Washington: The US Federal Reserve on Tuesday laid out plans for a program to spur consumer lending that could grow to $1 trillion and said it was widening the effort in order to help credit-starved businesses.
Originally envisioned to support auto, credit card, student and some small business loans, the Fed said it had decided to expand the so-called Term Asset-Backed Securities Loan Facility, or TALF, to cover equipment and vehicle fleet leases.
The Fed hopes the program, in which it will lend against a variety of top-rated asset-backed securities held by investors, will restore credit flows at a time loss-laden banks are hesitant to lend. It will begin lending on 25 March.
In a joint statement with the US Treasury, the central bank said it might further widen the program in the future to riskier mortgage and debt securities now plaguing banks.
“Ultimately, the program should bring down the cost and increase the availability of new credit to consumers and businesses,” the Treasury said in a position paper.
The program is the latest in a series of unprecedented efforts to reverse the US economy’s steep downward slide and a financial market implosion sparked by mortgage defaults.
As collateral, the TALF will initially accept “triple-A”-rated asset-backed securities supported by new and recently originated auto, credit card, student and government-guaranteed small business loans.
By April, the Fed and Treasury expect the collateral list to widen to include securities backed by small-ticket equipment, heavy equipment and agricultural loans and leases. These include items ranging from office copiers for small businesses to giant construction cranes and farm harvesters.
Officials also said they might include non-auto floor loans as well as securities backed by mortgage-servicer advances.
They said eligible collateral could eventually include commercial mortgage-backed securities, “private label” residential mortgage-backed securities and collateralized debt obligations.
“We know right now there’s a looming crisis in commercial real estate whereby owners of shopping malls, hotels, rental properties and many other types of buildings are unable to refinance or pay for new construction because the CMBS securitization market has completely shut down,” Fed chairman Ben Bernanke told the Senate Budget Committee on Tuesday.
Analysts said the Fed was essentially stepping into a role banks were no longer playing.
The program “should provide a huge boost to the asset-backed securities market and possibly the commercial and residential mortgage-backed securities markets,” said Mirko Mikelic, a fund manager at Fifth Third Asset Management in Grand Rapids, Michigan. “The Fed is taking the role of liquidity provider for these products, which was once the domain of banks, investment banks and other dealers.”
Under the program, the Treasury Department will provide up to $100 billion from the government’s $700 billion financial rescue fund to cover credit risks the Fed is taking.
Although the program relies on money from the bailout fund, officials dropped plans to apply executive compensation restrictions for program participants that would normally apply to companies receiving bailouts. Officials were concerned restrictions could discourage participation.
“The success of the program is important to halting the destructive credit cycle and to restarting credit formation,” the Fed said.
The Fed said increased TALF lending and other actions to stabilize the financial system “have the potential to greatly expand” its balance sheet, already bloated to nearly $2 trillion by other lending and liquidity programs.
Such a large expansion could end up being inflationary if the Fed has difficulty unwinding its lending programs, and the Treasury and Fed said they will seek legislation to give the central bank tools to manage its balance sheet.
A source familiar with the matter said one approach would be to seek approval for the Treasury to issue securities to fund Fed initiatives, without having that debt count against the congressionally set federal debt limit. Another approach would be to have the Fed issue its own debt, the source said.