Banks have about seven months to go before the faucet of cheap government lending is shut, the
Banks have been accessing cheap funding from the Fed in exchange for collateral like student loans, auto loans, credit card debt and commercial paper. The liquidity programs launched by the Fed late last year have helped stabilize the markets and allowed banks to boost profitability by borrowing inexpensively to fund new loans in a low-interest rate environment.
Several programs, often referred to by acronyms like TALF or AMLF, helped boost the first-quarter bottom lines for major players like
Bank of America
, as well as smaller banking counterparts.
became bank holding companies, in part to avail themselves of such programs as well.
But since late November, when some programs were first unveiled, the markets have stabilized. With fewer fears about the impending failure of major banks, private partners have been instilled with enough trust to borrow and lend from one another again. As such, the Fed decided to halt some programs, curtail others, and set a timeframe on the duration of those that continue.
One key program, the Term Asset-Backed Securities Loan Facility (TALF), will extend through the end of this year. Four others will continue through Feb. 1, among them the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Primary Dealer Credit Facility (PDCF) and the Term Securities Lending Facility (TSLF).
One last program, the Term Auction Facility (TAF) does not have a fixed expiration date. Currency swap lines between the Fed and other central banks will also remain open through Feb. 1.
However, the Fed is trimming the size of upcoming TAF auctions by $25 billion, or 17%, due to weak demand recently. It is also halting certain TSLF auctions and limiting the frequency and size of others for the same reason, saying activity has "fallen noticeably." Furthermore, it will not extend the Money Market Investor Funding Facility (MMIFF) and placed "additional administrative criterion" on users of the AMLF.
The Fed noted that while market conditions "have improved in recent months," functioning in many areas "remains impaired and seems likely to be strained for some time."
The moves may make borrowing more expensive for financial institutions, and signals the end of a safety net for money market funds and some types of borrowers. But they are also positive signs for the markets overall as they continue to repair. The Fed also gave assurances that it will monitor market conditions and expand or restart programs if deemed necessary.