Corporate Finance in Crisis Mode: How the Federal Reserve is Providing Funding to Financial Firms
In the last several weeks the economic crisis that has frozen the credit markets has spurred significant government action in the form of the Emergency Economic Stabilization Act of 2008 (EESA), which has greatly enhanced the powers of both the Federal Reserve Board (FRB) and the Treasury Department. The EESA in essence is a bailout fund to be used broadly to acquire illiquid assets from financial firms and to inject capital into banks. But the EESA is just one of several major pieces of the economic recovery plan.
The Federal Reserve Board (FRB) already had significant power to intervene in the U.S. economy and has done so through both its traditional tools of monetary policy and through various lending facilities directed at specific elements of the financial industry. The FRB's traditional tools include the power to set reserve requirements. The FRB also must approve the discount rate set by the Federal Reserve banks. The FRB, as part of the Federal Open Market Committee (FOMC), also provides guidance to the New York Federal Reserve Bank to conduct open market operations to achieve the desired federal funds rate. The FRB recently announced that it will pay interest on reserves in the expectation that doing so will establish a floor to the federal funds rate. Section 128 of the EESA accelerated the effective date of the FRB's authority to pay interest on reserves to October 1, 2008. Link.
The FRB also has created a number of lending facilities to enhance liquidity generally and to encourage banks and other financial institutions to begin lending again to qualified borrowers. Below are links to FRB lending facilities that address the short term funding needs of banks and the asset-backed commercial paper market, including money market mutual funds.
1. Term Auction Facility
2. Primary Dealer Credit Facility
3. Term Securities Lending Facility
4. Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility
5. Commercial Paper Funding Facility