GAO-21-180, Federal Reserve Lending Programs
Summary
GAO report GAO-21-180, December 2020, to congressional committees on Federal Reserve lending programs. It says the Federal Reserve authorized 13 lending programs, known as facilities, and that nine of the 13 are supported through Treasury funding appropriated under the CARES Act. As of November 15, 2020, the CARES Act facilities had used about $24 billion, or a little more than 1 percent, of the $1.95 trillion the Federal Reserve can back in transaction volume. GAO reports that representatives from small business associations, banks, and state and local governments said the terms and conditions for some facilities are a deterrent for some potential participants.
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Cite this document
“GAO-21-180, Federal Reserve Lending Programs.”
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United States Government Accountability Office
Report to Congressional Committees
FEDERAL RESERVE
December 2020
LENDING
PROGRAMS
Use of CARES Act-
Supported Programs
Has Been Limited and
Flow of Credit Has
Generally Improved
GAO-21-180
December 2020
FEDERAL RESERVE LENDING PROGRAMS
Use of CARES Act-Supported Programs Has Been
Limited and Flow of Credit Has Generally Improved
Highlights of GAO-21-180, a report to
congressional committees
Why GAO Did This Study What GAO Found
The COVID-19 pandemic has resulted The Board of Governors of the Federal Reserve System (Federal Reserve)
in substantial damage to the economy. authorized 13 lending programs—known as facilities—to ensure the flow of credit
The CARES Act, enacted as part of the to various parts of the economy affected by the COVID-19 pandemic. Nine of the
federal response, includes amounts 13 facilities are supported through Department of the Treasury (Treasury)
appropriated to Treasury and made funding appropriated under the CARES Act. Overall, use of these CARES Act-
available to provide loans, loan supported facilities has been relatively limited. As of November 15, 2020, the
guarantees, and investments to states, CARES Act facilities had used about $24 billion, or a little more than 1 percent, of
tribes, municipalities, and eligible the $1.95 trillion the Federal Reserve can back in transaction volume for these
businesses. Section 4003(b)(4) of the
facilities. According to representatives from small business associations, banks,
act made available up to $454 billion
and state and local governments, the terms and conditions for some facilities are
and potentially certain other amounts
for Treasury to support Federal
a deterrent for some potential participants. Further, some small businesses may
Reserve lending facilities in providing prefer not to take on more debt. The Federal Reserve has continued to adjust
liquidity to the financial system that some of the terms of its facilities, which are designed to function as backstops.
provides credit to these entities.
CARES Act-Supported Facilities’ Transaction Volume and Capacity, as of November 15, 2020
The CARES Act also included a Transaction Percentage of
provision for GAO to periodically report Transaction volume transaction volume
volume capacity ($ in relative to capacity
on these loans, loan guarantees, and Federal Reserve facility ($ in billions) billions) (%)
investments. This report examines the Primary and Secondary Market 13.6 750 1.8
level of participation in the facilities and Corporate Credit Facilities
what available evidence suggests Main Street Lending Program (five 5.0 600 <1
regarding the effects of the facilities on facilities)a
corporate credit and related markets, Municipal Liquidity Facility 1.7 500 <1
states and municipalities, and small Term Asset-Backed Securities Loan 3.9 100 3.9
Facility
businesses; and the status of CARES
Total 24.1b 1,950 1.2
Act funding available to support the
Source: GAO analysis of Board of Governors of the Federal Reserve System (Federal Reserve) documents and data. | GAO-21-180
Federal Reserve’s facilities, among
other things.
a
The Main Street Lending Program comprises five facilities: Main Street New Loan Facility, Main
Street Priority Loan Facility, Main Street Expanded Loan Facility, Nonprofit Organization New Loan
GAO reviewed applicable laws and Facility, and Nonprofit Organization Expanded Loan Facility.
agency documentation, and analyzed Transaction volumes do not sum to the total due to rounding.
b
agency and other relevant data on the
facilities and credit markets. GAO also Corporate and municipal credit markets, which are targeted by certain facilities,
interviewed Federal Reserve and have improved since the onset of the pandemic. For example, from March
Treasury officials and representatives through September 2020, companies nearly doubled the amount of corporate
from industry associations representing bonds issued compared to the same period in 2019. However, state and local
businesses, banks, and state and local governments and small businesses continue to face financial challenges.
governments.
As of November 15, 2020, Treasury had committed $195 billion (of which it had
disbursed $102.5 billion) of the $454 billion in CARES Act funds available to
support the facilities. On November 19, 2020, the Treasury Secretary stated that
his understanding of the congressional intent related to the facilities’ authority to
purchase new assets or make new loans was for all CARES Act facilities to stop
purchasing eligible assets or extending credit on December 31, 2020. As such,
the Secretary requested that the Federal Reserve return unused funds from
facilities that received CARES Act funding. On November 20, 2020, the Federal
View GAO-21-180. For more information, Reserve stated it would work with Treasury to return unused CARES Act funds.
contact Michael E. Clements at (202) 512- GAO will continue to monitor facilities’ use through the end of 2020, and the
8678 or clementsm@gao.gov.
repayment of facilities’ outstanding loans and investments.
United States Government Accountability Office
Contents
Letter 1
Background 4
Federal Reserve Analyzed Funding Needs and Feedback in
Designing Its Facilities and Has Initiated Oversight Efforts 11
Conditions in Corporate Credit Markets Have Improved, and the
Corporate Credit Facilities Have Had Relatively Limited Activity 24
Municipal Credit Markets Have Improved, but State and Local
Governments Continue to Face Fiscal Challenges 35
Small Businesses Face Credit Challenges and, to Date, the Main
Street Facilities Have Had Limited Participation 40
Most CARES Act Funds to Support Federal Reserve Facilities
Were Not Used, and Treasury Has Requested Return of the
Unused Funds It Invested 49
Agency Comments 50
Appendix I Objectives, Scope, and Methodology 53
Appendix II GAO Contact and Staff Acknowledgments 56
Tables
Table 1: Federal Reserve Lending Facilities Established with
Section 13(3) Authority during the 2007–2009 Financial
Crisis 5
Table 2: Federal Reserve Lending Facilities with CARES Act
Funding 9
Table 3: Federal Reserve Lending Facilities without CARES Act
Funding 10
Table 4: Transaction Volume for the Primary Dealer Credit
Facility, Commercial Paper Funding Facility, and Money
Market Mutual Fund Liquidity Facility, March 2020–
November 2020 29
Table 5: Transaction Volume in the Primary and Secondary
Market Corporate Credit Facilities and Term Asset-
Backed Securities Loan Facility, March 2020–November
2020 35
Table 6: Number of Transactions and Transaction Volume for
Main Street Facilities, as of November 15, 2020 46
Page i GAO-21-180 Federal Reserve Facilities
Figures
Figure 1: Federal Reserve Lending Facilities Implemented during
the COVID-19 Pandemic 7
Figure 2: Funding Flow for Main Street Facilities Serving Small
and Mid-Sized Businesses 15
Figure 3: Spreads on 90-day Commercial Paper for Large
Nonfinancial Businesses, January 2020–September 2020 26
Figure 4: Cumulative Issuances of Commercial Paper for Large
Nonfinancial Businesses, January–August, 2019 and
2020 27
Figure 5: Net Flows of Prime Money Market Funds, January
2020–August 2020 28
Figure 6: Spreads on Corporate Bonds, January 2020–September
2020 31
Figure 7: Cumulative Issuances of Corporate Bonds, January–
September, 2019 and 2020 32
Figure 8: Cumulative Issuances of Asset-Backed Securities,
January–September, 2019 and 2020 33
Figure 9: Spreads on Municipal Bonds, January 2020–September
2020 38
Figure 10: Municipal Swap Index of Rates on Tax-Exempt
Variable Rate Demand Notes, January 2020–September
2020 39
Figure 11: Small Businesses’ Views on Credit Conditions, January
2019–July 2020 43
Figure 12: Banks’ Lending Conditions for Small Business Loans:
First Quarter 2018–Third Quarter 2020 45
Page ii GAO-21-180 Federal Reserve Facilities
Abbreviations Page
COVID-19 Coronavirus Disease 2019
ESF Exchange Stabilization Fund
Federal Reserve Board of Governors of the Federal Reserve System
PPP Paycheck Protection Program
RBOPS Reserve Bank Operations and Payment Systems
SBA Small Business Administration
SIFMA Securities Industry and Financial Markets
Association
Treasury Department of the Treasury
VRDN variable rate demand note
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Page iii GAO-21-180 Federal Reserve Facilities
Letter
441 G St. N.W.
Washington, DC 20548
December 10, 2020
Congressional Committees
The Coronavirus Disease 2019 (COVID-19) pandemic has resulted in
substantial damage to the global economy and affected the stability of
credit markets. The United States continues to experience serious
economic repercussions and turmoil. For example, as of October 2020,
there were 11 million unemployed individuals, compared to nearly 5.9
million individuals at the beginning of the calendar year. 1 In response to
the economic crisis, in March 2020, Congress passed, and the President
signed into law, the CARES Act, which provides over $2 trillion in
emergency assistance and health care response for individuals, families,
and businesses affected by COVID-19. 2
To provide economic relief, section 4003(b)(4) of the act made available
up to $454 billion and potentially certain other amounts for the
Department of the Treasury (Treasury) to support the Board of Governors
of the Federal Reserve System (Federal Reserve) in establishing
emergency lending programs, known as facilities. These facilities are
intended to provide liquidity to the financial system by lending to states,
tribes, municipalities, and eligible businesses. 3
The Federal Reserve has established nine facilities that are supported
through Treasury’s CARES Act-appropriated funds and are intended to
support the flow of credit to employers, consumers, small and medium-
sized businesses, state and local governments, and nonprofit
organizations. The facilities are authorized under section 13(3) of the
1Bureau of Labor Statistics, Unemployment Level (UNEMPLOY), retrieved from FRED,
Federal Reserve Bank of St. Louis, accessed November 9, 2020,
https://fred.stlouisfed.org/series/UNEMPLOY.
2Pub. L. No. 116-136, 134 Stat. 281 (2020).
3Section 4003(b) of the CARES Act authorized up to $46 billion to support passenger and
cargo air carriers and other eligible businesses, as well as businesses critical to
maintaining national security. Any amount left from this $46 billion in assistance will be
available to support the Federal Reserve facilities for lending to eligible businesses,
states, tribes, and municipalities. For purposes of our report, we did not include the $46
billion portion in our review, as a separate GAO report will be reviewing assistance from
this portion.
Page 1 GAO-21-180 Federal Reserve Facilities
Federal Reserve Act and approved by the Secretary of the Treasury. 4 In
addition to these CARES Act facilities, the Federal Reserve also invoked
its Section 13(3) authority to establish four emergency lending facilities
that are not supported through Treasury’s CARES Act-appropriated
funds. These four facilities serve various markets and credit needs.
Section 4026(f) of the CARES Act contains a provision for us to review
the loans, loan guarantees, and other investments provided under section
4003 of the act and report no later than 9 months after the date of
enactment of the act, and annually thereafter through the year
succeeding the last year for which loans, loan guarantees, or other
investments made under section 4003 are outstanding. We extended our
review to also include the Federal Reserve’s lending facilities that are not
supported by CARES Act section 4003 because they complete the
Federal Reserve’s full response to the pandemic using its Section 13(3)
authority.
This report examines (1) steps the Federal Reserve and Treasury have
taken to design, implement, monitor, and oversee lending facilities
established in response to the COVID-19 pandemic; (2) what available
evidence suggests regarding the effects of the Federal Reserve’s facilities
on corporate credit and related markets, and levels of participation in the
facilities intended to support them; (3) what available evidence suggests
regarding the effects of the Federal Reserve’s facilities on states and
municipalities, and levels of participation in the facility intended to support
them; (4) what available evidence suggests about the effects of the
Federal Reserve’s facilities on small businesses, and levels of
participation in the facilities intended to support them; and (5) the status
of CARES Act funding available to support the Federal Reserve’s
facilities.
To address the first objective, we reviewed Federal Reserve and
Treasury documentation on the design and implementation of the
facilities, such as the term sheets, application documents, frequently
asked questions, and publicly available announcements and press
releases for each facility. We also reviewed the Federal Reserve’s reports
to Congress on the status, operations, and transaction amounts for each
facility, as well as data on participants using the facilities. To examine the
Federal Reserve’s oversight and monitoring efforts, we reviewed the
4Section 13(3) of the Federal Reserve Act permits the Federal Reserve to provide
emergency lending.
Page 2 GAO-21-180 Federal Reserve Facilities
Federal Reserve’s Division of Reserve Bank Operations and Payment
Systems (RBOPS) documentation of its (1) framework and approach to
oversight of the facilities, and (2) completed reviews of the facilities.
To address our second, third, and fourth objectives, we analyzed the
most recently available data on indicators of credit markets affected by
the facilities. To identify and select potential indicators, we reviewed prior
and ongoing GAO work, federal regulatory agencies’ reports and data,
data available from the Bloomberg Terminal and the Securities Industry
and Financial Markets Association (SIFMA), and data on small business
owners from the National Federation of Independent Businesses. We
took a number of steps to assess the reliability of the data sources and
indicators, including reviewing relevant documentation, reviewing prior
GAO work, and interviewing data providers. We found that, collectively,
the indicators were sufficiently reliable for the purposes of providing a
general sense of how credit markets are performing. We also reviewed
relevant research publications from academics, regulatory agencies, and
industry experts. To describe levels of participation and the transaction
volume for specific Federal Reserve facilities, we obtained the total
number of transactions and total dollar amounts from the Federal
Reserve for the facilities.
To address our fifth objective, we reviewed Federal Reserve and
Treasury documentation on CARES Act-appropriated amounts in support
of the Federal Reserve’s facilities, including amounts allocated to the
facilities.
For all objectives, we interviewed Federal Reserve and Treasury officials,
representatives from associations representing banks, small businesses,
and municipalities, and representatives from a credit rating agency. We
also reviewed relevant federal laws and regulations, and a relevant GAO
report. 5 See appendix I for more information on our scope and
methodology.
We conducted this performance audit from March 2020 to December
2020 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
5See GAO, Federal Reserve System: Opportunities Exist to Strengthen Policies and
Processes for Managing Emergency Assistance, GAO-11-696 (Washington, D.C.: July 21,
2011).
Page 3 GAO-21-180 Federal Reserve Facilities
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
Background
Overview of the Federal The Federal Reserve Act established the Federal Reserve System as the
Reserve System country’s central bank. 6 The Federal Reserve System consists of three
parts: the Federal Reserve Board, Reserve Banks, and the Federal Open
Market Committee. The Federal Reserve Board is a federal agency
located in Washington, D.C., which is responsible for maintaining the
stability of financial markets; supervising financial, bank, and thrift holding
companies, state-chartered banks that are members of the Federal
Reserve System, and the U.S. operations of foreign banking
organizations; establishing monetary policy; and providing general
supervision over the operations of the Reserve Banks. The Federal
Reserve System is divided into 12 districts. Each district is served by a
regional Reserve Bank. The Federal Reserve Act authorizes the Reserve
Banks to make discount window loans, in accordance with the rules and
regulations prescribed by the Federal Reserve Board, and to execute
open-market operations at the direction of the Federal Open Market
Committee. 7 The Reserve Banks also provide payment services, such as
check clearing and wire transfers, to depository institutions, the Treasury,
and government agencies. In addition, Reserve Banks provide cash
services to financial institutions and serve as the Treasury’s fiscal agent.
RBOPS oversees the policies and operations of the Reserve Banks.
Overview of Federal The Federal Reserve Board has the authority to authorize the Reserve
Reserve Emergency Banks to extend credit more broadly than usual during emergencies.
Reserve Banks typically lend to banks through discount window programs
Lending Authority
6Federal Reserve Act, Pub. L. No. 63-43, 38 Stat. 251 (1913). The Federal Reserve
System is self-funded and pays its expenses and maintains a statutorily limited amount of
surplus from its revenue. Remaining revenue is transferred to the Treasury.
7The discount window is a Federal Reserve Board lending program that allows eligible
institutions to borrow money, usually on a short-term basis, at an above market rate to
meet temporary liquidity shortages. The Federal Open Market Committee consists of the
seven members of the Board of Governors, the President of the Federal Reserve Bank of
New York, and four other Reserve Bank presidents who serve on a rotating basis. The
Committee is responsible for directing open market operations to influence the total
amount of money and credit available in the economy. The Federal Reserve Bank of New
York carries out the Committee’s directives on open market operations by engaging in
purchases or sales of certain securities, typically U.S. government securities, in the
secondary market.
Page 4 GAO-21-180 Federal Reserve Facilities
based on established statutory criteria. 8 However, under Section 13(3) of
the Federal Reserve Act, during unusual and exigent circumstances, the
Federal Reserve can authorize Reserve Banks to extend credit to a
broader range of borrowers. 9
During the 2007–2009 financial crisis, the Federal Reserve invoked its
Section 13(3) authority to create emergency programs to stabilize
financial markets and avert the failures of a few individual institutions.
Through these programs, the Federal Reserve extended credit to
nonbank financial firms for the first time since the 1930s. The Federal
Reserve used its Section 13(3) authority to create six broadly based
facilities (see table 1) and provide direct assistance to four large financial
firms. The Federal Reserve used special purpose vehicles to conduct
some of the transactions. Special purpose vehicles are legal entities
created to carry out a specific financial purpose or activity—for example,
to borrow from a Reserve Bank to purchase financial assets.
Table 1: Federal Reserve Lending Facilities Established with Section 13(3) Authority
during the 2007–2009 Financial Crisis
Name of facility Date announced
Term Securities Lending Facility Mar. 11, 2008
Primary Dealer Credit Facility Mar. 16, 2008
Asset-Backed Commercial Paper Money Market Mutual Fund Sept. 19, 2008
Liquidity Facility
Commercial Paper Funding Facility Oct. 7, 2008
Money Market Investor Funding Facility Oct. 21, 2008
Term Asset-Backed Securities Loan Facility Nov. 25, 2008
Source: Federal Reserve Board Statistical Release H.4.1 and Federal Reserve Board documents | GAO-21-180
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act added restrictions to the Federal Reserve’s Section 13(3) authority. 10
The act required the Federal Reserve Board to implement any future
emergency lending through facilities with broad-based eligibility, required
that emergency lending assistance be for the purpose of providing
liquidity to the financial system and not to aid a failing financial company,
and required the approval of the Secretary of the Treasury for all lending
812 U.S.C. § 347b(a).
912 U.S.C. § 343(3).
10Pub. L. No. 111-203, § 1101, 121 Stat. 1376, 2113 (2010).
Page 5 GAO-21-180 Federal Reserve Facilities
facilities. Additionally, the act required the Federal Reserve Board to
promulgate a rule governing the use of Section 13(3) emergency lending
authority. The Federal Reserve Board promulgated a final rule on
December 18, 2015, amending Regulation A—which governs extensions
of credit by Federal Reserve Banks—to include rules on the extension of
emergency credit. 11
Treasury Exchange The Exchange Stabilization Fund (ESF) is a fund that was originally
Stabilization Fund established in the 1930s to stabilize the exchange value of the dollar by
buying and selling foreign currencies and gold. The Secretary of the
Treasury has broad authority to use the ESF to deal in gold, foreign
exchange, and other instruments of credit and securities. Prior to 2008,
Treasury primarily used the ESF to finance short-term loans to foreign
countries facing a financial crisis. In 2008, Treasury used the ESF to
guarantee deposits in money market mutual funds.
The ESF retains earnings from its operations and had a portfolio asset
value of $94 billion in February 2020. In March 2020, Treasury began
using the ESF to make equity investments in Federal Reserve emergency
lending facilities created in response to COVID-19. When the CARES Act
was enacted later in the same month, it made available at least $454
billion to the ESF for this purpose.
Federal Reserve From March through September 2020, the Federal Reserve used its
Emergency Lending authority under Section 13(3) to authorize 13 emergency lending facilities
in response to the COVID-19 pandemic (see fig. 1). The Federal Reserve
Facilities in Response to
cited a number of factors in determining that unusual and exigent
the COVID-19 Pandemic circumstances existed, including disruption in financial markets, reduced
availability of credit, heightened need for credit, and an increase in
business expenditures.
1180 Fed. Reg. 78959, amending 12 C.F.R. Part 201 (Regulation A).
Page 6 GAO-21-180 Federal Reserve Facilities
Figure 1: Federal Reserve Lending Facilities Implemented during the COVID-19 Pandemic
Note: The dates in the timeline reflect the day when a facility can begin entering into transactions.
Nine of the 13 facilities receive support from funds appropriated to
Treasury’s ESF under the CARES Act and are subject to additional
requirements (see table 2). 12 For example, facilities with CARES Act
funding may only purchase obligations from or make loans to businesses
that are created or organized in the United States and that have
12The Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding
Facility received support from ESF funds before the enactment of the CARES Act and are
not subject to CARES Act requirements.
Page 7 GAO-21-180 Federal Reserve Facilities
significant operations and a majority of employees in the United States. 13
Borrowers from the five Main Street facilities also are required to comply
with additional CARES Act requirements, including limitations on
executive compensation, dividends, and equity buybacks. 14
In general, the CARES Act-supported facilities are designed to address
broad sectors of the economy, such as large corporations, small and mid-
sized businesses, and state and local governments. Of the nine CARES
Act-supported facilities, eight were newly designed by the Federal
Reserve and Treasury in response to the COVID-19 pandemic. Only the
Term Asset-Backed Securities Loan Facility was previously used in the
2007–2009 financial crisis and reinstated as part of the Federal Reserve’s
response to the COVID-19 pandemic. Overall, the CARES Act facilities
can support up to $1.95 trillion in transaction volume.
13Pub. L. No. 116-136, § 4003(c)(3)(C), 134 Stat. 281, 473 (2020). Further, under the
CARES Act conflict-of-interest requirement, no covered entity may be eligible for any
transaction with a facility with CARES Act funding. Pub. L. No. 116-136 § 4019, 134 Stat.
281, 485 (2020). The term “covered entity” means an entity “in which a covered individual
directly or indirectly holds a controlling interest.” The term "covered individual" includes the
president, vice president, the head of all executive branch departments (but not other
federal agencies), and any member of Congress. The term also includes the spouse, child
(including adult children), or son or daughter-in-law of such executive branch officials and
members of Congress.
14Pub. L. No. 116-136, §§ 4003, 4004, 134 Stat. 281, 472, 476 (2020).
Page 8 GAO-21-180 Federal Reserve Facilities
Table 2: Federal Reserve Lending Facilities with CARES Act Funding
Starting activity
Announcement date (all end Dec.
Name of facility Purpose Facility activity date 31, 2020)
1. Primary Market Support large Primary market facility: purchase Mar. 23, 2020 June 29, 2020
Corporate Credit businesses qualifying bonds, and purchase portions of
Facility qualifying syndicated loans or bonds at
issuance.
2. Secondary Market Secondary market facility: purchase Mar. 23, 2020 May 12, 2020
Corporate Credit qualifying corporate bonds, certain bond
Facility portfolios, and U.S.-listed exchange-
traded funds in the secondary market.
3. Main Street New Support small and New loan and priority loan facilities: Apr. 9, 2020, for the July 6, 2020, for
Loan Facility mid-sized purchase 95 percent participation interest new and expanded facilities supporting
businesses in newly issued eligible loans that eligible loan facilities small and mid-sized
lenders make to eligible small and mid- supporting small and for-profit businesses
4. Main Street sized for-profit borrowers. mid-sized for-profit
Expanded Loan businesses
Facility Expanded loan facility: purchase 95
percent participation interest in a new
5. Main Street extension of credit under an existing Apr. 30, 2020, for the
Priority Loan eligible loan made by an eligible lender to priority loan facility
Facility an eligible small or mid-sized for-profit supporting small and
borrower. mid-sized for-profit
businesses
6. Main Street Support small and Nonprofit new loan facility: purchase 95 July 17, 2020, for Sept. 4, 2020, for
Nonprofit mid-sized percent participation interest in newly facilities supporting facilities supporting
Organization New nonprofit issued eligible loans that eligible lenders nonprofit nonprofit
organizations
Loan Facility organizations make to eligible nonprofit organization organizations
borrowers.
7. Main Street Nonprofit expanded loan facility: purchase
Nonprofit 95 percent participation interest in a new
Organization extension of credit under an existing
Expanded Loan eligible loan made by an eligible lender to
Facility an eligible nonprofit organization
borrowers.
8. Municipal Liquidity Support states Purchase eligible notes directly from Apr. 9, 2020 May 26, 2020
Facility and certain eligible issuers at time of issuance.
counties, cities,
multistate entities,
and revenue bond
issuers
9. Term Asset- Support Provide nonrecourse loans to U.S. Mar. 23, 2020 June 17, 2020
Backed Securities consumers and companies secured by qualifying asset-
Loan Facility businesses backed securities generally backed by
recently originated consumer and
business loans.
Source: GAO analysis of Federal Reserve Board documents. | GAO-21-180
Page 9 GAO-21-180 Federal Reserve Facilities
Four of the 13 facilities authorized in response to the COVID-19
pandemic do not receive support from funds appropriated to Treasury’s
ESF under the CARES Act (see table 3). Of the four, the Commercial
Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility,
and the Primary Dealer Credit Facility are facilities that the Federal
Reserve used previously during the 2007–2009 crisis and reinstated in
March and April of 2020. The Paycheck Protection Program Liquidity
Facility was designed to supply liquidity to lenders that make Paycheck
Protection Program (PPP) loans, and receives no funding from Treasury.
Table 3: Federal Reserve Lending Facilities without CARES Act Funding
Activity dates
Announcement (can be
Name of facility Purpose Facility activity date extended)
1. Commercial Serve as funding backstop to Purchase commercial paper from Mar. 17, 2020 Apr. 14, 2020,
Paper Funding provide liquidity for U.S. issuers eligible companies; eligible issuers through Mar. 31,
Facility of commercial paper include U.S. issuers of commercial 2021
paper, including municipal issuers and
U.S. issuers with a foreign parent
company
2. Money Market Assist money market mutual Make nonrecourse loans available to Mar. 18, 2020 Mar. 23, 2020,
Mutual Fund funds in meeting demands for eligible financial institutions that are through Mar. 31,
Liquidity Facility redemption by investors secured by high-quality assets 2021
purchased by the financial institution
from money market mutual funds
3. Paycheck Facilitate lending by eligible Lend to institutions eligible for making Apr. 9, 2020 Apr.16, 2020,
Protection institutions that provide loans to Paycheck Protection Program loans through Mar. 31,
Program small businesses under the on a nonrecourse basis, taking these 2021
Liquidity Facility Paycheck Protection Program loans as collateral
4. Primary Dealer Provide support to primary Provide loans to primary dealers in Mar. 17, 2020 Mar. 20, 2020,
Credit Facility dealers to facilitate the exchange for collateral through Mar. 31,
availability of credit to 2021
businesses and households
Source: GAO analysis of Federal Reserve Board documents. | GAO-21-180
Page 10 GAO-21-180 Federal Reserve Facilities
Federal Reserve
Analyzed Funding
Needs and Feedback
in Designing Its
Facilities and Has
Initiated Oversight
Efforts
Emergency Lending In designing and implementing the lending facilities, Federal Reserve
Facilities Were Intended to officials said their primary goals were to stabilize financial markets and
address macroeconomic issues, including meeting the needs of small and
Stabilize Financial Markets
mid-sized businesses. To ensure the flow of credit and therefore stability
and Address in various financial markets, the Federal Reserve first reinstated some of
Macroeconomic Issues the facilities established during the 2007–2009 financial crisis—the
Commercial Paper Funding Facility, Money Market Mutual Fund Liquidity
Facility, and Primary Dealer Credit Facility—that are not supported by
CARES Act funding. Officials said that Federal Reserve staff were able to
quickly reinstate these facilities because they already were familiar with
them. To stabilize the corporate credit markets, the Federal Reserve also
implemented two facilities that are supported through funding
appropriated by the CARES Act—the Primary Market Corporate Credit
Facility and Secondary Market Corporate Credit Facility.
To address macroeconomic issues caused by the pandemic, Federal
Reserve officials said they considered macroeconomic factors, such as
unemployment rates and the market segments accounting for the highest
shares of U.S. employment, to design facilities to meet market needs.
The facilities addressing macroeconomic issues include the Municipal
Liquidity Facility, Term Asset-Backed Securities Loan Facility, and the five
facilities under the Main Street Lending Program. All of these facilities are
supported through funding appropriated by the CARES Act. The Federal
Reserve also implemented the Paycheck Protection Program Liquidity
Facility in support of the PPP, and that facility is not supported through
CARES Act-appropriated funding.
Officials said that because most of the CARES Act-supported facilities are
new and provide loans to nonfinancial companies, it took time for the
Federal Reserve to structure and design the facilities to effectively
address the needs of the targeted market segments. For example, the
Page 11 GAO-21-180 Federal Reserve Facilities
Federal Reserve proposed three Main Street facilities for small and mid-
sized for-profit businesses in April 2020—the facilities for new loans,
expanded loans, and priority loans—but these facilities did not begin
accepting loans until early July 2020. The Federal Reserve conducted
two rounds of soliciting public comments on the facilities’ terms for
participation—in April and June of 2020—and modified the terms as a
result, which officials said contributed to the facilities not accepting loans
until July.
Design of the Facilities Intent. The Federal Reserve designed its emergency lending facilities to
serve as a funding backstop—that is, as an alternative funding source for
borrowers that are unable to readily obtain credit in the private market
during economic downturns. Moreover, for the Main Street Lending
Program, the Federal Reserve targeted these facilities to support lending
to for-profit businesses and nonprofit organizations that were in sound
financial health before the onset of the pandemic. In setting program
terms and conditions, the Federal Reserve, in accordance with
Regulation A, set rates at a level that was higher than what would be
offered in the marketplace during normal market conditions but that would
be effective in addressing market strains during crisis conditions. 15
According to Federal Reserve officials, as designed, the facilities would
experience limited participation when credit is available in the
marketplace and increased participation when markets declined and there
was a shortage of credit.
Terms. Federal Reserve officials told us that they set the facilities’ terms
and eligibility requirements to balance each facility’s ability to meet
market needs against managing potential credit exposures and
minimizing losses to taxpayers. 16 For example, based on our review of
the Federal Reserve’s proposals for structuring the Main Street facilities
serving small and mid-sized businesses, officials considered factors
including how much loss a lender would retain if loans default, the size of
eligible borrowers, the types of loans the facilities would purchase, and
the facilities’ capacity for absorbing losses. For all of the facilities, the
Federal Reserve published term sheets and frequently asked questions to
1512 C.F.R. § 201.4(d)(7).
16Section 13(3) of the Federal Reserve Act requires that the security for emergency loans
be sufficient to protect taxpayers from losses. Section 13(3) also prohibits insolvent
companies from participating in the loan facilities. Additionally, Section 4003 of the
CARES Act prohibits forgiveness of loans extended to eligible businesses, states, tribes,
or municipalities. To that end, Treasury’s equity investments in the facilities’ special
purpose vehicles protect the Federal Reserve from future losses.
Page 12 GAO-21-180 Federal Reserve Facilities
set out and clarify the terms, including eligibility requirements and
restrictions, for participating in each of the facilities.
Treasury support. As part of the CARES Act facilities’ design process,
the Federal Reserve conducted scenario-based analyses in determining
how the lending terms and eligibility requirements would affect the
facilities’ funding needs, including support from Treasury. For example,
our review of the scenario-based analyses for the Municipal Liquidity
Facility and Main Street facilities found that Federal Reserve staff set the
agreed-upon level of Treasury funding to be sufficient to prevent these
facilities, and ultimately the Federal Reserve, from incurring losses, even
if the facilities reached their maximum capacity and experienced default
rates higher than any previous historical comparison.
Lender underwriting. For loans under the Main Street program, as
another layer to manage the Main Street facilities’ risk exposure, lenders
also apply their own underwriting standards as part of the loan approval
process. Federal Reserve officials said that this allows lenders to tailor
the loan approval to each borrower’s unique situation and enables
traditional underwriting practices to assess a borrower’s creditworthiness.
Federal Reserve officials told us that to ensure lender participation, they
wanted to allow lenders to make loans based on standards that align with
their underwriting practices. Officials also told us that lenders likely would
be discouraged from participating in a facility if the Federal Reserve
required them to make loans based on standards different from those
typical of their underwriting process.
On September 18, 2020, the Federal Reserve updated its Main Street
Lending facilities’ frequently asked questions to clarify the Federal
Reserve’s and Treasury’s expectations on lender underwriting. The
agency emphasized that underwriting should assess a borrower’s pre-
pandemic financial condition and post-pandemic prospects in making loan
approval decisions, in an effort to encourage greater lender participation
in the program.
Feedback on the facilities. As previously mentioned, for the Main Street
Lending facilities serving small and mid-sized businesses, the Federal
Reserve also sought and considered public input in revising and
expanding the facilities’ terms in April and June 2020. For example, partly
based on public comments, the Federal Reserve and Treasury lowered
the minimum loan amount for certain loans from $1 million to $500,000 (in
April), to $250,000 (in June), and then to $100,000 (in October). The
Federal Reserve and Treasury also increased the loan repayment period
Page 13 GAO-21-180 Federal Reserve Facilities
from 4 years to 5 years (in June) and raised the Federal Reserve’s
participation—the percent purchased of lenders’ Main Street loans—from
85 percent for certain loans to 95 percent for all loans. For the Municipal
Liquidity Facility, the Federal Reserve and Treasury also expanded the
facility’s scope and duration (in April) and the number and types of
entities eligible to use the facility (in June).
Once facilities were operational, the Federal Reserve created
mechanisms for collecting and addressing public feedback, including an
email inbox. For example, for the Main Street program, Reserve Bank
staff review emails daily and forward comments about program design
and access to the Federal Reserve Board for review, according to
documentation we reviewed on the Federal Reserve Bank of Boston’s
email procedures.
Federal Reserve and Treasury The Federal Reserve worked with Treasury to design and implement the
Collaboration facilities and obtain the Treasury Secretary’s approval of them. According
to Federal Reserve and Treasury officials, the Federal Reserve has
primary responsibility for designing, implementing, and managing the
facilities. Officials added that the Federal Reserve coordinated with
Treasury through regular meetings and discussions on policy and legal
issues as well as key details, including finalizing the size of Treasury’s
investments in the facilities and the terms and conditions for extending
loans. For the facilities supported by CARES Act funding, Treasury
provides support by making an equity investment in the special purpose
vehicle that the Federal Reserve established to support a facility’s
operations. The investment covers losses that the facility may incur. As
an example, figure 2 illustrates the lending structure of the Main Street
Lending Program.
Page 14 GAO-21-180 Federal Reserve Facilities
Figure 2: Funding Flow for Main Street Facilities Serving Small and Mid-Sized
Businesses
Federal Reserve Actions to Inconsistent treatment of borrowers. In July 2011, we found that a few
Address Operational Concerns of the Federal Reserve’s 2007–2009 emergency lending programs lacked
with Previous Facilities specific procedures for guiding how a lending Reserve Bank would
exercise discretion for restricting program access for higher-risk
borrowers, which we said could lead to inconsistent treatment of
participants across lending programs. 17 We therefore recommended that
the Federal Reserve strengthen procedures in place to guide the Federal
Reserve Banks’ efforts to manage program access by high-risk
borrowers, and to ensure consistent treatment of participants across
programs. Because the Federal Reserve implemented programs in
response to the COVID-19 pandemic similar to those implemented in
2007–2009, this recommendation remains relevant today.
In our follow-up on this recommendation, we found that the Federal
Reserve established eligibility requirements and terms for current facilities
that could not vary by participant. As previously mentioned, for each of
17GAO-11-696.
Page 15 GAO-21-180 Federal Reserve Facilities
the facilities the Federal Reserve established in response to the current
pandemic, it published term sheets that set out the eligibility criteria for
participants, restrictions, and other terms. According to Federal Reserve
officials, the Reserve Banks establish and operate the facilities in
accordance with the criteria stipulated in the term sheets and do not have
discretion to operate or approve transactions that fall outside of the scope
of the term sheets.
The Main Street Lending Program allows the Federal Reserve some
discretion in determining the eligibility of an entity. However, the Federal
Reserve’s discretion applies only to determining whether an entity that
does not fall within the Main Street Lending Program’s definition of a
“business” or a “nonprofit organization” may nonetheless be deemed a
business or nonprofit organization. 18 The Federal Reserve does not have
discretion in waiving borrower eligibility requirements, so the entity still
must meet those requirements. Because the Federal Reserve does not
have discretion to waive borrowers’ eligibility requirements, there is no
risk of inconsistent treatment of program participants because all
interested participants in a facility must meet the same terms and
requirements for that facility. Therefore, the Federal Reserve’s actions
effectively address the intent of our 2011 recommendation that the
Federal Reserve strengthen procedures pertaining to exercising
discretion in managing program access for higher-risk borrowers.
Loss monitoring. In July 2011, we found that the Federal Reserve
estimated and tracked potential stress losses under adverse economic
scenarios for some facilities but not for others. As a result, the Federal
Reserve Board and Reserve Banks did not have a comprehensive view of
potential risk exposures when making risk management decisions. 19 We
recommended that the Federal Reserve document a plan for estimating
18The Main Street Lending Program defines “business” as an entity that is organized for
profit as a partnership, a limited liability company, a corporation, an association, a trust, a
cooperative, a joint venture with no more than 49 percent participation by foreign business
entities, or a tribal business concern as defined in 15 U.S.C. § 657a(b)(2)(C)—with the
term “small business concern” replaced with “business.” The Federal Reserve has
discretion to determine other entities are “businesses”, and used such discretion on July
31, 2020, to find that tribal economic enterprises that do not have a separate legal
personality from the related tribal government are “Businesses”. See question E.2 of the
Main Street Lending Program – For-Profit Businesses Frequently Asked Questions. The
program also defines a “nonprofit organization” as a tax-exempt nonprofit or veterans’
organization as described in Section 501(c) of the Internal Revenue Code, but the Federal
Reserve is within its discretion to choose to include other forms of nonprofit organizations.
19GAO-11-696.
Page 16 GAO-21-180 Federal Reserve Facilities
and tracking losses that could occur under more adverse economic
conditions within and across all emergency lending activities, and for
using this information to inform policy decisions, such as decisions to limit
risk exposures through program design or restrictions applied to eligible
borrowing institutions. Because the Federal Reserve implemented similar
facilities in response to the COVID-19 pandemic, this prior
recommendation remains relevant.
As of October 2020, the Federal Reserve had taken some actions to
address our recommendation. As previously mentioned, the Federal
Reserve conducted scenario-based analyses as part of designing the
facilities to assess the extent of possible losses in a range of scenarios—
including severely adverse scenarios—and to determine the amount of
Treasury’s funding necessary to support the facilities. As discussed in the
next section, the Federal Reserve also monitors and reports on the
facilities’ usage. Federal Reserve officials said that the Reserve Banks
responsible for administering the facilities may hire vendors with expertise
in modeling losses as further support for their risk monitoring. Further, for
financial reporting purposes, the Reserve Banks estimate losses from
loan defaults on an aggregated basis across the Federal Reserve System
to determine allowances for loan and lease losses. However, information
on the extent to which they have assessed risk monitoring on an
aggregated, system-wide basis is presented in the Federal Reserve’s
year-end financial statements, which were not released before this report.
As such, we will continue to review the Federal Reserve’s actions taken
to address this recommendation when additional documentation is
available.
Federal Reserve Is The Federal Reserve’s Regulation A provision applicable to emergency
Required to Determine lending requires the Federal Reserve to conduct periodic analyses for
assessing the continued need for facilities, and the CARES Act requires
Continued Need for the
the Federal Reserve to provide periodic reports on the facilities to
Facilities and Provide Congress.
Periodic Reporting
Regulatory Requirement for The Federal Reserve’s Regulation A requires, among other things, that at
Analysis least once every 6 months, the Federal Reserve must monitor and
analyze market conditions related to the facilities to determine if they are
still needed. 20 The Federal Reserve Board must vote with no fewer than
five members in agreement to extend past 1 year. Specifically, for a
2012 C.F.R. § 201.4(d)(9).
Page 17 GAO-21-180 Federal Reserve Facilities
facility to be extended, Regulation A requires that at least five members of
the Federal Reserve Board must find that unusual and exigent
circumstances continue to exist and the facility continues to appropriately
provide liquidity to the financial system, and the Federal Reserve Board
must obtain approval from the Secretary of the Treasury.
Staff from the Federal Reserve and the Reserve Banks said that a group
of staff conducts the analyses, reviews legal requirements to ensure the
analyses comply with regulatory requirements, and documents results in
a briefing packet for the Federal Reserve Board. Next, staff said that
subject-matter experts review the packet and make a recommendation to
terminate or extend the facilities. They then send the updated packet with
recommendations to the Federal Reserve Board for a vote. Staff said that
the Board makes a final decision based on the information,
recommendation, and discussion with Treasury principals, including the
Secretary of the Treasury.
Based on our review of the Federal Reserve’s work, we found that the
determination analyses in 2020 included reviews of the following:
• market conditions, supported by analysis of interest rate spreads and
issuance rates;
• facilities’ potential effects on market functioning, such as facilities’
usage rate and whether the announcement and presence of a facility
may have restored market confidence and improved market health;
and
• market disruptions stemming from COVID-19, such as the pandemic’s
effects on the broader economy—including unemployment claims and
effects of stay-at-home orders on the financial health of businesses
and municipalities.
In July 2020, the Federal Reserve Board determined, with the Secretary
of the Treasury’s approval, that unusual and exigent circumstances
continued to exist and that the need for facilities remained. It therefore
extended all of the CARES Act facilities set to terminate in September
2020 through December 31, 2020. 21 As part of the determination, the
Federal Reserve also extended the non-CARES Act facilities, which were
21The Municipal Liquidity Facility’s termination date was already December 31, 2020, and
the date was established in April 2020.
Page 18 GAO-21-180 Federal Reserve Facilities
set to expire in September 2020, through at least the end of 2020. 22 On
November 19, 2020, Treasury announced that all CARES Act facilities will
stop purchasing eligible assets or extending credit on December 31,
2020. On November 30, 2020, the Federal Reserve and Treasury
extended the non-CARES Act facilities through March 31, 2021. Going
forward, the Federal Reserve and Treasury can determine whether to
further extend the non-CARES Act facilities.
In addition to the required determination of whether the need for the
facilities persists, the Federal Reserve and Reserve Banks also
continually monitor the facilities’ performance. Staff from the Federal
Reserve Board and Reserve Banks said that they continually monitor
several indicators, including participation levels and volumes of
transactions for the facilities, to track the facilities’ performance. Staff also
said that since the pandemic began, they have started examining and
tracking conditions in various markets such as the municipal debt and
corporate bond markets, to assess the health of the markets served by
the facilities.
CARES Act Reporting Section 13(3) of the Federal Reserve Act requires the Federal Reserve to
Requirements provide periodic reports on the facilities to Congress. 23 The CARES Act
imposes Section 13(3) reporting requirements and requires that the
Federal Reserve publish these reports on its website. Accordingly, the
Federal Reserve publishes these reports for all CARES Act facilities,
along with transaction-level data, such as information on the bond issuer
(for the corporate credit facilities), lender (for the Main Street facilities),
borrower, loan amount, and other loan-related information such as the
interest rate and maturity date. 24 The Federal Reserve provides similar
reporting for the Paycheck Protection Program Liquidity Facility. For the
non-CARES Act facilities (other than the Paycheck Protection Program
Liquidity Facility), the Federal Reserve provides reports to Congress,
22The Commercial Paper Funding Facility’s termination date was already March 17, 2021,
and this date was established when the facility was announced.
23Section 13(3) requires the Federal Reserve to report to Congress every 30 days on the
outstanding balance of each facility, including the value of the collateral posted; the
amount of interest, fees, and other revenue or items of value received in exchange for the
assistance; and any expected taxpayer losses for such assistance.
24In addition to the required reporting, the Federal Reserve Board publishes the weekly
report, "Factors Affecting Reserve Balances of Depository Institutions and Condition
Statement of Federal Reserve Banks" (also known as H.4.1 statistical release). This report
includes the aggregate balance of the special purpose vehicles supporting the facilities
and, where relevant, provides additional information about its net portfolio holdings.
Page 19 GAO-21-180 Federal Reserve Facilities
pursuant to Section 13(3) requirements. Although not legally required, the
Federal Reserve also publishes on its website the reports for the non-
CARES Act facilities.
Federal Reserve officials said that Section 13(3)(C)(ii) does not require
the Federal Reserve to disclose transaction-level data, and under the
Section 13(3)(D) confidentiality provision, the Federal Reserve Board
Chair may request that certain information—the identity of the facilities’
participants, amounts borrowed by each participant, and identifying
details of the collateral provided by a participant—be kept confidential and
reported only to certain members of Congress. Officials explained that the
Federal Reserve Board Chair requested confidential treatment of this
information for the Primary Dealer Credit Facility, Commercial Paper
Funding Facility, and Money Market Mutual Fund Liquidity Facility
because publicly disclosing this information could adversely affect these
facilities’ participants. For example, market stakeholders may perceive an
entity’s participation in these facilities as a sign of the entity’s financial
trouble which may lead to a run on the entity’s liquidity.
Federal Reserve When the Federal Reserve began developing the system of internal
Developed and Began controls for the CARES Act and non-CARES Act facilities, it used existing
control structures within the Federal Reserve System as a starting point.
Implementing a
For example, the Federal Reserve Board and Reserve Banks have
Framework to Oversee the established policies, procedures, and other controls for their ongoing
Facilities’ Controls operations, such as for managing credit risk. As a result, any controls for
CARES Act Section 13(3) facilities and programs were built on and
interfaced with the existing system of internal controls. Based on our
interviews with RBOPS officials and review of RBOPS oversight
documentation, the Federal Reserve’s controls for the facilities exist at
three levels:
• At the lowest level, at each of the Federal Reserve Banks,
management is accountable for the design, implementation, and
operating effectiveness of internal controls.
• Next, risk management functions are put in place at each of the
Reserve Banks through the assurance, internal audit, and enterprise
risk management roles and responsibilities.
• Finally, the highest-level controls exist at the Federal Reserve Board,
which include oversight of the facilities by RBOPS.
Page 20 GAO-21-180 Federal Reserve Facilities
To fulfill its responsibilities for overseeing the facilities on behalf of the
Federal Reserve System, RBOPS developed and documented a general
framework and approach to oversight, consisting of three phases.
• First phase. During its initial phase of oversight, RBOPS, through
communication with Reserve Bank staff, focused on providing
assistance in setting up the various facilities quickly.
• Second phase. As the facilities became operational, RBOPS
reviewed the facilities’ established governance structures, process
workflows, and internal control design. Their objectives were to help
the Reserve Banks identify any enhancements early in the facilities’
life and obtain reasonable assurance that the design of controls and
processes was adequate to ensure the facilities’ effective operation.
At the time of our review, RBOPS had not yet completed the second-
phase reviews of all of the facilities. As of October 27, 2020, RBOPS
had completed second-phase reviews for eight facilities.
• Third phase. Following the completion of these reviews, RBOPS
plans to maintain ongoing monitoring activities. These include
continued communication with Reserve Banks and periodic reviews of
facility operations and controls to obtain reasonable assurance that
controls are present and are functioning in a manner that addresses
identified risks. We will continue to review the progress of the
remaining second- and third-phase reviews as part of our ongoing
work on the Federal Reserve facilities.
During the first phase of its oversight, RBOPS identified two focus areas
for its oversight efforts—(1) transparency and information, and (2) credit
program operations. According to RBOPS officials, the transparency and
information focus area recognizes the importance of transparency to
ensure the effective management of the facilities and of providing reliable
information to Congress and the public. RBOPS added that the credit
program operations focus area reflects the Board’s interest in ensuring
that the Reserve Banks implement and operate the credit programs in a
manner that is consistent with the authorized terms and that
demonstrates appropriate accountability.
Additionally, as part of the first phase of oversight, RBOPS documented
several specific methods under which Board staff are expected to
constructively engage with Reserve Bank staff, including (1) liaising with
the Reserve Banks as they set up the facilities and implemented business
processes and internal controls, (2) establishing communication with
Reserve Banks for notification of risk incidents as they occurred, (3)
Page 21 GAO-21-180 Federal Reserve Facilities
obtaining notification of vendor relationships that the Reserve Banks
planned to pursue in support of the facilities, (4) discussing accounting
policy and financial reporting matters with Reserve Banks, and (5)
determining that Reserve Bank-provided funds are used in accordance
with program terms.
As RBOPS transitioned to the second phase of its oversight and further
documented its approach to oversight, it divided the two oversight focus
areas of transparency and information and credit program operations into
four focus areas: (1) compliance, governance, and risk management; (2)
credit and collateral; (3) processes and controls; and (4) accounting and
reporting.
• Compliance, governance, and risk management. RBOPS designed
the compliance, governance, and risk management focus area to
determine whether programs are conducted in accordance with Board
authorizations and applicable laws, whether roles and responsibilities
for the design and operation of the programs are clearly defined and
understandable, and whether appropriate risk management structures
are in place.
• Credit and collateral. The credit and collateral focus area seeks to
evaluate whether practices for assessing credit risk are consistent
with related policies, whether processes are in place for validating
collateral eligibility, whether procedures for valuation of investments
and collateral are consistent with related policies, and whether
procedures with respect to asset disposition and facility wind-down
are documented and carried out in accordance with authorizations.
• Processes and controls. The processes and controls focus area
aims to determine whether internal systems and resources provide
reasonable assurance that programs can be administered in
accordance with authorizations, whether internal controls ensure that
programs are managed in accordance with authorizations, and
whether contracted services with third parties that are directly related
to the programs are operated in accordance with policies.
• Accounting and reporting. The accounting and reporting focus area
includes a determination of whether accounting policies and data are
appropriately considered and designed in a manner that ensures
compliance with accounting principles and facilitates financial
reporting.
For each area, RBOPS documented specific oversight activities for
addressing a given oversight objective. For example, oversight activities
for the compliance, governance, and risk management focus area include
Page 22 GAO-21-180 Federal Reserve Facilities
discussing with Reserve Banks’ management the steps taken to ensure
that policies related to conflicts of interest and ethical compliance are
followed. Additionally, RBOPS performed a risk assessment that
identified risk areas of focus for its second-phase reviews, mapped how
the focus areas address those risks, and according to RBOPS officials,
helped to identify the needed skillset for the review teams.
For the second phase of its oversight, RBOPS planned to begin the
review of each facility no later than 45 days after the Board authorized the
facility. RBOPS officials explained that they experienced delays in starting
the second-phase reviews because of a number of factors, such as when
facilities commenced lending activities as well as efforts to sequence the
reviews to better assist collaboration with Reserve Banks and effective
use of RBOPS resources. As a result, RBOPS did not begin reviews of
any facilities within 45 days after a facility was established. At the time of
our review, RBOPS had completed second-phase reviews for the Primary
Dealer Credit Facility and Commercial Paper Funding Facility and
provided us with the results and supporting documentation.
As part of the reviews, RBOPS interviewed Reserve Bank officials and
communicated its expectations of Reserve Bank management. For
example, RBOPS sent a memorandum to the first vice presidents of the
Reserve Banks setting forth its expectations of actions each Reserve
Bank would need to take to facilitate the bank’s oversight and reviews. As
they implement the facilities, Reserve Banks are expected to comply with
applicable policies and controls and to continually mature them to ensure
a high level of accountability. Additionally, RBOPS evaluated controls
documented in the facilities’ business process narratives, and it assessed
the effect of instances in which a Reserve Bank or vendor noted that it
mistakenly did not follow applicable policies or procedures.
At the conclusion of each facility’s review, RBOPS summarized any
control design gaps it identified and communicated its findings and
recommendations for remediation to Reserve Bank management.
RBOPS identified gaps in the design of controls for the Primary Dealer
Credit Facility and did not identify any gaps for the Commercial Paper
Funding Facility. RBOPS determined that the design of the controls for
both facilities would provide reasonable assurance that facilities’
operations are conducted effectively. According to RBOPS officials, the
results of the phase two reviews will provide a basis for reassessing risk
in the phase three reviews and inform the ongoing monitoring of the
facilities.
Page 23 GAO-21-180 Federal Reserve Facilities
The COVID-19 pandemic disrupted financial markets, including corporate
Conditions in bond markets and short-term corporate credit markets. In response, the
Corporate Credit Federal Reserve reinstated previously used emergency lending facilities
to stabilize these credit markets. Since then, corporate credit markets
Markets Have have generally stabilized, with rates moderating since the COVID-19-
Improved, and the related disruptions in March and April 2020. Corporate bond issuances
have also increased and, from March through September, companies
Corporate Credit nearly doubled the amount of corporate bonds issued in 2020 compared
Facilities Have Had to the same period in 2019. The corporate credit facilities have had
limited activity, but they likely were a factor in restoring confidence among
Relatively Limited market participants.
Activity
Short-Term Corporate After the onset of market stress caused by the COVID-19 pandemic and
Credit Markets Have the Federal Reserve’s implementation of emergency lending facilities in
March and April 2020, short-term corporate credit markets stabilized. 25 In
Improved Since the Onset
March 2020, the Federal Reserve had responded to market disruptions
of the COVID-19 from the COVID-19 pandemic by taking a number of measures, including
Pandemic establishing emergency lending facilities. 26 The Federal Reserve
announced that it was reinstating three emergency lending facilities that
had previously been active from 2008 to 2010: the Primary Dealer Credit
Facility, the Commercial Paper Funding Facility, and the Money Market
Mutual Fund Liquidity Facility. 27 Each of these facilities is intended to
provide liquidity to short-term financial markets such as the commercial
paper market and prime money market funds. By August, spreads in the
commercial paper market declined while issuances and outstanding
balances decreased and outflows from prime money market funds
25Corporations use short-term corporate credit markets to issue debt such as commercial
paper to meet short-term funding needs such as making payroll. Because of short
maturities, many businesses must frequently issue new short-term debt to pay off expiring
debt.
26In addition to establishing lending facilities, the Federal Reserve took regulatory and
monetary policy actions to support the flow of credit to households, businesses, and the
U.S. economy.
27The Primary Dealer Credit Facility differs from the 2008 version of the facility, most
notably in that it allows loans up to 90 days, while the 2008 version of the facility offered
only overnight loans. The Money Market Mutual Fund Liquidity Facility is very similar in
structure to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility that operated from 2008 to 2010, but it accepts a broader range of assets.
Page 24 GAO-21-180 Federal Reserve Facilities
reversed, indicating improved credit conditions for short-term funding for
large businesses. 28
Commercial Paper During the COVID-19-related market stress in March 2020, the cost of
issuing commercial paper rose as investors grew reluctant to buy new
commercial paper. (See sidebar for an explanation of commercial paper.)
Commercial Paper
Credit spreads are financial market indicators that compare the yield of a
Commercial paper is short-term debt issued
primarily by corporations. The commercial financial security to the yield of a benchmark security, such as a Treasury
paper market is an important source of short- security. Spreads are measures of price and reflect the premium that
term credit for a range of financial and non-
financial businesses that may rely on it to
borrowers must pay to compensate lenders for taking on the risk of loss
make payroll or for other short-term funding due to default and for forgoing investments in more liquid assets.
needs. Municipalities can also issue
commercial paper for short-term funding
needs, and asset-backed commercial paper When the Federal Reserve announced the Commercial Paper Funding
finances certain consumer loans such as auto Facility on March 17, 2020, the spread between high-rated (that is,
loans. Because commercial paper involves
short maturities, many businesses must investment grade) commercial paper and the benchmark rate was 152
frequently issue new commercial paper to pay basis points, while the spread between lower-rated (that is, non-
off expiring commercial paper.
investment grade) commercial paper and the benchmark rate was 240
Source: Congressional Research Service. | GAO-21-180
basis points. 29 By comparison, spreads on both high-rated and lower-
rated commercial paper were below 54 basis points during the pre-
pandemic period. Since March 17, 2020, spreads on commercial paper
have declined, and as of September 2020, spreads had returned to their
pre-pandemic levels (see fig. 3).
28Spreads are the difference in yields between a security (such as commercial paper) and
a safer asset (such as a Treasury security) with similar timing of interest and principal
payments.
29One basis point is equal to 1/100th of 1 percent. Spreads are the difference between the
commercial paper rate and the overnight indexed swap of the same maturity. High-rated
commercial paper is commercial paper with at least one “1” or “1+” rating, but no ratings
other than “1,” according to the rating agencies Moody’s or Standard & Poor’s.
Page 25 GAO-21-180 Federal Reserve Facilities
Figure 3: Spreads on 90-day Commercial Paper for Large Nonfinancial Businesses, January 2020–September 2020
Notes: An AA rating is for issuers with at least one “1” or “1+” rating, but no ratings other than “1,”
according to the rating agencies Moody’s or Standard & Poor’s. An A2/P2 rating is for issuers with at
least one “2” rating, but no ratings other than “2.” A line is broken if there are no data for the category
on that date. A basis point is 1/100th of a percentage point. The spread is the difference between the
commercial paper rate and the overnight indexed swap of the same maturity.
The chart is for large nonfinancial businesses, and the movements of the spreads are similar for
commercial paper issued by large financial businesses.
Issuances of commercial paper from January through August 2020
generally declined compared to the same period in 2019 (see fig. 4).
Issuances especially declined for lower-rated commercial paper as
COVID-19 began to stress markets in March. Lower-rated issuances in
January through August 2020 were 42 percent lower than in the same
period in 2019. As of September 2020, net flows of commercial paper
among large nonfinancial businesses were down 45 percent from their
January 2020 level, suggesting that large nonfinancial businesses may
have been facing challenges refinancing their short-term unsecured debt
as a result of the uncertainty associated with COVID-19. However,
reduced issuances and balances of commercial paper may also indicate
that businesses have shifted away from short-term financing in the
Page 26 GAO-21-180 Federal Reserve Facilities
commercial paper market in favor of longer-term financing in the
corporate bond market, as discussed later in this report. 30
Figure 4: Cumulative Issuances of Commercial Paper for Large Nonfinancial
Businesses, January–August, 2019 and 2020
Note: An AA is for issuers with at least one “1” or “1+” rating, but no ratings other than “1,” according
to the rating agencies Moody’s or Standard & Poor’s. An A2/P2 is for issuers with at least one “2”
rating, but no ratings other than “2.” The issuances of commercial paper include both domestic and
foreign issues, and all other issues (including unknown domicile or industry of issuers).
Prime Money Market Funds Prime money market funds experienced net outflows—that is, investors
withdrew more money overall from the funds than they added—as
Prime Money Market Funds
A money market fund is a type of mutual fund
investors withdrew money during the COVID-19-related market stress in
that is required by law to invest in low-risk March 2020. (See sidebar for an explanation of prime money market
securities. Money market funds act as funds.) Prime money market assets under management declined 12
intermediaries between investors seeking
highly liquid, safe investments and corporate percent in March compared to their January level. The Federal Reserve
and government entities that issue short-term announced the Money Market Mutual Fund Liquidity Facility on March 18,
debt to fund operations. Prime money market
funds, one category of money market funds,
2020, to assist money market funds in meeting demands for redemptions
primarily invest in short-term corporate and by investors and to foster liquidity in markets for the assets typically held
bank debt such as commercial paper, though by money market funds.
they may also hold U.S. government-backed
securities such as U.S. Treasury securities.
Source: GAO. | GAO-21-180
30Outstanding balances for commercial paper of asset-backed securities, financial issuers,
and all other issuers decreased by 5, 31, and 1 percent, respectively, from January to
September 2020.
Page 27 GAO-21-180 Federal Reserve Facilities
By August 2020, prime money market assets under management had
rebounded to their January level (see fig. 5). During this period, prime
money market funds reduced their holdings of commercial paper—
particularly unsecured commercial paper—while increasing their holdings
of government-backed securities. 31 Because government-backed
securities are considered safer than commercial paper, this shift may
indicate that prime money market fund managers and investors perceived
increased uncertainty in the commercial paper market (see previous
discussion).
Figure 5: Net Flows of Prime Money Market Funds, January 2020–August 2020
Note: The chart shows cumulative percentage net flows of money market funds outstanding since
January 2020. The total value of prime money market funds outstanding in January 2020 was $1.1
trillion.
The Commercial Paper Funding Facility and Money Market Mutual Fund
Liquidity Facility were most active shortly after they became operational in
March and April 2020, when disruptions in credit markets were most
pronounced, and the latter was designed to work in concert with the
31The prime money market funds also invest in certificates of deposit, asset-backed
commercial paper, and other instruments.
Page 28 GAO-21-180 Federal Reserve Facilities
former. 32 The Primary Dealer Credit Facility was also most active during
this period. The Federal Reserve established this facility to make loans to
primary dealers in exchange for a wide range of collateral, including
Treasury securities, corporate bonds, commercial paper, and asset-
backed securities. 33 As of November 15, 2020, more than 90 percent of
the total transaction volume conducted, or total dollar amount of loans
made or assets purchased, by these three facilities had occurred before
May 15 (see table 4). As markets became more stable, activity in these
facilities sharply declined.
Table 4: Transaction Volume for the Primary Dealer Credit Facility, Commercial
Paper Funding Facility, and Money Market Mutual Fund Liquidity Facility, March
2020–November 2020
Facility transaction volume ($ in millions)
Primary Dealer Commercial Paper Money Market Mutual
Credit Facility Funding Facility Fund Liquidity
(operational (operational Facility (operational
Date (2020) March 20) April 14) March 23)
Before Apr. 15 83,470 947 57,714
Apr. 16–May 15 34,935 3,295 297
May 16–June 15 6,488 0 0
June 16–July 15 2,128 30 0
July 16–Aug. 15 1,796 0 0
Aug. 16–Sept. 15 725 0 0
Sept. 16–Oct. 15 288 0 0
Oct. 16–Nov. 15 400 0 0
Total 130,230 4,272 58,012
Source: GAO analysis of Board of Governors of the Federal Reserve System data | GAO-21-180
Note: Monthly volumes may not sum to total due to rounding.
32By allowing issuers to buy back outstanding commercial paper and re-issue it using the
Commercial Paper Funding Facility, the facility reduces the strain placed on money
market funds invested in commercial paper. At the same time, by providing liquidity
support to money market funds, the Money Market Mutual Fund Liquidity Facility mitigates
the risk that money market funds would be forced to sell commercial paper into an illiquid
market, preventing further market disruption.
33Primary dealers are a group of banks and broker-dealers designated by the Federal
Reserve Bank of New York to serve as trading counterparties in the implementation of
monetary policy. As of October 29, 2020, there were 24 primary dealers.
Page 29 GAO-21-180 Federal Reserve Facilities
Conditions in the Corporate bond spreads have improved (declined) since the onset of
Corporate Bond Market disruptions to the corporate bond market resulting from the COVID-19
pandemic. In response to the disruptions, in March 2020, the Federal
Have Generally Improved
Reserve announced the Primary Market Corporate Credit Facility and
and Corporate Credit Secondary Market Corporate Credit Facility to support the flow of credit to
Facilities Have Had companies. It also established the Term Asset-Backed Securities Loan
Limited Activity Facility to support the flow of credit to consumers and businesses,
because, compared with 2019, the reduction in issuances of asset-
backed securities since February 2020 suggested that the market was
uncertain about households’ ability to make payments on their loans.
Overall, the facilities have had limited activity relative to their capacity.
Corporate Bond Market The corporate bond market was disrupted in March 2020 during the onset
of the COVID-19 pandemic. (See sidebar for an explanation of corporate
bonds.) Bonds became more expensive to issue as investors had lower
Corporate Bonds
confidence in large companies’ ability to repay their debts. On March 23,
In the corporate bond market, large
2020, spreads on investment grade corporate bonds exceeded 350 basis
companies issue and sell bonds to investors points—350 basis points higher than the benchmark interest rate—and
in exchange for cash. Bond investors function spreads on non-investment grade corporate bonds exceeded 1000 basis
as lenders who generally receive payments of
principal plus interest over a period of time. points. 34 By comparison, those spreads were under 200 basis points and
The borrowing cost and liquidity for under 534 basis points, respectively, in the pre-pandemic period.
companies that issue corporate bonds are
largely determined by credit ratings, which are
assigned by credit rating agencies and In the months since the COVID-19-related market stress and the Federal
intended to indicate the companies’
investment risks and payment capabilities.
Reserve’s announcement of emergency lending facilities in March 2020,
Bonds rated above a certain threshold are corporate bond spreads have moderated. Since March 23, 2020, spreads
called investment grade bonds. on corporate bonds have declined, and as of September 2020 were under
Source: Congressional Research Service. | GAO-21-180
150 basis points for investment grade bonds and 600 basis points for
non-investment grade bonds (see fig. 6). However, the spreads are still
elevated relative to those in January 2020, suggesting that stress in
corporate bond markets has not fully abated and concerns about default
risk persist, especially for non-investment grade bonds.
34Option-adjusted spreads on dollar-denominated investment grade and non-investment
grade bonds are available through Bloomberg’s Fixed Income Credit Monitoring.
Page 30 GAO-21-180 Federal Reserve Facilities
Figure 6: Spreads on Corporate Bonds, January 2020–September 2020
Note: Option-adjusted spreads on dollar-denominated investment grade and non-investment grade
bonds are available through Bloomberg’s Fixed Income Credit Monitoring. A basis point is 1/100th of
a percentage point.
Issuances of non-investment grade corporate bonds in 2020 are 57
percent higher than in 2019 (January to September), and issuances of
investment grade corporate bonds are 72 percent higher than the same
period in 2019 (see fig. 7). Increased issuances of investment grade
corporate bonds demonstrate that highly rated issuers have access to
longer-term credit in the private marketplace. Additionally, companies
may be issuing debt to replace the decline in their revenues due to the
pandemic, may be shifting from short-term debt to longer-term debt to
reduce uncertainty, or may be refinancing existing debt ahead of
schedule to take advantage of low overall interest rates.
Page 31 GAO-21-180 Federal Reserve Facilities
Figure 7: Cumulative Issuances of Corporate Bonds, January–September, 2019 and
2020
Note: Figure excludes all issuances with maturities of 1 year or less and certificates of deposit.
Asset-Backed Securities Issuances of asset-backed securities declined during the COVID-19
pandemic, compared to 2019. (See sidebar for an explanation of asset-
Asset-Backed Securities backed securities.) Total asset-backed security issuances from March to
Asset-backed securities are tradable September 2020 fell below those of the same period in 2019, with some
securities backed by pools of assets, such as
loans, leases, or other cash-flow producing sectors seeing very few issuances.
assets. The holders of asset-backed
securities are entitled to payments that are In light of the disruptions, the Federal Reserve re-activated the Term
distributed by the underlying assets. Common
underlying assets for asset-backed securities Asset-Backed Securities Loan Facility that it had previously used from
include auto loans and leases, credit card 2008 to 2010. The facility, which is intended to enable the issuance of
loans, student loans, insurance premiums,
commercial mortgages, and small business asset-backed securities and therefore encourage lending to consumers
loans guaranteed by the Small Business and businesses, was announced on March 23, 2020, and became active
Administration. Well-functioning markets for
asset-backed securities benefit borrowers—
on June 17, 2020. From January to September 2020, total issuances of
who may gain access to funds with more asset-backed securities were $179 billion, which is 73 percent of the $247
favorable terms—and lenders, who may better billion total issuances in the same period in 2019 (see fig. 8). Credit card
manage their capital and diversify their
income streams. loans had the largest decrease of 91 percent. The ongoing reduction in
Source: GAO. | GAO-21-180 issuances of asset-backed securities since February, compared with
2019, suggests that the market is uncertain about households’ ability to
make payments on their loans.
Page 32 GAO-21-180 Federal Reserve Facilities
Figure 8: Cumulative Issuances of Asset-Backed Securities, January–September,
2019 and 2020
The corporate credit facilities have had limited activity relative to their
capacity. Combined, the two facilities conducted transactions totaling less
than 2 percent of their maximum capacity of $750 billion, as of November
15, 2020. 35 The Secondary Market Corporate Credit Facility was active in
the months after it was launched in May 2020, but the pace of purchases
has slowed substantially since July 2020. As of November 15, 2020, more
than 80 percent of the facility’s total transaction volume of $13.6 billion
had occurred before July 15, 2020.
The facility’s pace of corporate bond purchases—which are made in the
secondary market from various bond holders and not from bond issuers—
is determined by an array of measures of bond market functioning. If
these measures indicate sustained improvement in market functioning,
purchases can slow notably or pause entirely. Officials told us that
Federal Reserve Bank of New York staff with relevant market expertise
determined how the pace of purchases would relate to measures of bond
35The Federal Reserve announced that the corporate credit facilities would purchase a
maximum combined amount of $750 billion in bonds, bond exchange-traded funds, and
syndicated loans. As of November 15, 2020, the corporate credit facilities had conducted
a total of $13.6 billion in transactions.
Page 33 GAO-21-180 Federal Reserve Facilities
market functioning. They said staff receive daily updates on measures of
bond market functioning from the facility’s investment manager.
The Primary Market Corporate Credit Facility had not recorded a
transaction as of November 15, 2020. The absence of transactions in the
Primary Market Corporate Credit Facility is consistent with the narrowing
of bond spreads and decreased distress in the bond market. Federal
Reserve facilities are intended as a backstop, providing relief in times of
market stress, but they are not expected to be used under normal
conditions since the facilities charge above-market rates. 36 Federal
Reserve officials stated that the creation of emergency lending facilities
as a backstop ideally improves market conditions by restoring the
confidence of market participants, causing the facilities’ capacity to be
largely unused unless conditions worsen.
Officials also said that improvements in corporate bond market function
demonstrated the positive effect of the facilities’ announcement.
Corporate bond spreads fell in the weeks after the Federal Reserve
announced the corporate credit facilities on March 23, then fell again in
the weeks after the Federal Reserve announced the expansion of the
corporate credit facilities on April 9. 37 One research economist who
specializes in credit markets told us that the corporate credit facilities
have been very effective because they reassured market participants and
prevented forced sales. Although it is difficult to isolate the impact of the
facilities’ announcement and purchases from the impact of other
interventions by the Federal Reserve and Congress, some studies have
suggested that the facilities’ announcements and purchases likely helped
to rally the corporate bond market. 38
36Under the Federal Reserve’s Regulation A, emergency lending facilities must charge an
interest rate that is a premium to the market rate in normal circumstances. 12 C.F.R. §
201.4(d)(7).
37The change announced on April 9, 2020, expanded the corporate credit facilities to a
maximum combined size of $750 billion backed by a $75 billion equity investment from
Treasury’s ESF. Previously, the Federal Reserve had announced that the corporate credit
facilities, together with the Term Asset-Backed Securities Loan Facility, would provide up
to $300 billion in financing backed by $30 billion in equity from Treasury’s ESF.
38See, for example, Nina Boyarchenko, Anna Kovner, and Or Shachar, It’s What You Say
and What You Buy: A Holistic Evaluation of the Corporate Credit Facilities, Federal
Reserve Bank of New York Staff Reports, no. 935, July 2020. See also, Simon Gilchrist,
Bin Wei, Vivian Z. Yue, and Egon Zakrajsek, “The Fed Takes on Corporate Credit Risk:
An Analysis of the Efficacy of the SMCCF,” NBER Working Paper Series, No. 27809,
September 2020, http://www.nber.org/papers/w27809.
Page 34 GAO-21-180 Federal Reserve Facilities
Through November 15, 2020, the Term Asset-Backed Securities Loan
Facility had its highest level of transaction volumes in the 2 months after it
became operational in June 2020 (see table 5). Transactions were
concentrated in securities backed by commercial mortgages and by small
business loans guaranteed by the Small Business Administration (SBA).
As discussed above, overall issuances of asset-backed securities have
declined substantially from January to September 2020, compared to the
same period in 2019.
Table 5: Transaction Volume in the Primary and Secondary Market Corporate Credit
Facilities and Term Asset-Backed Securities Loan Facility, March 2020–November
2020
Facility transaction volume ($ in millions)
Primary Market Secondary Market Term Asset-Backed
Corporate Credit Corporate Credit Securities Loan
Facility Facility Facility
(operational (operational (operational
Date (2020) June 29) May 12) June 17)
Before Apr. 15 - - -
Apr. 16–May 15 - 637 -
May 16–June 15 - 5,280 -
June 16–July 15 0 5,247 937
July 16–Aug. 15 0 989 1,329
Aug. 16–Sep. 15 0 542 383
Sep. 16–Oct. 15 0 453 593
Oct. 16–Nov. 15 0 432 639
Total 0 13,579 3,880
Source: GAO analysis of Board of Governors of the Federal Reserve System data | GAO-21-180
Note: Monthly volumes may not sum to total due to rounding.
Municipal Credit
Markets Have
Improved, but State
and Local
Governments
Continue to Face
Fiscal Challenges
Page 35 GAO-21-180 Federal Reserve Facilities
Municipal Credit Markets COVID-19 caused deteriorating conditions in municipal credit markets,
Were Significantly Affected such as the municipal bond market and the related market for municipal
variable rate demand notes (VRDN). Municipal bonds are debt
by COVID-19 and Have
instruments that state and local governments issue to finance
Since Improved, but transportation, housing, hospitals, education, and other diverse projects.
Concerns Remain Municipal bond spreads rose from pre-pandemic levels below 0 basis
points to a high of 276 basis points on March 23, 2020, as institutional
investors sold off municipal securities holdings. 39 VRDNs are long-term
municipal securities that are payable on demand and accrue interest
based on the prevailing money market rate—effectively making VRDNs
short-term duration assets. VRDNs are the most commonly held type of
asset in municipal money market funds. 40 The SIFMA municipal swap
index of rates—a commonly used benchmark rate for VRDNs—more than
quadrupled from March 11, 2020, to March 18, 2020, indicating a
disruption in the VRDN market.
The Federal Reserve established the Municipal Liquidity Facility to
enhance the liquidity of the short-term municipal securities market and
help restore confidence in the municipal securities market. The Municipal
Liquidity Facility purchases short-term municipal securities—for example,
tax anticipation notes, which are short-term debt instruments to be paid
from specific taxes due in the near future—from eligible states, cities,
counties, or multi-state entities. 41 Although the facility limits purchases to
short-term securities typically used for cash management, Federal
Reserve officials have said that the facility is intended to encourage
investors to participate in the municipal securities market more broadly
39Spreads on municipal bonds are calculated relative to interest rates on Treasury
securities based on the Bloomberg-Barclays Municipal Bond Index and are measured in
basis points (1/100th of a percentage point). Spreads measure the premium borrowers
must pay to compensate lenders for taking on the risk of loss due to default and for
forgoing investments in more liquid assets. Higher spreads reflect higher perceived risk
among municipal borrowers by investors. A negative municipal spread has been prevalent
historically, especially before the 2007–2009 financial crisis. The federal tax exemption of
interest on municipal bonds (and state tax exemption for in-state bonds) and the
perception of relatively low risk of these bonds could enable state and local governments
to obtain financing at rates lower than Treasury securities on a before-tax basis.
40Municipal money market funds include other assets.
41Eligible states are U.S. states and the District of Columbia. Eligible cities and counties
are U.S. cities and counties with a population exceeding 250,000 residents and 500,000
residents, respectively. State governors can also designate a limited number of cities,
counties, or revenue bond issuers within their state as eligible. Revenue bond issuers are
entities affiliated with state or local governments that issue bonds secured by revenue
from a specified government-owned source. Borrowers must also meet credit rating
requirements to be eligible.
Page 36 GAO-21-180 Federal Reserve Facilities
and to support overall municipal market functioning. The Municipal
Liquidity facility was announced on April 9, 2020, and became operational
on May 26, 2020.
Conditions in the municipal bond market improved after March 2020.
Spreads on municipal bonds have stabilized since the market disruptions
in March and April, falling from a high of 276 basis points to levels around
60 basis points in September 2020, suggesting that perceived risk among
municipal issuers has fallen and access to credit for state and local
governments has improved (see fig. 9). While spreads remain above pre-
pandemic levels, this may reflect very low interest rates on Treasury
securities rather than an absence of demand for municipal bonds.
Moreover, spreads are likely to be affected by other factors, including the
uncertainty surrounding whether Congress will extend aid to help
governments manage loss of tax revenues and increased expenditures
related to the pandemic. Issuances of municipal bonds have increased in
2020, compared to the same period in 2019—especially for revenue
bonds, compared with general obligation bonds. 42
42Municipal bonds can be classified as either general obligation bonds or revenue bonds.
General obligation bonds are backed by general revenues of the issuing municipality,
while revenue bonds are repaid from the revenue generated by the specific project the
bonds paid for, such as income from a toll road.
Page 37 GAO-21-180 Federal Reserve Facilities
Figure 9: Spreads on Municipal Bonds, January 2020–September 2020
Note: Spreads on municipal bonds are calculated relative to interest rates on Treasury securities
based on the Bloomberg-Barclays Municipal Bond Index and are measured in basis points (1/100th of
a percentage point).
VRDN market conditions have also improved since the market disruptions
in March. After the SIFMA municipal swap index of rates more than
quadrupled from March 11, 2020, to March 18, 2020, rising to 5.2
percent, it returned to pre-pandemic levels by early April (see fig. 10).
Outflows of VRDNs in March reduced in August. As of September 30,
2020, the SIFMA municipal swap index of rates had been near zero since
May, but outflows in August 2020 were 8 percent, indicating that the
VRDN market had not fully recovered. On March 23, 2020, the Federal
Reserve announced it was adding VRDNs to the list of eligible collateral
for the Money Market Mutual Fund Liquidity Facility, and this likely played
a role in the VRDN market’s recovery. 43 Officials from associations
representing state and local government finance professionals told us that
the move created demand for VRDNs and was greatly welcomed by
market participants.
43On March 23, 2020, the Federal Reserve expanded the list of eligible securities for the
Commercial Paper Funding Facility to include high-quality, tax-exempt commercial paper.
Page 38 GAO-21-180 Federal Reserve Facilities
Figure 10: Municipal Swap Index of Rates on Tax-Exempt Variable Rate Demand
Notes, January 2020–September 2020
Note: The index is a weekly non-weighted average of the reset rates of high-grade tax-exempt
variable rate demand notes.
Use of the Municipal As of November 15, 2020, the Municipal Liquidity Facility had completed
Liquidity Facility Has Been two transactions with a total loan value of $1.65 billion. 44 This represents
Limited and Many State less than half of 1 percent of the facility’s ability to purchase up to $500
billion of eligible notes. Officials from associations representing state and
and Local Governments local finance professionals told us that city and county governments
Cannot Fund Operations below the population size requirements cannot obtain loans through the
Using Debt facility unless they can borrow through their state government, which may
not be willing to borrow on behalf of city and county governments as that
may expose the states to additional risk. They also told us that their
members are currently able to obtain lower rates for loans in the
marketplace compared to the facility’s rates. As previously mentioned, the
Federal Reserve’s Regulation A requires emergency lending facilities to
charge an interest rate higher than the market rate in normal
circumstances. On August 11, 2020, the Federal Reserve lowered the
44The Municipal Liquidity Facility purchased $1.2 billion of notes from the State of Illinois
and $0.45 billion of notes from New York’s Metropolitan Transportation Authority.
Page 39 GAO-21-180 Federal Reserve Facilities
interest rates that the Municipal Liquidity Facility requires, allowing
borrowers to access the facility at a lower rate than originally announced.
Federal Reserve officials have said that the Federal Reserve does not
measure the success of the Municipal Liquidity Facility based on its
transaction volume, but rather on the condition of the municipal securities
market and state and local government access to capital. As discussed
above, conditions in the municipal bond market have improved since the
COVID-19-related disruption in March and April 2020. On September 22,
2020, the Chair of the Federal Reserve Board testified that the Municipal
Liquidity Facility has contributed to a strong recovery in municipal
securities markets, with municipal issuers with a wide range of types,
sizes, and ratings able to issue bonds with interest rates at or near
historical lows. 45
Although conditions in municipal bond markets have improved, state and
local governments face pressing budgetary challenges due to increased
expenditures and decreased revenues stemming from COVID-19 and the
resulting economic downturn. Specifically, state and local governments
faced disruptions in the timing of revenues and expenditures, which has
affected their budgets. For example, the majority of states extended their
individual income tax filing deadlines to match the Internal Revenue
Service’s July 15 extended deadline for filing federal income tax returns,
which delayed state and local government income tax revenues for 3
months. State and local governments have taken actions to respond to
these challenges such as freezing hiring efforts, furloughing staff,
restricting contracts and new spending, and freezing discretionary
spending. Additionally, a number of states have used their reserve funds
to balance budgets for fiscal year 2020.
Small Businesses
Face Credit
Challenges and, to
Date, the Main Street
Facilities Have Had
Limited Participation
45Jerome Powell, testimony before the House Committee on Financial Services,
September 22, 2020.
Page 40 GAO-21-180 Federal Reserve Facilities
Small Businesses Small businesses have been particularly vulnerable to large and
Generally Face a Lack of sustained losses of revenue resulting from COVID-19, and they generally
lack available funding in the credit market. Of particular concern are the
Available Funding in the
effects the pandemic is having and will likely continue to have on small
Credit Market businesses as they endure the direct impacts of social distancing
directives, including temporary closures and modified operations. With
declining revenues, many small businesses have had to lay off
employees.
Before the pandemic, small businesses were generally financially fragile,
and they were therefore vulnerable to the large and sustained loss of
revenue the pandemic has caused. For example, according to the
Federal Reserve Banks’ 2020 Small Business Credit Survey, 88 percent
of small business owners typically rely on their personal credit score to
secure financing, and 56 percent of all small business owners have relied
on funds from their personal savings, friends, or family to support
operations in the past 5 years. 46 Additionally, 47 percent stated that they
would rely on personal funds if they needed to fill a 2-month gap in
revenues. Further, among small businesses that applied for financing in
the prior 12 months, 46 percent stated that they would plan to take out
additional debt. According to another study, at the onset of the pandemic,
approximately 75 percent of small businesses surveyed did not have
enough cash on hand to cover more than 2 months of expenses. 47
The Federal Reserve has taken measures to support the flow of credit to
small businesses. Specifically, to provide liquidity to financial institutions
participating in SBA’s PPP, it authorized each of the 12 Federal Reserve
Banks to establish and operate the Paycheck Protection Program
Liquidity Facility to extend credit on a nonrecourse basis to eligible
financial institutions that originate PPP loans, taking the loans as
46Federal Reserve Banks of Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City,
Minneapolis, New York, Philadelphia, Richmond, St. Louis, and San Francisco, Small
Business Credit Survey: 2020 Report on Employer Firms (New York, NY: 2020). The
survey was conducted in the third and fourth quarters of 2019, with 5,514 responses from
small employer businesses with fewer than 500 full or part-time employees in the 50
states and the District of Columbia.
47See Alexander W. Bartik et al., “The Impact of COVID-19 on Small Business Outcomes
and Expectations,” Proceedings of the National Academy of Sciences of the United States
of America, vol. 117, no. 30 (July 28, 2020).The study was based on more than 5,800
small businesses that are members of Alignable, a network of 4.6 million small
businesses. The survey was conducted from March 28 through April 4, 2020.
Page 41 GAO-21-180 Federal Reserve Facilities
collateral. 48 The facility is not a CARES Act facility because it does not
receive funding from the CARES Act, but it was created to support the
PPP—a CARES Act program. Since establishment of the facility, the
Federal Reserve has expanded access to all SBA-qualified lenders of the
program.
The Federal Reserve also established the Main Street Lending Program
to support lending to small and mid-sized for-profit businesses and
nonprofit organizations that were in sound financial condition before the
onset of COVID-19. Small businesses in particular are generally
dependent on bank lending for credit because they are too small to raise
capital in bond markets directly. The Main Street Lending Program
consists of five different facilities—the Main Street New Loan Facility,
Main Street Expanded Loan Facility, Main Street Priority Loan Facility,
Nonprofit Organization New Loan Facility, and Nonprofit Organization
Expanded Loan Facility. Loans issued under the program are recourse
loans and have a 5-year maturity, deferral of principal payments for 2
years, and deferral of interest payments for 1 year. Additionally, the
minimum loan amount for most Main Street facilities is $100,000. 49
Small business owners, however, continue to expect unfavorable credit
conditions. According to quarterly surveys of small and independent
business owners conducted by the National Federation of Independent
Businesses, in July 2020, small business owners expected credit
conditions would be unfavorable in the next 3 months (that is, in the third
quarter of 2020). Specifically, although expectations improved from the
previous quarter, there were more owners reporting it would be harder to
obtain credit than those reporting it would be easier (see fig. 11).
However, the number of owners reporting their borrowing needs were
48The Paycheck Protection Program closed to new applicants on August 8, 2020, and as
of that date, lenders had made over 5.2 million loans totaling more than $525 billion. The
CARES Act and the Paycheck Protection Program and Health Care Enhancement Act
appropriated a total of $670 billion for PPP under SBA’s largest guaranteed loan program,
its 7(a) small business lending program. PPP loans, made by lenders but guaranteed 100
percent by SBA, are low interest (1 percent) and fully forgivable if certain conditions are
met, such as using a minimum percentage of the loan forgiveness amount for payroll
costs.
49On October 30, 2020, the Federal Reserve lowered the minimum loan amount for most
Main Street facilities from $250,000 to $100,000. The Main Street Expanded Loan Facility
and Nonprofit Organization Expanded Loan Facility have a minimum loan requirement of
$10 million.
Page 42 GAO-21-180 Federal Reserve Facilities
satisfied in the previous 3 months compared to those reporting they were
not met increased from the first to second quarter of 2020.
Figure 11: Small Businesses’ Views on Credit Conditions, January 2019–July 2020
Note: Data are based on quarterly surveys of a sample of the National Federation of Independent
Business’ membership. Borrowing needs satisfied reflects the net percent (“satisfied” minus “not
satisfied”) of borrowers in the last 3 months. Expected credit conditions reflects the net percent
(“easier” minus “harder”) of borrowers during the next 3 months. For information on the number of
owners surveyed, see William C. Dunkelberg and Holly Wade, NFIB Small Business Economic
Trends, Quarterly Report (July 2020). The Main Street for-profit lending facilities consist of the Main
Street New Loan Facility, the Main Street Expanded Loan Facility, and the Main Street Priority Loan
Facility (which was announced on April 30, 2020).
Bank underwriting standards have also tightened. Underwriting standards
on small business loans measure the selectivity of lenders in determining
to which small business borrowers they should extend credit. Changes in
these underwriting standards over time can provide a general indication
of changes in credit conditions facing small business borrowers.
Underwriting standards tighten as perceived economic risk increases—
Page 43 GAO-21-180 Federal Reserve Facilities
that is, lenders focus on high-quality borrowers as the economy
weakens—and loosen as perceived economic risk falls.
Based on responses to the Federal Reserve’s Senior Loan Officer
Opinion Survey for the third quarter of 2020, banks have tightened their
credit standards and terms on commercial and industrial loans to small
businesses (see fig. 12). 50 According to the survey, banks cited a less
favorable or more uncertain economic outlook, worsening industry-
specific problems, and reduced tolerance for risks as reasons for
tightening lending standards or terms. Additionally, banks continued to
increase spreads of loan rates over banks’ costs of funds. Increased loan
spreads indicate that banks are instituting a larger difference between the
interest rates they charge on loans and the interest rate paid to depositors
on financial products, such as savings accounts.
50In this survey, small businesses are defined as those with annual sales of less than $50
million. Based on the timing of survey completion, each quarter of the survey generally
corresponds to the previous quarter. For example, the third quarter of 2020 of the survey
generally corresponds to the second quarter of 2020. The latest survey covers the
previous 3 months, which generally corresponds to the second quarter of 2020.
Respondent banks received the survey on June 22, 2020, and responses were due by
July 2, 2020.
Page 44 GAO-21-180 Federal Reserve Facilities
Figure 12: Banks’ Lending Conditions for Small Business Loans: First Quarter
2018–Third Quarter 2020
Note: We report results from the Federal Reserve’s Senior Loan Officer Opinion Survey measured as
the “net percentage” of banks tightening underwriting standards on commercial and industrial loans—
that is, the percent of banks reporting that they have tightened standards minus the percent of banks
reporting that they have loosened standards. A positive number indicates that more banks are
tightening rather than loosening standards. Similarly, loan spreads also reflect the “net percentage” of
banks increasing spreads of loan rates over banks’ cost of funds. Based on the timing of survey
completion, each quarter of the survey generally corresponds to the past quarter. For example, the
third quarter of 2020 of the survey corresponds to the second quarter of 2020. For information on the
number of respondent banks surveyed, see
https://www.federalreserve.gov/data/sloos/sloos-202007.htm, accessed August 3, 2020. The Main
Street for-profit lending facilities consist of the Main Street New Loan Facility, the Main Street
Expanded Loan Facility, and the Main Street Priority Loan Facility (which was announced on April 30,
2020).
Additionally, the Federal Reserve Bank of Kansas City’s Small Business
Lending Survey, which contains quantitative and qualitative information
on credit market conditions for bank lending to small businesses, showed
similar trends. 51 According to the survey’s September 2020 release, 48
percent of respondents reported a change in credit standards in the
51The Small Business Lending Survey is a survey of domestically chartered commercial
banks. For this survey, a small business loan is defined as a loan made to a firm with $5
million or less in annual gross revenue.
Page 45 GAO-21-180 Federal Reserve Facilities
second quarter of 2020, up about 23 percentage points from the first
quarter. Of banks indicating a change in credit standards, 44 percent on
net—the percent of banks reporting that they have tightened credit
standards minus the percent of banks reporting that they have loosened
credit standards—reported tightening their credit standards, an increase
of about 26 percentage points from the previous quarter. Additionally,
respondents indicated that collateral requirements increased, especially
the use of interest rate floors and loan covenants. Respondents who
reported tightening credit standards or loan terms in the second quarter
cited a less favorable or more uncertain economic outlook and worsening
industry specific problems. Lastly, according to the survey, outstanding
balances on small business commercial and industrial loans increased
significantly—about 70 percent in the second quarter of 2020 compared
to the same quarter of the previous year—driven primarily by loans
related to SBA’s Paycheck Protection Program.
Participation in the Main As of November 15, 2020, the Main Street lending facilities had
Street Facilities Serving conducted a total of 522 transactions resulting in about $5 billion in
transaction volume, or almost 1 percent of the $600 billion of loans that
Small and Mid-Sized
the facility’s special purpose vehicle can purchase (see table 6). Of the
Businesses Has Been five facilities, the Main Street Priority Loan Facility had conducted the
Relatively Limited most transaction volume—about $3 billion in loans through 292
transactions.
Table 6: Number of Transactions and Transaction Volume for Main Street Facilities,
as of November 15, 2020
Transaction volume
Facility Number of transactions ($ in millions)
Main Street Expanded Loan 12 902.9
Facility
Main Street New Loan Facility 216 1,007.0
Main Street Priority Loan Facility 292 3,057.7
Nonprofit Organization New Loan 2 4.7
Facility
Nonprofit Organization Expanded 0 0
Loan Facility
Total 522 4,972.3
Source: GAO presentation of Board of Governors of the Federal Reserve System data | GAO-21-180
According to officials from industry associations representing small
businesses and community banks we interviewed, there are several
reasons for the limited participation in Main Street Facilities. For example:
Page 46 GAO-21-180 Federal Reserve Facilities
• The price of obtaining a loan through the Main Street facilities—an
adjustable rate of the London Interbank Offered Rate (1 or 3 months)
plus 300 basis points (or 3 percent)—may be too high compared to
other loan options in the private market.
• The 5-year repayment period may deter small businesses since small
businesses may face great uncertainty from the pandemic and may
be unsure if they can repay the loan within that time. SBA’s Economic
Injury Disaster Loan program, for example, has a repayment period of
up to 30 years. 52
• Small businesses with existing debt may not be willing to take on a
loan, particularly with such terms.
• The minimum Main Street loan amount, which until October 30, 2020,
was $250,000, may have been too high for many of the smaller
businesses eligible for Main Street loans. 53
Officials from these associations and another association representing
banks of all sizes stated that the complexity of the Main Street loans may
also serve as a deterrent to both borrowers and lenders. For example,
they stated that factors such as the complexity of the terms of the
program and the number of documents and requirements associated with
the loan process may discourage both small businesses and lenders from
participating. As of November 24, 2020, there were 623 registered
lenders under the Main Street program. Officials from associations
representing banks told us that the requirement for banks to retain 5
percent of the loan may result in more costs than benefits to the banks,
as banks have to account for the 5 percent and conduct their own due
diligence on the loan. They also explained that they have seen limited
interest from their members in participating in the Main Street facilities.
Lastly, one association representing businesses of all sizes told us that
restrictions on dividends and stock repurchase tied to Main Street loans
may also deter some of the larger small businesses and mid-sized
52SBA’s Economic Injury Disaster Loan program provides economic relief to small
businesses and nonprofit organizations that are experiencing a temporary loss of revenue.
The purpose of the loan is to meet financial obligations and operating expenses that could
have been met had a disaster not occurred. The program provides low-interest loans of
generally up to $2 million for such expenses with a maturity of 30 years. Collateral is
required for loans over $25,000.
53On October 30, 2020, the Federal Reserve lowered the minimum loan amount for
certain Main Street loans from $250,000 to $100,000.
Page 47 GAO-21-180 Federal Reserve Facilities
businesses from using the Main Street facilities. 54 Data on the number of
Main Street loan applications submitted that have been declined by
lenders are not available to help determine the demand for Main Street
loans.
According to Federal Reserve officials, the relatively limited demand for
the Main Street facilities is tied to improvements in the functioning of the
markets that the facilities are intended to serve, among other factors. For
example, businesses may have been able to meet credit needs in the
early stages of the pandemic by borrowing in the private-sector market or
through the PPP. The Federal Reserve’s Paycheck Protection Program
Liquidity Facility has seen substantial participation, conducting more than
14,000 transactions totaling over $100 billion, as of November 15, 2020.
The officials also said lenders may not be comfortable extending loans to
smaller borrowers with higher risk, especially given the need to tailor
those loans to meet the borrowers’ needs and manage risk. Further, they
added that Main Street loans’ documentation and reporting
requirements—especially those related to loan participation programs and
the risk management of the special purpose vehicle purchasing the
loans—may create significant burdens for smaller borrowers.
Lastly, Federal Reserve officials told us that participation levels in the
Main Street lending program depend on the course of the economy,
whether a loan (which must be repaid, unlike a grant) is best for a specific
borrower, and on the ability of lenders to meet credit needs of eligible
borrowers outside of the program. They explained that the program’s
success is tied to the ability of creditworthy businesses to obtain credit
from a range of sources, not by uptake from the facility itself. Federal
Reserve officials stated that since the Main Street facilities are intended
to provide financing where it is not otherwise available, they would expect
growing demand for Main Street loans if the economy declines.
Recent survey data suggest that small businesses continue to be affected
by COVID-19 and some expect to obtain financing or additional capital.
According to the U.S. Census Bureau’s Small Business Pulse Survey, for
data collected through October 12, 2020, 75 percent of small business
respondents reported that COVID-19 has had a large or moderate
54For Main Street loans, an eligible borrower must commit to follow compensation, stock
repurchase, and capital distribution restrictions that apply to direct loan programs under
section 4003(c)(3)(A)(ii) of the CARES Act.
Page 48 GAO-21-180 Federal Reserve Facilities
negative effect on them. 55 Additionally, 23 percent anticipated obtaining
financial assistance or additional capital in the next 6 months, and nearly
half of respondents expected that it would take more than 6 months
before their business returned to its normal level of operations compared
to a year earlier. In terms of assistance, more than 70 percent of
respondents had already requested assistance through the PPP, 25
percent had requested assistance through SBA’s Economic Injury
Disaster Loan program, and less than 1 percent had requested
assistance through the Main Street lending program. These businesses
would be even less likely to be able to seek assistance through the Main
Street lending program if their creditworthiness declines.
As of November 15, 2020, of the $454 billion available under the CARES
Most CARES Act Act to support the Federal Reserve facilities, Treasury had committed
Funds to Support $195 billion and had disbursed $102.5 billion of the committed amounts to
the facilities. As of the same date, the CARES Act facilities had used
Federal Reserve about $24 billion of the $1.95 trillion the Federal Reserve can support in
Facilities Were Not lending for these facilities.
Used, and Treasury On November 19, 2020, the Secretary of the Treasury issued a letter to
Has Requested the Chair of the Federal Reserve Board stating that his understanding of
the congressional intent related to the facilities’ authority to purchase new
Return of the Unused assets or make new loans was for all of the CARES Act facilities to stop
Funds It Invested purchasing eligible assets or extending credit on December 31, 2020. 56 In
the letter, the Secretary stated that “while portions of the economy are still
severely impacted and in need of additional fiscal support, financial
conditions have responded and the use of these facilities has been
limited.” The letter cited improvements in conditions in certain markets
targeted by some of the facilities and stated that banks currently have the
lending capacity to meet the borrowing needs of their corporate,
55The Small Business Pulse Survey measures the effect of changing business conditions
during COVID-19 on small businesses in the United States. The weekly survey includes
information on small business operations and finances, requests and receipt of
assistance, and measures of overall well-being and expectations for recovery. The target
population is all nonfarm, single-location employer businesses with between one and 499
employees and receipts of $1,000 or more in the 50 states, the District of Columbia, and
Puerto Rico. The margin of error for responses we included in this report was 1 percent or
less, and the response rate was between 19 and 31 percent, depending on the state or
territory.
56See https://home.treasury.gov/news/press-releases/sm1190, accessed November 20,
2020.
Page 49 GAO-21-180 Federal Reserve Facilities
municipal, and nonprofit customers. The letter also requested that the
Federal Reserve return the unused CARES Act funds to Treasury.
In a statement provided to the press on November 19, 2020, the Federal
Reserve stated that it “would prefer that the full suite of emergency
facilities established during the coronavirus pandemic continue to serve
their important role as a backstop for our still-strained and vulnerable
economy.” On November 20, 2020, the Federal Reserve issued a letter to
the Secretary of the Treasury stating that it would work with Treasury on
returning the unused portions of the CARES Act funds. We will continue
to monitor the use of the CARES Act facilities through the end of 2020,
and the repayment of facilities’ outstanding loans and investments.
We provided a draft of this report to the Federal Reserve and Treasury for
Agency Comments review and comment. The agencies provided technical comments, which
we incorporated as appropriate.
We are sending copies of this report to the appropriate congressional
committees, the Chair of the Board of Governors of the Federal Reserve
System, and the Secretary of the Treasury. This report will also be
available at no charge on our website at http://www.gao.gov.
Should you or your staff have questions concerning this report, please
contact me at (202) 512-8678 or clementsm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are listed in
appendix II.
Michael E. Clements
Director, Financial Markets and Community Investment
Page 50 GAO-21-180 Federal Reserve Facilities
List of Committees
The Honorable Richard Shelby
Chairman
The Honorable Patrick Leahy
Ranking Member
Committee on Appropriations
United States Senate
The Honorable Mike Crapo
Chairman
The Honorable Sherrod Brown
Ranking Member
Committee on Banking, Housing, and Urban Affairs
United States Senate
The Honorable Mike Enzi
Chairman
The Honorable Bernard Sanders
Ranking Member
Committee on the Budget
United States Senate
The Honorable Roger Wicker
Chairman
The Honorable Maria Cantwell
Ranking Member
Committee on Commerce, Science, and Transportation
United States Senate
The Honorable Nita M. Lowey
Chairwoman
The Honorable Kay Granger
Ranking Member
Committee on Appropriations
House of Representatives
The Honorable John Yarmuth
Chairman
The Honorable Steve Womack
Ranking Member
Committee on the Budget
House of Representatives
Page 51 GAO-21-180 Federal Reserve Facilities
The Honorable Maxine Waters
Chairwoman
The Honorable Patrick McHenry
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Peter A. DeFazio
Chairman
The Honorable Sam Graves
Ranking Member
Committee on Transportation and Infrastructure
House of Representatives
Page 52 GAO-21-180 Federal Reserve Facilities
Appendix I: Objectives, Scope, and
Appendix I: Objectives, Scope, and
Methodology
Methodology
Our objectives in this report were to examine (1) steps the Board of
Governors of the Federal Reserve System (Federal Reserve) and the
Department of the Treasury (Treasury) have taken to design, implement,
monitor, and oversee lending facilities established in response to the
COVID-19 pandemic; (2) what available evidence suggests regarding the
effects of the Federal Reserve’s facilities on corporate credit and related
markets, and levels of participation in the facilities intended to support
them; (3) what available evidence suggests regarding the effects of the
Federal Reserve’s facilities on states and municipalities, and levels of
participation in the facility intended to support them; (4) what available
evidence suggests about the effects of the Federal Reserve’s facilities on
small businesses, and levels of participation in the facilities intended to
support them; and (5) the status of CARES Act funding available to
support the Federal Reserve’s facilities.
To address our first objective, we reviewed Federal Reserve and
Treasury documentation on the design and implementation of the
facilities, such as the term sheets, application documents, frequently
asked questions, public comments, and publicly available
announcements and press releases for each facility. We also reviewed
documentation related to scenario-based analyses the Federal Reserve
conducted in determining how the lending terms and eligibility
requirements would affect the funding needs of its facilities, including
support from Treasury. Additionally, we reviewed the Federal Reserve’s
reports to Congress on the status, operations, and transaction amounts
for each facility, as well as data on participants using the facilities. 1 To
examine the Federal Reserve’s oversight and monitoring efforts, we
reviewed the Federal Reserve’s Division of Reserve Bank Operations and
Payment Systems documentation of its (1) framework and approach to its
oversight of the facilities, and (2) completed reviews of the facilities.
To address our second, third, and fourth objectives, we reviewed
research from academics, regulatory agencies, and industry experts, and
analyzed the most recently available data on indicators of credit markets
affected by the facilities. To identify and select potential indicators, we
reviewed several sources, including prior and ongoing GAO work, federal
regulatory agencies’ reports and data, data available from the Bloomberg
1Section 13(3) of the Federal Reserve Act requires the Federal Reserve to provide
periodic reports on its emergency lending facilities to Congress. In addition to the required
reporting, the Federal Reserve Board publishes weekly reports (also known as H.4.1) on
the aggregate balance of each of the facilities and, where relevant, provides additional
information about their net portfolio holdings.
Page 53 GAO-21-180 Federal Reserve Facilities
Appendix I: Objectives, Scope, and
Methodology
Terminal and the Securities Industry and Financial Markets Association,
and data on small business owners from the National Federation of
Independent Businesses. We took a number of steps to assess the
reliability of the data sources and indicators, including reviewing relevant
documentation, reviewing prior GAO work, and interviewing data
providers. We found that, collectively, the indicators were sufficiently
reliable for the purposes of providing a general sense of how credit
markets are performing.
We also reviewed the U.S. Census Bureau’s weekly Small Business
Pulse Survey to better assess the impact of the pandemic on the
operations and finances of small businesses. 2 Additionally, we reviewed
relevant research publications from academics, regulatory agencies, and
industry experts and a study from the Proceedings of the National
Academy of Sciences of the United States of America based on more
than 5,800 small businesses that are members of Alignable, a network of
4.6 million small businesses. 3
We documented changes in the conditions of credit markets and areas
targeted by the facilities by assessing indicators of the price (such as
credit spreads) and availability of credit (such as issuances of securities).
The facilities could affect specific credit markets through the
announcements of the facilities and purchases of securities or loans, as
well as being intended as a backstop. However, it is difficult to isolate the
effect of the facilities from other federal support. To describe levels of
participation and the transaction volume for specific Federal Reserve
facilities, we obtained the number of transactions and total dollar amounts
from the Federal Reserve for the facilities.
To address our fifth objective, we reviewed Federal Reserve and
Treasury documentation on CARES Act-appropriated amounts in support
2The Small Business Pulse Survey measures the effect of changing business conditions
during COVID-19 on small businesses in the United States. The weekly survey includes
information on small business operations and finances, requests and receipt of
assistance, and measures of overall well-being and expectations for recovery. The target
population is all nonfarm, single-location employer businesses with between one and 499
employees and receipts of $1,000 or more in the 50 states, the District of Columbia, and
Puerto Rico. See https://portal.census.gov/pulse/data/, accessed November 4, 2020.
3See Alexander W. Bartik et al., “The Impact of COVID-19 on Small Business Outcomes
and Expectations,” Proceedings of the National Academy of Sciences of the United States
of America, vol. 117, no. 30 (July 28, 2020). The survey was conducted from March 28
through April 4, 2020.
Page 54 GAO-21-180 Federal Reserve Facilities
Appendix I: Objectives, Scope, and
Methodology
of the Federal Reserve’s facilities, including amounts allocated to the
facilities.
For all objectives, we interviewed Federal Reserve and Treasury officials
and representatives from associations representing banks, credit unions,
small businesses, and states and municipalities, and representatives from
a credit market research firm. We also reviewed relevant federal laws and
regulations, proposed legislation, and a relevant GAO report. 4
We conducted this performance audit from March 2020 to December
2020 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
4See GAO, Federal Reserve System: Opportunities Exist to Strengthen Policies and
Processes for Managing Emergency Assistance, GAO-11-696 (Washington, D.C.: July 21,
2011).
Page 55 GAO-21-180 Federal Reserve Facilities
Appendix II: GAO Contact and Staff
Appendix II: GAO Contact and Staff
Acknowledgments
Acknowledgments
Michael E. Clements, clementsm@gao.gov, 202-512-8678
GAO Contact
In addition to the contact named above, Karen Tremba (Assistant
Staff Director), Tarek Mahmassani (Analyst in Charge), John Karikari, Richard
Acknowledgments Ryan Guthrie, Kun-Fang Lee, Loren Lipsey, Joshua Marcus, Jessica
Sandler, Jennifer Schwartz, Jena Sinkfield, and Farrah Stone made key
contributions to this report.
(104246)
Page 56 GAO-21-180 Federal Reserve Facilities
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