities.

'Main Street Lending Program.' The Fed also said that it "expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses, complementing efforts" by the Small Business Administration. The Fed's statement included few other details about this initiative. The program is likely intended to function alongside stimulus programs in congressional legislation. The Senate Republican proposal described below includes language providing funding to very small companies, while this Fed program will focus on medium-sized firms.

These latest steps come after interventions that the Fed had rolled out last week, including the Fed's announcement that it would buy $500 billion of Treasuries and $200 billion of mortgage-backed securities. The central bank had already gone through about half those amounts by the end of last week. (The New York Federal Reserve also had pledged it would buy $75 billion of Treasuries and $50 billion of mortgage-backed securities each day this week.) The Fed last week also announced that it was using its emergency authority under section 13(3) of the Federal Reserve Act to revive its crisis-era commercial paper facility, which will purchase unsecured and asset-backed commercial paper directly from eligible companies. The Fed also used the same emergency authority to revive its crisis-era primary dealer credit facility and a backstop guarantee program for money market mutual funds.

Senate Republican bill

The Senate coronavirus emergency bill that was the subject of cloture votes on the floor on March 23 (HR 748, the CARES Act) includes $300 billion for loans to employers with fewer than 500 employees to maintain payrolls. Loans of up to $10 million can be forgiven if the employers retain workers through June 30, 2020. The bill also gives Treasury the authority to use the Exchange Stabilization Fund to guarantee money market mutual funds, intended to stop any runs on those funds. The Senate bill also includes a number of features important for financial firms in Title IV, "Economic Stabilization and Assistance to Severely Distressed Sectors of the U.S. Economy." These include:

• Lending to Nonbank financial firms. Section 4011 adds language to federal law allowing national banks to lend to "any nonbank financial company" (as that term is defined under the 2010 Dodd-Frank Act) and giving the Comptroller of the Currency authority to waive the National Bank Act's lending limits related to capital, surplus and collateral for specific transactions.
• Community Bank Leverage Ratio reduced. For community banks (those with a total consolidated assets of less than $10 billion), section 4012 of the bill temporarily lowers the Community Bank Leverage Ratio from 9% to 8%, and allows for a "reasonable grace period" to satisfy the CBLR's requirements, during which a community bank that is working to comply with capital and leverage rules will be treated as if they were in compliance. The language is similar to that in a bill offered on March 16 by Sen. Thom Tillis (R-NC).
• Troubled debt restructuring and CECL accounting standard. Under section 4013, a bank can suspend the requirements under GAAP for loan modifications that normally would be categorized as a restructuring of troubled debt, if those reworked loans are related to the pandemic. Under section 4014, banks will not be required to comply with the Financial Accounting Standards Board (FASB's) new current expected credit loss (CECL) standard, a controversial accounting rule for financial instruments, until the pandemic national health emergency is ended or December 31, 2020, whichever is earlier.
• Loans to money market funds: Section 4015 waives restrictions on loan guarantees from Treasury's Exchange Stabilization Fund that normally would apply under Section 131 of the 2008 Emergency Economic Stabilization Act (the financial crisis-era law establishing TARP), until December 31. The Exchange Stabilization Fund (ESF), normally used to shore up the dollar, was used during the financial crisis to guarantee assets held by money market mutual funds in an effort to stop runs on those funds. This section also automatically appropriates money to make the ESF whole if Treasury's Money Market Funds Guaranty Program pays out claims that exceed assets held by the ESF.
• FDIC transaction account guarantees. Section 4008 gives the FDIC authority to start a program guaranteeing transaction accounts "without a maximum guarantee," as long as the guarantee sunsets on December 31, 2020. This section also allows the National Credit Union Administration's Board to vote to increase share insurance coverage to "unlimited," or some other threshold, for any noninterest-bearing transaction account in any federally insured credit union until December 31.
• Stock buybacks. Under section 4003 of the bill, which authorizes the Treasury Secretary "to make loans, loan guarantees, and other investments in support of eligible businesses, states, and municipalities" under certain dollar thresholds, the bill prohibits companies that accept such loans from buying back their own stock until they repay the loans. The language, however, allows the Treasury Secretary to waive that restriction if the Secretary determines it would "reduce the effectiveness of the program or facility" or "is not necessary to protect the interests of the federal government," a provision that Democrats have objected to. Stock buybacks are blocked unless the companies getting emergency loans have previously signed a contract with a shareholder obligating them to do so. The companies would also have to keep their workforces at March 13 levels "to the extent practicable" — language that is too vague for some Democrats.

Democrats' priorities

House and Senate Democrats hope to add a number of other financial provisions to any coronavirus stimulus bill moving through Congress, as well as give the Federal Reserve new powers in some areas. Among other proposals, these features would:

• Begin a four-month moratorium on all negative credit reporting and provide free, unlimited credit reports and scores for a year
• Prohibit debt collection, repossession and garnishment of wages during the pandemic
• Pause all rulemaking by financial regulators
• Prohibit stock buybacks by any corporation receiving coronavirus assistance
• Provide emergency rental and eviction-prevention assistance, and assistance to homelessness service providers and housing authorities
• Suspend nearly all consumer and small-business debt payments (mortgages, car notes, student loans, credit cards, small business loans, personal loans) during the pandemic, supported by reimbursements to creditors and servicers through a new Federal Reserve facility
• Provide tax rebates and grants for small businesses
• Suspend commercial rental payments
• Provide a broad range of assistance to support renters, homeowners and the homeless

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ATTACHMENT

Federal reserve statement