20 / 10 / 2020 the federal reserve ’ s corporate credit facilities : why, how, and for whom - federal reserve bank of new york speech the federal reserve ’ s corporate credit facilities : why, how, and for whom october 20, 2020 daleep singh, executive vice president remarks at the u. s. chamber of commerce ’ s center for capital markets competitiveness ( delivered via videoconference ) as prepared for delivery thank you, tom, for the invitation to join this event. as all of you know, in march the federal reserve — with backing from the u. s. treasury — created a set of facilities to purchase corporate credit for the first time in its history. many observers have credited the facilities with repairing market functioning in the corporate bond market and restoring the ability of many businesses to finance themselves through the pandemic. but my focus today is not the corporate bond market, credit spreads, or wall street. rather, i ’ d like to connect the dots by explaining why these facilities were necessary to support jobs and the economic recovery on main street, and why transparency, access, and accountability were so critical to their implementation. before i review the initial success of these programs, i want to acknowledge the painful realities that many firms, employees, and households continue to face. for millions of americans, it ’ s a long road back to normal. i should also make it clear that these remarks are my personal views and not necessarily those of the new york fed or the federal reserve system. 1 the shock to u. s. businesses and employees let ’ s start with some context and recall why unprecedented action was necessary in march. amid a synchronized global demand shock of uncertain length and severity, access to credit takes on outsized importance. companies that issue public bonds and commercial paper depend on financing to make investments and meet their obligations, including payrolls, and together likely account for nearly one - fourth of all u. s. private sector employment and just under 50 percent of u. s. output. 2 even companies that do not themselves have public bonds are closely linked through the supply chain, as they receive trade credit from or sell to large corporate bond issuers. research suggests that shocks impacting large businesses spill over to smaller firms, perhaps accounting for 10 percent of the reduction in employment at small firms during the last recession. 3 the unusually high level of uncertainty about the pandemic shock was reflected in the functioning of markets that finance large u. s. employers. market liquidity

bond issuance at the pre - pandemic pace. second, close coordination with the u. s. treasury acted as a force multiplier. the equity committed by the u. s. treasury facilitated broad support for large employers. 8 the facilities ’ combined capacity leveraged treasury ’ s committed equity contribution of $ 75 billion by up to 10 times. third, the support provided by the facilities is broad. excluding banks, all u. s. domiciled firms with an investment - grade rating prior to the facilities ’ announcement were eligible, thus concentrating support for firms that primarily faced liquidity strains due to the pandemic. the facilities also provide support for firms with ratings just below investment grade to mitigate the “ cliff effects ” at the boundary of our support. 9 together, these programs backstop about 80 percent of corporate bonds outstanding, excluding those issued by banks. 10 finally, policymakers signaled their willingness to adapt. even before purchases began, the size of the equity injection and purchasing power of the facility was increased, and the scope was broadened to allow support for “ fallen angels, ” or bonds downgraded below investment grade ( but no lower than bb - ) after the ccf announcement. implementation matters in addition to program design, the principles that guided the implementation of these facilities — access, transparency, and accountability — reinforced their credibility and impact. providing broad access to the facilities for corporate borrowers was essential, both to expand the reach of backstop support for the economy, and to ensure that the facilities avoid the allocation of credit. our initial purchases were in a diversified set of etfs that provide broad exposure to the market for u. s. corporate bonds. purchasing via etfs offered efficient and rapid transmission of broad - based support to the secondary market. at the outset of these purchases, we communicated that etfs would only be used if their purchase is reasonably expected to achieve the objectives of the smccf more effectively than the purchase of underlying bonds. 11 one month after starting etf purchases, the federal reserve announced a framework to use corporate bonds as the smccf ’ s primary vehicle for providing support. in preparation, we had created a “ broad market index ” of eligible corporate bonds, weighted proportionately by amount of debt outstanding from individual companies. 12 we then began purchasing bonds across the index in a rules - based manner, taking care that our purchases are neutral toward eligible sectors and companies. i should note https : / / www. newyo