More specifically, the TALF was designed to support the market for securitized credit. Overall, the TALF performed impressively in meeting that objective. The program contributed to a substantial improvement in conditions in the securitized credit market, facilitating an increase in the availability of credit to households and businesses. Moreover, it achieved this outcome with limited risk to the Federal Reserve’s balance sheet. Let me begin with some general background information on securitized credit markets. Securitization is an important funding source for bank and nonbank lenders. When a lender extends credit, it makes the decision of whether to keep loans on its books or to securitize and sell them to other investors. If kept on the lender’s books, the holdings have to be financed, either by borrowing or by using funds that could be deployed for other purposes, including making other loans. Thus, in many circumstances the lender finds it advantageous to sell assets through the securitization channel, allowing other investors to ultimately hold the assets and hence bear the risk. The amount of credit financed through securitization rivals that provided directly by banks. Indeed, even excluding the sizable securitization markets for mortgage credit, approximately $ trillion in loans to consumers, students, and businesses were securitized over the past decade. 2 The securitization market became significantly disrupted during the financial crisis in 2008 and 2009 in all areas outside of conforming agency mortgage-backed securities. Liquidity for securitized products deteriorated, leading to an unprecedented widening of spreads.

Issuance virtually ground to a halt, resulting in significant funding concerns for a variety of lenders who relied on securitization. These funding strains prompted some lenders to dramatically tighten underwriting standards, thus reducing overall credit to consumers and businesses. A prolonged shutdown of the securitization market could have compounded the credit crunch and increased the risk of an even more severe contraction of the economy than we experienced. In response, the TALF was created to provide liquidity in the form of term loans to investors in the least risky part—the AAA tranches—of particular types of asset-backed securities, including those backed by consumer loans, student loans, small business loans, and commercial real estate loans. The hope was that, by providing loans directly to investors against asset-backed collateral, the TALF would help stabilize and improve the prices at which those securities could be sold, thus reducing lenders’ costs of funds. With lenders’ funding strains alleviated, the extension of credit to consumers and other borrowers could occur on more favorable terms. While the TALF is essentially similar to other programs in its basic objective of providing liquidity and encouraging the extension of credit, it is worth highlighting that the TALF has several features that are not common in other liquidity facilities. First, TALF loans are non-recourse, meaning that the borrower can put the collateral to the Federal Reserve rather than repay the loan if the collateral value falls sufficiently below the amount owed. The provision of non-recourse loans helped to encourage investor participation.