What is the Term Asset-Backed Securities Lending Facility (TALF)?
The Term Asset-Backed Securities Lending Facility (TALF) was a program created by the US Federal Reserve in November 2008 to stimulate consumer spending to help revive the economy. He did this by making loans to banks using asset-backed securities (ABS) as a guarantee. The collateral for these securities consisted of automobile loans, student loans, credit card loans, equipment loans, floor plan loansinsurance premium financing loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances or commercial mortgages. This increased banks’ liquidity as they extended more credit to consumers and small businesses, which increased economic activity. Backing for these loans came from funds provided by the Federal Reserve Bank of New York. A new version of the program was launched in 2020 to purchase ABS during the economic disruption of the global crisis.
On November 19, 2020, Treasury Secretary Steven Mnuchin said he would not allow the 2020 TALF to be extended again after December 31, 2020. The program stopped making new loans effective December 31, 2020.
Key points to remember
- Asset-backed securities (ABS) are illiquid assets, like corporate loans, that are bundled into sellable securities.
- During the 2008 financial crisis, the Federal Reserve launched the Term Asset-Backed Securities Loan Facility (TALF) to increase the availability of consumer credit.
- A new TALF program was launched during the 2020 crisis for the same reason, which ended on December 31, 2020.
TALF 2020
The Federal Reserve restarted the program in 2020 during the coronavirus crisis. The revived TALF program was a special purpose vehicle (SPV) to which the Fed lent money. This SPV initially provided up to $100 billion in loans on a without recourse basis, with a maturity of three years. It stopped making loans as of December 31, 2020. The Treasury Department gave $10 billion to the TALF program to cover loan losses.
To qualify for loans from the facility, a business had to be “incorporated or organized in the United States or under the laws of the United States, have substantial operations and a majority of its employees based in the United States, and maintain a account relationship with main trader.”
To be used as collateral, an ABS had to meet the following conditions:
- It was to be denominated in US dollars.
- It couldn’t be synthetic.
- It must have had the long term high investment grade credit ratings of at least two eligible Nationally Recognized Statistical Rating Organizations (NRSROs). If there were no long-term ratings available, two NRSRO ratings of the highest short-term investment grade ratings, and no NRSRO ratings below that rating, were also acceptable.
- All (or substantially all) of its underlying credit (except CMBS) must have been newly issued.
- It must have been issued on or after March 23, 2020, with three exceptions. Eligible commercial mortgage-backed securities (CMBS) must have been issued before March 23, 2020 and be eligible SBA Pool Certificates and Development Company Participation Certificates (types of securitized small business loans) must have been issued on or after January 1, 2019.
- Its underlying credit risk was to be one of the following: automobile loans and leases, student loans, credit card receivables (consumer and business), equipment loans and leases, floor plan loans, financing of premiums for property and casualty insurance, certain small business loans that were guaranteed by the Small Business Administration (SBA), leveraged loansor commercial mortgages.
All collateral has been valued using various haircuts created in 2008, and borrowers had to pay an administrative fee equivalent to 10 basis points on the loan amount.
TALF 2008
TALF was a funding facility that helped market participants meet the credit needs of households and small businesses by supporting the issuance of ABS secured by loans of various types to consumers and businesses of all sizes, according to the Federal Reserve.
During the 2008 financial crisis, TALF was one of the government programs that helped unlock credit and stabilize the economy. The program was relaunched in 2020 during the global crisis.
Under TALF, the Federal Reserve Bank of New York (FRBNY) lent up to $200 billion non-recourse to holders of certain AAA-rated ABS backed by newly and recently issued consumer and small business loans. The FRBNY made loans in an amount equal to the market value of ABS, less a withheld percentage known as a haircut, and these loans were guaranteed at all times by ABS.
The US Treasury Department under the Troubled Asset Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008 provided $20 billion of credit protection to the FRBNY under the TALF. TALF began operating in March 2009 and was closed for further loan extensions on June 30, 2010. The last outstanding TALF loan was repaid in full in October 2014.
The success of TALF
Over the life of the program, all TALF loans were repaid in full on or before their respective due dates. The New York Fed did not suffer a loss on any TALF loans, according to the Fed.As all TALF loans have been fully repaid, no TALF collateral has been posted to the New York Fed and TALF LLC has not acquired any such assets during its existence.
The Treasury received 90% of the monthly distributions and the New York Fed received 10%. In total, TALF LLC paid a total of $745.7 million of these distributions to the Treasury and the New York Fed, the Fed reported.
TALF was one of many government programs aimed at stabilizing the economy and unfreezing credit during the financial crisis. Economists generally agree that the measures taken achieved their objective without massive losses for the Treasury.