The Paycheck Protection Program Liquidity Facility (PPPLF) was created on April 9, 2020 to bolster a key component of the massive $2 trillion stimulus bill passed in March. Specifically, the PPPLF loans money to commercial lenders that are, in turn, loaning money to small businesses through the Paycheck Protection Program (PPP). The banks making loans to small businesses then pledge those loans as collateral on the loans they get from the Fed. The intent is to help small businesses, a major job generator, quickly obtain loans to maintain their payrolls in the face of business disruptions due to the coronavirus pandemic. The liquidity facility is a joint initiative of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
On April 30, 2020, the program was expanded. According to the Federal Reserve, "all PPP lenders approved by the SBA, including non-depository institution lenders, are now eligible to participate in the PPPLF. SBA-qualified PPP lenders include banks, credit unions, Community Development Financial Institutions, members of the Farm Credit System, small business lending companies licensed by the SBA, and some financial technology firms." It will also accept PPP loans that a lender has purchased as collateral, not just ones they originated.
The PPP and the PPPLF are among a large number of government initiatives worldwide that are designed to prop up the global economy, including the U.S. Coronavirus Aid, Relief, and Economic Security (CARES) Act approved in March 2020 by Congress and the White House.
- Under the PPPLF, the Fed loans money to lending institutions who are loaning money to small businesses under the PPP.
- The banks pledge the PPP loans to small businesses as collateral on the loans given to them by the Fed.
- The point of the program is to give small businesses loans to avoid layoffs.
Details on the PPPLF
The PPPLF is designed to encourage banks and other lenders to make loans to small businesses through the Paycheck Protection Program (PPP) of the Small Business Administration (SBA). Small businesses said the program got off to a rocky start, plagued by delays and confusion. To address that, federal regulators on April 9 also announced a major interim rule to encourage lending. Since that announcement, the program has provided liquidity to lenders while also neutralizing the effects on their regulatory capital. The interim rule also clarified that a "zero percent risk weight applies to loans by the PPP for capital purposes," according to a Fed statement.
Through the Paycheck Protection Program Liquidity Facility, the Fed extends non-recourse loans to eligible financial institutions to fund loans guaranteed by the Small Business Administration. The Fed, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) all have agreed that loans extended by the PPPLF to financial institutions will not increase the regulatory capital requirements for those institutions.
The rationale behind the PPP and the PPPL were summarized in the Federal Register notice filed jointly by the Fed, the FDIC and the OCC: "As millions of Americans have been ordered to stay home, severely reducing their ability to engage in normal commerce, revenue streams for many small businesses have collapsed. This has resulted in severe liquidity constraints at small businesses and has forced many small businesses to close temporarily or furlough employees. Continued access to financing will be crucial for small businesses to weather economic disruptions caused by COVID-19 and, ultimately, to help restore economic activity."
Loans extended by financial institutions under the PPP are considered to be risk-free under regulatory capital rules because the SBA guarantees the payment of principal and interest to those lenders.
On June 5, 2020, the Federal Reserve said that participation in the PPPLF wouldn't affect the liquidity coverage ratio of participating banks.
The program will stop lending on March 31, 2021 unless it is extended.