What Was the Paycheck Protection Program Liquidity Facility (PPPLF)?
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 2020. Specifically, the PPPLF loaned money to commercial lenders that, in turn, loaned money to small businesses through the Paycheck Protection Program (PPP).
The banks that made loans to small businesses then pledged those loans as collateral on the loans they got from the Fed. The intent was 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 was 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 also accepted PPP loans that a lender has purchased as collateral, not just ones they originated.
The PPP and the PPPLF were among a large number of government initiatives worldwide that were designed to prop up the global economy, including the U.S. Coronavirus Aid, Relief, and Economic Security (CARES) Act as well as President Biden's follow-up, the American Rescue Plan Act of 2021.
- Under the PPPLF, the Fed loaned money to lending institutions that loaned money to small businesses under the PPP.
- The banks pledged the PPP loans to small businesses as collateral on the loans given to them by the Fed.
- The point of the program was to give small businesses loans to avoid layoffs.
- The program ended on July 30, 2021
Understanding the Paycheck Protection Program Liquidity Facility (PPPLF)
The PPPLF was 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. After that announcement, the program provided liquidity to lenders while also neutralizing the effects on their regulatory capital requirements. 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 extended 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 resulted in severe liquidity constraints at small businesses and forced many small businesses to close temporarily or furlough employees.
Loans extended by financial institutions under the PPP were 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 ceased extending new loans on July 30, 2021.