The Paycheck Protection Program Liquidity Facility (PPPLF)
This post is part of an ongoing series on the credit and liquidity facilities established by the Federal Reserve to support households and businesses during the COVID-19 outbreak.
On April 9, 2020, the Federal Reserve announced that it would take additional actions to provide up to $2.3 trillion in loans to support the economy in response to the COVID-19 crisis. Among the measures taken was the establishment of a new facility intended to facilitate lending to small businesses via the Small Business Administration's Paycheck Protection Program (PPP). Under the Paycheck Protection Program Liquidity Facility (PPPLF), Federal Reserve Banks are authorized to supply liquidity to financial institutions participating in the PPP in the form of term financing on a non-recourse basis while taking PPP loans as collateral. The facility was launched April 16, 2020. As of May 7, it had issued over $29 billion in loans (see the H.4.1 Statistical Release). This post lays out the background for the PPPLF and discusses its intended effects.
The Paycheck Protection Program
The spread of COVID-19 and the measures enacted to contain it have adversely affected much of the nation’s economy, halting or disrupting the normal operations of many small businesses. Countless small firms find themselves in dire need of credit in order to sustain operations and keep employees on payroll, but are confronted with a contraction in the availability of credit. The PPP, administered by the Small Business Administration (SBA) and a central piece of the CARES Act, is aimed at providing economic relief to small businesses affected by COVID-19 and incentivizing them to keep their workers on payroll. In an earlier Liberty Street Economics post, we examined where the first round of PPP loans went across states and industries.
Under the PPP’s first round of funding, lawmakers authorized $349 billion in forgivable government-guaranteed loans to small businesses to cover costs related to payroll and utilities, as well as mortgage and rent payments, over the covered period of eight weeks following loan approval. PPP loans have very favorable terms: a 1 percent interest rate, deferment of interest payments for the first six months, and no participation or processing fees. Furthermore, the eligibility criteria qualify most small businesses. Loan forgiveness is subject to the proceeds being used for eligible expenses, and no personal guarantees are required. In order to provide relief expeditiously, the SBA has delegated authority to a list of approved financial institutions (both bank and non-bank lenders) to originate PPP loans. The program launched on April 3 and the first round of funding ran out on April 16. Lawmakers authorized a $310 billion second round of funding to restart the program on April 27.
The Paycheck Protection Program Liquidity Facility
On April 8, 2020, the Board of Governors of the Federal Reserve System, with the approval of the Secretary of the Treasury, authorized each of the regional Federal Reserve Banks to establish and operate the PPPLF, pursuant to Section 13(3) of the Federal Reserve Act. Detailed information on the facility can be found here. Under the facility, Reserve Banks will extend non-recourse credit to financial institutions participating in the SBA's PPP, taking PPP loans as collateral. The purpose of the facility is to bolster the effectiveness of the PPP, provide liquidity to credit markets, help stabilize the financial system, and provide relief to small businesses affected by the COVID-19 crisis. The PPPLF became fully operational on April 16; it will stop extending new credit September 30, 2020, unless the facility is extended by the Federal Reserve Board and the Department of the Treasury.
While initially only depository institutions were eligible to borrow under the PPPLF, the Federal Reserve announced on April 30 that it had expanded access to all SBA-qualified PPP lenders. The Reserve Bank extending the credit varies by type of lender. Depository institutions and credit unions must apply at their district Reserve Bank. The lending Reserve Bank for community development financial institutions is the Federal Reserve Bank of Cleveland, while for members of the farm credit community and small business lending companies it is the Federal Reserve Bank of Minneapolis, and for all other eligible borrowers, including financial technology (fintech) companies, it is the Federal Reserve Bank of San Francisco.
No fees are associated with the facility. Credit is extended at an interest rate of 35 basis points, and the PPP loans posted as collateral are taken at face value. Eligible SBA-approved financial institutions can post as collateral not only PPP loans they have originated, but also whole loans they have purchased on the secondary market. Partial shares of a loan are not eligible collateral. The principal amount and maturity of an extension of credit under the facility are equal to the principal amount and maturity of the PPP loans pledged as collateral. The maturity date is accelerated commensurate with any loan forgiveness reimbursement received by the eligible borrower from the SBA, or if the underlying PPP loan goes into default and the PPP loan is sold to the SBA in return for the guarantee.
Why Is the PPPLF Needed?
The PPPLF bolsters the PPP’s effectiveness in several ways.
First, it incentivizes lender participation in the PPP by facilitating access to credit to all SBA-approved PPP lenders and offering them reasonably priced financing with a duration matching that of the underlying PPP loans. This affordable access to credit is of particular relevance for smaller and non-depository institutions, such as community development financial institutions and fintechs, that don’t have access to the discount window’s primary credit and/or whose sources of funding are costlier than those of large banks. These institutions are more likely to reach communities underserved by traditional banks and therefore may play an important role in distributing PPP credit where it is needed most. The additional liquidity provided through the facility increases the PPP lenders’ capacity to make loans. PPP lenders don’t need to have a master account at the Federal Reserve to borrow under the PPPLF, as long as they have a correspondent relationship with a depository institution that does (see facility FAQs).
Second, the PPPLF creates the necessary conditions for a liquid secondary market of PPP loans, providing further impetus for broader PPP lender participation. Access to the facility is not only available to institutions originating PPP loans, but has been extended to SBA-approved eligible institutions that purchase whole PPP loans in the secondary market. All PPP loans, either originated or purchased in the secondary market, can be posted as collateral. Institutions pledging purchased PPP loans need to provide documentation from the SBA that they are the beneficiary of the SBA guarantee for the loan.
Third, the PPPLF gives beneficial regulatory capital treatment to PPP loans pledged to the facility by supervised depository institutions, further incentivizing lender participation in the program. As per Section 1102 of the CARES Act, PPP loans have a zero risk weight, so they don’t affect banks’ risk-based capital ratios. But they could affect banks’ leverage ratios and liquidity coverage ratios (LCR). However, extensions of credit under the PPPLF are non-recourse, and, because of the SBA guarantee, PPP loans pledged at the PPPLF do not expose the bank pledging them to any credit risk or market risk. For these reasons and to facilitate use of the PPPLF, the federal banking regulatory agencies—the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (FDIC)—adopted interim final rules (announced here and here) that will allow banks to exclude from their leverage-based regulatory capital and LCR calculations PPP loans pledged to the PPPLF as collateral.
Finally, the positive impact of the PPPLF comes with no expected losses to the Federal Reserve and hence taxpayers. Access to credit under the PPPLF is fully collateralized by pledged PPP loans with the same principal amount and maturity as the extended loans, and PPP loans are fully SBA-guaranteed with respect to both principal and interest.
The Paycheck Protection Program Liquidity Facility is aimed at bolstering the effectiveness of the SBA’s Paycheck Protection Program and thereby providing a lifeline to small businesses affected by COVID-19. The facility enables broader lender participation in the PPP by (1) facilitating access to credit for financial institutions participating in the PPP, (2) supplying liquidity at the relevant duration at reasonable terms, and (3) providing beneficial regulatory capital treatment of PPP loans pledged at the facility as collateral by supervised institutions.
Haoyang Liu is an economist in the Federal Reserve Bank of New York’s Research and Statistics Group.
Desi Volker is an economist in the Federal Reserve Bank of New York’s Research and Statistics Group.
Also in the Liberty Street Economics Facilities Series
Helping State and Local Governments Stay Liquid, April 10
The Money Market Mutual Fund Liquidity Facility, May 8
The Commercial Paper Funding Facility, May 15
The Primary Dealer Credit Facility, May 19
The Primary and Secondary Market Corporate Credit Facilities, May 26
Securing Secured Finance: The Term Asset-Backed Securities Loan Facility, August 7
Up on Main Street, February 5
How to cite this post:
Haoyang Liu and Desi Volker, “The Paycheck Protection Program Liquidity Facility (PPPLF),” Federal Reserve Bank of New York Liberty Street Economics, May 20, 2020, https://libertystreeteconomics.newyorkfed.org/2020/05/the-paycheck-protection-program-liquidity-facility-ppplf.html.
The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.