Daleep Singh: Implementing the Fed's facilities - moving at
maximum speed with maximum care
Remarks (via audio webinar) by Mr Daleep Singh, Executive Vice President and Head of the
Markets Group of the Federal Reserve Bank of New York, before the Money Marketeers of New
York University, 17 April 2020.
* * *
As prepared for delivery
Good morning everyone. Thanks for being here, and let me begin by offering best wishes for
everyone's health under these difficult circumstances. I should also make clear at the outset that
the views I express are my own and do not necessarily reflect those of the Federal Reserve
Bank of New York or the Federal Reserve System.
In my remarks today I'd like to review the context in which the Federal Reserve launched an
unprecedented set of policy actions, and I will then describe our approach to standing up
emergency facilities at maximum speed with maximum care as we execute our mission.
Context in Mid-March
As you will no doubt recall, financial markets in mid-March were seized by the uncertainty caused
by virus outbreak, both in terms of the speed and scale of impact on the economic outlook, and
for society as a whole. Extreme uncertainty triggered unprecedented market volatility across
asset classes, escalating into a system-wide deleveraging event that appeared to overwhelm the
capacity of financial intermediaries to absorb and transfer risk in an orderly manner. Liquidity
dried up across markets, including in U.S. Treasuries, the benchmark upon which virtually every
other asset is priced or hedged, the foundation for the dollar's primacy as a reserve currency,
and the source of funding for our federal government.
As uncertainty rose and liquidity deteriorated, demand for cash and safe assets rose and
demand for assets with any form of credit or liquidity risk plummeted. For a few weeks in March,
even Treasury yields began to rise, especially in longer maturities, and so did the cost for almost
all forms of household and corporate borrowing. Access to financing beyond overnight tenors
became severely impaired, causing acute dislocation across short-term funding markets and
triggering outflows across prime money market funds.
In the race to safety, dollars became increasingly scarce, intensifying the stress across global
markets. Emerging market economies experienced an unprecedented outflow of capital from
non-residents. Sovereign yields surged in the most indebted European countries. The ominous
reality was that a synchronized global selloff had taken on a life of its own, with little prospect for
self-correction.
Moving with Maximum Speed
Against this backdrop, policymakers at the Federal Reserve acted swiftly and unreservedly in an
effort to break the damaging psychology that was taking hold. The series of policy actions
announced over the past month - both conventional and unconventional - reflected a full
recognition that the current shock is qualitatively different from the financial crisis of 2008, without
a culprit other than the virus itself. Unconstrained by a diagnosis of who was to blame - and
considering the mounting downside risks - the speed and scale of the policy response was free
to match the dimensions of the unfolding shock.
I won't review all of the actions that the Fed has taken over the past month - they are well
documented elsewhere - but I would like to note of the breadth of activity to stabilize the financial
system and to support the flow of credit, both within and outside banking system.
To that end, I'll describe a few of the lending and credit facilities that the New York Fed is charged
with standing up to supply credit for households, businesses, and state and local governments:
Commercial Paper Funding Facility
By the middle of March, unusually high funding needs and pullbacks by key lenders of short-term
funds led to surging rates in the market for commercial paper, or short-term IOUs issued by
businesses and municipalities. Interest rates on longer-term commercial paper, in particular,
rose to levels not seen since the financial crisis of 2008. Many issuers were reportedly unable to
place commercial paper with a term of longer than a week, leading to increased risk that
companies would not be able to fund basic operational needs, such as meeting payrolls or
financing inventories.
With backing from the U.S. Treasury, the Federal Reserve established the commercial paper
funding facility as a funding vehicle that can purchase new issuance of commercial paper from
highly rated businesses and municipalities, and certain issuers that were downgraded after the
virus shock. By providing assurances to issuers and investors that retiring commercial paper
can be replaced with new issuance, the facility will promote confidence in the market and support
the flow of credit to businesses and municipalities.
Corporate Credit Facilities (CCFs)
At the same time that short-term commercial paper markets were nearly frozen, so too were
markets for longer-term corporate borrowing - at precisely the moment when companies most
needed a financing buffer. Borrowing rates for investment-grade corporate issuers relative to
Treasury securities increased by about 2.5 percentage points in the first half of March, while
issuance for companies rated below investment grade came to a halt.
In this context, the primary market corporate credit facility (PMCCF) was designed to provide
funding for highly rated companies that need access to financing in order to maintain business
operations during this period of dislocation. Again with backing from the U.S. Treasury, the
Federal Reserve will create a funding vehicle to backstop eligible corporate borrowers for up to
four years, at an interest rate that is better aligned with corporates' underlying credit risk than
was available through market-based financing during March. This funding can be provided by the
PMCCF either through purchases of eligible corporate bonds as the sole investor at issuance, or
from purchases of portions of syndications at issuance.
The secondary market corporate credit facility (SMCCF), also backed by the U.S. Treasury with
funding from the Federal Reserve, will play an important complementary role to the PMCCF.
Here again, there will be two mechanisms at work: the SMCCF may either purchase eligible
corporate bonds with a remaining maturity of 5 years or less, or it can purchase U.S.-listed
ETFs. For ETFs, the preponderance of holdings will be of ETFs whose primary investment
objective is exposure to U.S. investment-grade corporate bonds, and the remainder will be in
ETFs whose primary investment objective is exposure to U.S. high-yield corporate bonds.
Taken together, the corporate credit facilities will have three main objectives when we go live in
the coming weeks: first, to provide broad support for market functioning in secondary markets to
allow for orderly and timely risk transfer in corporate credit; second, to support primary issuance
for businesses at funding costs that better reflect normal liquidity conditions; and third, to reduce
the incidence and severity of fire sales and/or indiscriminate liquidation.
Municipal Liquidity Facility
The last facility I'll mention today is the municipal liquidity facility, which was designed to help
provide states, cities and counties with the funding needed to provide essential public services to
their citizens. Due to the virus outbreak, the municipal securities market has recently been under
considerable strain as investors have become reluctant to purchase municipal securities. As a
result, interest rates on municipal securities have increased significantly. At the same time,
states, cities, and counties are facing severe liquidity constraints resulting from the increase in
state and local government expenditures related to the COVID-19 pandemic and the decrease
and delay of certain tax revenue. By ensuring the smooth functioning of this market, particularly in
times of strain, the Federal Reserve is providing credit that will support families, businesses, and
jobs in communities, large and small, across the economy.
The immediate purpose of the Municipal Liquidity Facility is to enhance the liquidity of the
municipal securities market by increasing the availability of funding to eligible States, Cities and
Counties through Tax Anticipation Notes ("TANs"), Tax and Revenue Anticipation Notes
("TRANs"), Bond Anticipation Notes ("BANs"), and other similar short-term notes from eligible
issuers (collectively, "Notes"). The eligible issuer's proceeds from its notes sales can in turn be
used to support its political subdivisions and instrumentalities, among other uses. This facility will
provide a form of bridge financing to eligible issuers, and by addressing the cash management
needs of eligible issuers, the facility will also encourage investors to once again engage in the
municipal securities market.
Of course what I've just covered is not an exhaustive list. The Federal Reserve Board has also
announced a number of other programs designed to supply credit directly to households,
businesses, and municipalities. These include:
The Paycheck Protection Program Liquidity Facility will bolster the effectiveness of the Small
Business Administration's Paycheck Protection Program by supplying liquidity to
participating financial institutions through two-year loans backed by PPP loans as collateral.
The Main Street Lending Program will enhance support for small and mid-sized businesses
that were in good financial standing before the crisis by purchasing up to $600 billion in
fouryear loans to small and mid-size businesses.
The Term Asset-Backed Securities Loan Facility (TALF) will support issuance of securities
backed by student loans, auto loans, credit card loans, small business loans, and other
debt.
Moving with Maximum Care
Considering the speed and scale of damage caused by the virus outbreak, we are making all
efforts to implement these facilities at maximum speed. At the same time, though, we are
moving with maximum care, drawing upon all of the lessons learned since 2008.
First and foremost, we know that transparency will be key to sustaining public confidence in our
efforts. What does this mean in practice? It means that when we work with outside vendors, we
explain why we're doing so, who we're working with, and how much we're paying for their
services. It requires if we accelerate the vendor selection process to minimize time to market,
we operate under a short-term contract and then open up the process to a competitive range of
bidders, looking beyond the largest and most established players and providing broad access to
a diverse range of smaller players. It means putting on our website the eligibility of borrowers and
laying out the terms and conditions of the facilities as clearly as possible, along with posting
FAQs and providing opportunities to ask questions. And it means that we actively explore ways to
go beyond what's required by legislation and proactively report on the usage of the facilities as
much as possible, subject to meeting our policy objectives.
In terms of governance, we will embed the facilities into our existing infrastructure for controls,
management, and oversight. We will proactively identify and address conflicts of interest - real or
perceived - for anyone working on the facilities. Personal investment guidelines will be refined as
needed, and rules will be clear on the gathering of market intelligence and handling sensitive
information related to the facilities. Good governance will also require balancing loss protection
with financial stability goals, which requires integration of our risk management team into the full
life-cycle of the facilities, from policy design to the eventual wind-down.
As a concluding thought, we know the ultimate definition of success is accomplishing what we
set out to do in support of the American economy. In pursuing this goal, we've been entrusted
with a great responsibility to deploy large sums of public resources, and we have an obligation to
the public to be accountable for all our actions. We look forward to engaging with our oversight
bodies and those appointed under the CARES Act to ensure that the American people
understand the steps we are taking on their behalf as faithful stewards of the public trust.