The Federal Reserve Board has launched a Money Market Mutual Fund Liquidity Facility (MMLF) designed to "support the flow of credit to households and businesses...enhance the liquidity and functioning of the financial markets and to support the economy." The Treasury Department is also providing up to $10 billion to help the Fed cover loan losses under the program. The key goal of this emergency measure, announced late in the evening of March 18, 2020, is to support prime money market funds. The funds are experiencing heavy outflows from large corporate and institutional depositors that are desperate to raise cash as the COVID-19 coronavirus rattles the economy and the markets.
Prime money market funds invest in short-term corporate debt, commercial paper, and government agency debt. They thus are designed to offer a somewhat higher yield than is offered by U.S. Treasurys, while still being a low-risk investment option.
- Big coronavirus-related outflows are hitting money market funds.
- The Federal Reserve is providing liquidity to these funds.
- The Money Market Mutual Fund Liquidity Facility (MMLF) is the organization which the Fed will lend through.
- The MMLF lends money to financial institutions to buy assets from money market funds.
Details of the MMLF
The Money Market Mutual Fund Liquidity Facility (MMLF) is a joint initiative of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). "Under the MMLF, the Federal Reserve Bank of Boston will extend non-recourse loans to eligible financial institutions to purchase certain types of assets from money market mutual funds (MMFs)."
While the Federal Reserve is the agency actually making the loans under the MMLF, the cooperation of the OCC and the FDIC as banking regulators has been deemed necessary. "To facilitate this Federal Reserve lending program, the Board, the OCC and FDIC (together, the agencies) are adopting this interim final rule to allow banking organizations to neutralize the regulatory capital effects of participating in the program...agencies believe that it would be appropriate to exclude the effects of purchasing assets through the MMLF from a banking organization’s regulatory capital.
This means that the loans banks take out from the MMLF will not count against leverage and capital requirements, which are limits on how much debt and capital a bank can have to prevent them from going under in the event of another financial crisis.
The program will run until December 31, 2020, unless it is extended.
The MMLF is similar to a program that the Fed created during the 2008 Financial Crisis, the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) which operated from 2008 to 2010, and performed a similar function. It was established after the collapse of Lehman Brothers caused the collapse of a money market fund, The Reserve Primary Fund.
On May 5, 2020, the Federal Reserve said that participation in the MMLF wouldn't affect the liquidity coverage ratio of participating banks.