Fed expands program to shore up state, municipal money market/mutual funds through loans to FIs

Loans secured by high-quality assets purchased from single state and other tax-exempt municipal money market mutual funds will be available to financial institutions under an expansion of the Federal Reserve’s liquidity program announced this week, the agency said Friday.

In a release, the Fed said it had expanded the terms of its Money Market Mutual Fund Liquidity Facility (MMLF) in its efforts to support the flow of credit to the economy. Through the facility, the Fed said, the Federal Reserve Bank of Boston can make loans available to eligible financial institutions secured by such high-quality assets as:

  • U.S. Treasuries and fully guaranteed agencies;
  • Securities issued by U.S. government-sponsored entities;
  • Asset-backed commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency;
  • Unsecured commercial paper that is issued by a U.S. issuer, is rated at the time purchased from the fund or pledged to the Reserve Bank not lower than A1, F1, or P1 by at least two major rating agencies or, if rated by only one major rating agency, is rated within the top rating category by that agency;
  • A U.S. municipal short-term debt that has a maturity that does not exceed 12 months, and at the time purchased from the fund or pledged to the Reserve Bank:
    • If rated in the short-term rating category, is rated in the top short-term rating category (e.g., rated SP1, MIG1, or F1, as applicable) by at least two major rating agencies or if rated by only one major rating agency, is rated within the top rating category by that agency; or
    • If not rated in the short-term rating category, is rated in the top long-term rating category (e.g., AA or above) by at least two major rating agencies or if rated by only one major rating agency, is rated within the top rating category by that agency.

According to the term sheet from the Fed issued with the announcement, “borrower eligibility” includes all U.S. depository institutions, U.S. bank holding companies (parent companies incorporated in the United States or their U.S. broker-dealer subsidiaries), or U.S. branches and agencies of foreign banks are eligible to borrow under the facility.

The Fed also noted that, regarding treatment of regulatory capital, that Thursday it joined the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) in issuing an interim final rule to allow banking organizations to neutralize the effects of purchasing assets through the program on risk-based and leveraged capital ratios.

The Treasury Department, the Fed said, will provide $10 billion as credit protection to the Boston Reserve Bank; the source of the credit protection is the Exchange Stabilization Fund.

Federal Reserve Board expands its program of support for flow of credit to the economy by taking steps to enhance liquidity and functioning of crucial state and municipal money markets

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