Group Economic Research
- Major economic policy responses have been introduced to try to attenuate the impact of the Covid-19 pandemic on the economy.
- This document reviews the key measures taken by central banks and governments in a large number of countries as well as those taken by international organizations.
- It includes measures that were introduced through 27 March. It will be updated regularly.
Key central banks measures
US Federal Reserve (Fed)
Monetary policy measures
- Fed funds target rate: the Fed funds target rate was cut by 100 basis points (bp), to a range of 0-0.25% (effective 16 March).
- Discount rate: the discount rate was cut by 150 bp to 0.25% (effective 16 March), narrowing the spread with the Fed funds target rate by 50bp. Borrowing through the discount window was extended to periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
- Reserve rates: Interest on Reserves (IOR) and Interest on Excess Reserves (IOER) were lowered to 0.1% (effective 6 March).
- Required reserve ratio: the required reserve ratio was cut to 0% (effective 26 March).
Quantitative Easing (QE)
A new round of quantitative easing with securities purchases of at least USD 700 bn over the months ahead, including USD 500 bn in Treasury securities and USD 200 bn in agency mortgage-backed securities (effective 16 March). All principal payments from the Fed’s holdings of Treasuries, agency debt and agency MBS will be fully reinvested in Treasuries and agency mortgage-backed securities. 23 March: the securities purchasing program for agency MBS was expanded to include commercial mortgage-backed securities (CMBS) issued or guaranteed by mortgage refinancing agencies (effective 3 March).
Repurchase agreements (repo)
A continuation of regular term and overnight repurchase agreement operations. One to two overnight repo operations of at least USD 175 bn will be conducted daily, in addition to those conducted on a weekly basis: two 14-day operations of USD 45 bn each, one 1-month operation of USD 500 bn and one 3-month operation of USD 500 bn. According to the timetable announced so far, the Fed intends to use this mechanism to inject additional central bank liquidity of up to USD 5,855 bn through 9–10 April.
Commercial Paper Funding Facility (CPFF)
The Commercial Paper Funding Facility will be the Secondary Market Corporate Credit Facility will be activated at least through 20 September 2020. The Federal Reserve of New York will lend to a special purpose vehicle (SPV) that will purchase in the secondary market corporate debt issued by eligible American issuers (i.e. those with a good credit rating). The SPV will also purchase eligible investment-grade corporate bond portfolios in the form of exchange-traded funds. The Treasury will make an equity investment of USD 10 bn in the SPV. Issuers must have a rating of at least BBB-/Baa3, and the maturity of securities purchased by the SPV must not exceed 5 years. For any eligible issuer, the maximum amount of bonds that the SPV will purchase will be capped at 10% of the issuer’s maximum bonds outstanding on any day between reactivated at least through 17 March 2021. The Fed created a Special Purpose Vehicle (SPV) that it has supplied with liquidity. The SPV purchases USD- denominated commercial paper from American issuers with the highest credit ratings (at least A-1/P-1/F-1). The maximum amount of a single issuer’s commercial paper that the SPV may own at any time will be the greatest amount of commercial paper the issuer had outstanding on any day between 16 March 2019 and 16 March 2020. The price is set at the overnight index swap rate (OIS)+200bp. The SPV would be allowed to conduct a one-time purchase of the commercial paper by issuers with a rating of at least A-2/P-2/F-2 at an unspecified price. The Treasury will cover any initial losses of up to USD 10 bn.
Primary Dealer Credit Facility (PDCF)
The Primary Dealer Credit Facility will be reactivated for at least 6 months. Through this facility, the Fed provides guaranteed loans to primary dealers through their clearing bank at the discount rate (0.25% since Monday, 16 March). Loans have a term of up to 90 days and can be prepaid at any time. This facility expands the range of collateral that can be used to obtain central bank liquidity. In addition to collateral eligible for pledge in open market operations (Treasury securities, debt securities, and agency MBS), collateral eligible for pledge under the PDCF includes a range of investment-grade securities (at least BBB-), including corporate debt securities, international agency securities, commercial paper, municipal securities, mortgage-backed securities and asset-backed securities (only AAA-rated securities are accepted for CMBS, CLO and CDO), plus equity securities (with the exception of rights and warrants, mutual funds, unit investment trusts, and exchange-traded funds). Pledged collateral will be valued by the Bank of New York Mellon.
Primary Market Corporate Credit Facility (PMCCF)
The Primary Market Corporate Credit Facility will be activated at least through 20 September 2020. The Federal Reserve Bank of New York will commit to lending to a special purpose vehicle (SPV) that will purchase qualifying bonds directly from eligible issuers (i.e. with a good rating) and to provide loans to eligible issuers. The Treasury will make a USD 10 bn equity investment in the SPV. SPV counterparties must have a rating of at least BBB-/Baa3, and the maturity of the bonds or loans granted by the SPV must not exceed 4 years. For each eligible issuer, the maximum amount of outstanding bonds or loans borrowed from the SPV may not exceed the applicable percentage of the issuer’s maximum outstanding bonds and loans on any day between 22 March 2019 and 22 March 2020: 140% for companies with an AAA/Aaa rating from a major rating agency, 130% for those with an AA/Aa rating, 120% for those with a A/A rating, and 110% for those with a BBB/Baa rating. Bonds and loans under the SPV will be callable by the eligible issuer at any time.
Secondary Market Corporate Credit Facility (SMCCF)
The Secondary Market Corporate Credit Facility will be activated at least through 20 September 2020. The Federal Reserve of New York will lend to a special purpose vehicle (SPV) that will purchase in the secondary market corporate debt issued by eligible American issuers (i.e. those with a good credit rating). The SPV will also purchase eligible investment-grade corporate bond portfolios in the form of exchange-traded funds. The Treasury will make an equity investment of USD 10 bn in the SPV. Issuers must have a rating of at least BBB-/Baa3, and the maturity of securities purchased by the SPV must not exceed 5 years. For any eligible issuer, the maximum amount of bonds that the SPV will purchase will be capped at 10% of the issuer’s maximum bonds outstanding on any day between 22 March 2019 and 22 March 2020. The SPV may not purchase more than 20% of the assets of any particular ETF. Eligible bonds will be purchased at fair market value in the secondary market. The SPV will not purchase shares of ETF when they trade at prices that materially exceed the estimated NAV of the underlying portfolio.
Term Asset-Backed Securities Loan Facility (TALF)
The Term Asset-Backed Securities Loan Facility will be reactivated at least through 30 September 2020. This facility aims to facilitate the issuance of ABS backed by newly originated consumer and small business loans. The Federal Reserve Bank of New York lends to a special purpose vehicle (SPV), which will make available up to USD 100 billion of loans that will have a term of three years, will be nonrecourse to the borrower, and fully secured by eligible ABS. The Treasury will make an equity investment of USD 10 bn in the SPV. All US companies that maintain an account relationship with a primary dealer are eligible to borrow under the TALF. The not-synthetic ABS used as collateral must have an AAA credit rating, must be issued on or after 23 March 2020 and have an underlying credit exposure to auto loans, student loans, credit card receivables, small business loans guaranteed by the Small Business Administration (SBA) and certain other types of loans. For eligible ABS with underlying credit exposures that do not have a government guarantee, the interest rate will be 100 bp over the 2-year LIBOR swap rate for securities with a weighted average life of less than two years, or 100 bp over the 3-year LIBOR swap rate for securities with a weighted average life of two years or greater. The pricing of other eligible ABS will be set forth at a later date. The SPV will assess an administrative fee equal to 10 bp of the loan amount. TALF loans will be pre-payable in whole or in part.
Money Market Mutual Fund Liquidity Facility (MMLF)
The Money Market Mutual Fund Liquidity Facility was reactivated until at least 30 September 2020. Under this facility, the Federal Reserve Bank of Boston provides secured lending to banks (all US depository institutions, US bank holding companies, and the US branches and agencies of foreign banks). The maturity date of an advance will equal the maturity date of the eligible collateral pledged to secure the advance (although in no case will the maturity date exceed 12 months). Eligible collateral under the Facility are assets purchased from money market funds: US Treasuries, securities and MBS issued by Government Sponsored Entities (loans at the discount rate; collateral is valued at amortized cost or fair value); ABCP and unsecured commercial paper issued by a US issuer with a short-term rating at the time purchased from the MMF or pledged to the Reserve Bank with a rating no lower than A-1/F-1/P-1 (loans at 100 bp over the discount rate; the collateral valuation will be amortized cost). The Treasury, using the Exchange Stabilization Fund, will provide USD 10 bn as credit protection to the Reserve Bank. Advances are made without recourse: the borrower does not assume the credit risk associated with the collateral.
