YPFS COVID Handbook - 6-23-20 PDF

COVID-19 Handbook
Yale Program on Financial Stability
As of June 23, 2020

Table of Contents
INTRODUCTION .................................................................................................... 6
COVID-19 FINANCIAL RESPONSE TRACKER ..................................................................................7

RESOURCE GUIDES .......................................................................................................................7
KEY PROGRAM SUMMARIES ......................................................................................................... 8
2020 YPFS PRELIMINARY DISCUSSION DRAFTS ........................................................................... 8
CONTACT ..................................................................................................................................... 8
CRITICAL INDUSTRIES ......................................................................................... 9
ANALYSIS ....................................................................................................................................10
Aid to Airlines and other Critical Industries During Crises 10
CASE STUDIES AND POLICY CHANGES .......................................................................................... 16
US Begins Airline and Aviation Interventions 16
Aviation Interventions Continue Internationally 20
LIQUIDITY AND MARKET LIQUIDITY .................................................................22
ANALYSIS ................................................................................................................................... 23
Central Banks Introduce Programs to Improve Liquidity in Key Markets 23
Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008 TALF 28
Barriers to Access Impede Utilization of Municipal Liquidity Facility 31
Use of Federal Reserve Programs - 06/18/2020 35
Federal Reserve Programs Involve More Risk than in GFC 40
CASE STUDIES AND POLICY CHANGES ......................................................................................... 45
Fed Introduces Modified Primary Dealer Credit Facility 45
Fed Reintroduces Commercial Paper Funding Facility 46
Fed Provides Liquidity Options to Cities and States 47
Fed Reintroduces Term Asset-backed Securities Loan Facility 49
Bank of England activates the Contingent Term Repo Facility 50
Federal Reserve Supports Corporate Bond Markets 51
ECB Unveils Pandemic Emergency Purchase Programme 52
Federal Reserve Expands Support to Corporate Bond Markets 54
Federal Reserve Broadens Range of Eligible Collateral for TALF 55
Federal Reserve Announces New Municipal Liquidity Facility 57
Bank of Canada Establishes Series of Programs to Promote Market Liquidity 59
Federal Reserve Expands Eligibility for Municipal Liquidity Facility 61
India Extends Special Liquidity Facility to Mutual Funds 63
Bank of Japan Increases Liquidity Measures 65
The Bank of Mexico Plans to Inject $30 billion to Provide Liquidity 66
Federal Reserve Expands Support to Corporate Bond Markets Again 69
MACROPRUDENTIAL POLICY ............................................................................. 73
YALE PROGRAM ON FINANCIAL STABILITY | 2

ANALYSIS ................................................................................................................................... 74
Countries Implement Broad Forbearance Programs for Small Businesses, Sometimes with Taxpayer Support 74
Authorities Restrict Short Sales during COVID-19 Crisis 77
Easing Liquidity Regulations to Counter COVID-19 82
Countries Ease Bank Capital Buffers 88
Governments Provide Financial Regulatory Relief 93
Conventional Monetary Policy and the Zero-Lower-Bound 97
Authorities Urge Prudence in Loan Loss Accounting 99
COVID-19 and Insurance (1 of 3): Helping Individuals and Businesses 107
COVID-19 and Insurance (2 of 3): Operational Regulatory Relief 111
COVID-19 and Insurance (3 of 3): Capital Conservation and Countercyclical Regulation 113
CASE STUDIES AND POLICY CHANGES ........................................................................................ 116
UK, EU Move to Ease Impact of Accounting Rules for Borrowers Affected by COVID-19 116
Denmark Plans to Pay Fixed Costs for SMEs Hit by Coronavirus Lockdown 117
US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19 119
MORTGAGE RELIEF ........................................................................................... 121
ANALYSIS ..................................................................................................................................122
Residential Mortgage and Rent Relief During Crises 122
Mortgage Forbearance and Housing Expense Relief in Response to the COVID-19 Outbreak 131
Expanding Debt Restructuring Options for Mortgage Lenders in Response to the COVID-19 Outbreak 133
FHFA Relaxes Standards for GSE Mortgage Servicers 135
FHFA Allows Payment Deferral for Forbearance Payments While Extending Foreclosure and Eviction Moratoria
137
SIGTARP Proposes Using Leftover TARP Funds for COVID Relief 139
MULTINATIONAL ORGANIZATIONS ................................................................. 141
ANALYSIS ..................................................................................................................................142
Multinational Organizations’ Efforts to Assist Countries through COVID-19 crisis 142
The Limits of the G20's Debt Service Suspension Initiative 152
Multilateral Development Banks in Latin America and the Caribbean 157
CASE STUDIES AND POLICY CHANGES ........................................................................................162
Asian Development Bank Increases Funds for Producers of Critical Medical Supplies 162
The IMF makes funds available in response to the COVID-19 crisis 164
World Bank Support to Developing Countries 166
The IMF Expands and Expedites Lending in Response to the COVID-19 crisis 168
IFC Provides $8 Billion in Fast-Track Financing to Private Sector 170
EU Programs Supporting non-EU Countries 172
EU Programs in Support of Member Countries 175
SMALL AND MEDIUM ENTERPRISES (SMES) ................................................... 179
ANALYSIS ................................................................................................................................. 180

Credit Guarantee Programs for Small and Medium-Sized Enterprises 180
Loan Guarantee Programs May Include Nonbanks 182

Making SME Credit Guarantee Programs Affordable: Subsidized Interest Payments for an Initial Period 183
Large-Scale Assistance Programs for Small Businesses 184
Lessons Learned in Designing and Implementing Support for Small Businesses 195
Countries Provide Support to Workers in the Informal Economy 201
Governments Provide SMEs with Relief for Non-Wage Fixed Costs 205
Governments Encourage SMEs to Adopt New Technology 209
CASE STUDIES AND POLICY CHANGES ........................................................................................212
MicroFinance Ireland: Targeted Lending for Microenterprises Impacted by COVID-19 212
Federal Reserve Announces Main Street Lending Program 213
Federal Reserve Introduces Paycheck Protection Program Liquidity Facility 215
Germany Launches New Support Program After Partial Guarantee Insufficient to Promote Lending to Small
Businesses 216
Federal Reserve Waives Restriction on Wells Fargo to Allow Lending to Small Businesses 218
Italy Expands and Updates its Credit Guarantee Programs 219
UK Expands Support for Small Businesses After Limited Impact of Initial Program 221
Switzerland Programs Serve as Model for Quick Support to Small Businesses 223
Congress Expands Support to Small Businesses 224
Germany Provides Public Funding for Recapitalization and Startup Equity 226
ECB Considers Adopting EU Bad Bank 228
UK Announces Support to Innovative Firms 229
Federal Reserve Announces Changes to Main Street Lending Program 231
UK Announces New 100% Loan Guarantee Program Targeted at Smallest Businesses 234
Federal Reserve Expands Access to Paycheck Protection Program Lending Facility to Non-Depository
Institution Lenders 235
PPP Rules Changed to Better Target Funds 236
Denmark Extends Duration of COVID-19 Support Programs and Introduces New Measures 238
FHFA Allows Federal Home Loan Banks to Take PPP Loans as Collateral 240
US Businesses Navigate Multiple Government Support Programs 242
The Philippines Provides Support to Workers in the Informal Economy 247
EU Expands Temporary Framework For State Aid to Allow Recapitalization 249
Nepal Expands Public-Works Program 253
Bank of Japan Introduces New Facility to Support Bank Lending to Small and Medium-Sized Firms 254
Poland’s Financial Shield Provides Support to Businesses 255
Bank of Mauritius Granted Permission to Make Equity Investments in Companies 258
United States Congress Passes Amendments to Paycheck Protection Program 259
SBA and Treasury Issue Guidance on PPP Loan Forgiveness 260
Federal Reserve Amends Main Street Lending Program 262
Germany Introduces Fixed Cost Support for SMEs 265
Main Street Lending Program Opens for Lenders 267
Small Business Administration Announces Updates to Small Business Support Programs 268
SUPPORT FOR INDIVIDUALS ............................................................................ 272
ANALYSIS ................................................................................................................................. 273

Government Support to Individuals and Households During Crises 273
US Supports Individuals and Households in Response to COVID-19 284
Programs Support Individuals through Unemployment Insurance and Wage Subsidies 285
Programs Support Individuals through Direct Payments and Tax Cuts 289
Programs Support Individuals through Tax-Deadline Extensions and Penalty Waivers 292
CASE STUDIES AND POLICY CHANGES ....................................................................................... 295
EU Proposes Support for Short-Time Work Schemes 295
Unemployment Insurance and Short-Time Compensation in the US and abroad 297

SWAPS ................................................................................................................305
ANALYSIS ................................................................................................................................. 306

Central Banks Use Swap Lines to Maintain the Flow of US Dollar 306
Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to Central Banks that Don’t Have Fed
Swap Lines 312
MISCELLANEOUS TOPICS ................................................................................. 313
The FHLBs May Not be the Lenders-of-Next-to-Last Resort during the Coronavirus Crisis 314
Flight from Maturity during the Coronavirus Crisis 318
CARES Act $454 billion Emergency Fund Could add up to Much More for Businesses, States and Municipalities
322
What macroprudential policies are countries using to help their economies through the Covid-19 crisis? 327
The FHLBs During the Coronavirus Crisis, Part II 332
Communicating in a Crisis: Lessons Learned from the Last One 333
First Report of the Congressional Oversight Commission on the Use of CARES Act Funds 340
A Long Way to Go for Emerging Markets 343
Mnuchin Clarifies that Treasury is Prepared to Lose Money on Fed Programs 348
Usage of the Defense Production Act throughout history and to combat COVID-19 351
Forecasting the Economy During COVID-19 358
Lender beware: Emergency relief efforts are inherently risky 364
Use of Federal Reserve Programs - 05/28/2020 367
HEROES Act would provide $3 trillion in additional benefits but unlikely to progress 371
Countries Propose Catastrophe Insurance Through Public-Private Partnerships 374
Understanding Parametric Triggers in Catastrophe Insurance 376
Debt Mounts for US Retail and Lodging Mortgagors 379
APPENDIX ..........................................................................................................383
CORONAVIRUS FINANCIAL RESPONSE TRACKER PROJECT OVERVIEW ....................................... 384

Introduction
Founded in 2013, The Yale Program on Financial Stability’s mission is to create,
disseminate, and preserve knowledge about financial crises. We currently have four major
projects: Systemic Risk Institute, New Bagehot, Global Financial Crisis, and the Financial Crises
Archives. The diagram below represents how each project correlates with the YPFS:
In its early years, researchers at the YPFS authored dozens of case studies on these topics, and
hosted an annual set of meetings to bring together policymakers from around the world. These
activities covered both “peacetime” policies designed to prevent crises, and “wartime” policies
designed to fight crises in progress.
More recently, it became clear that the biggest knowledge gaps existed for wartime policies.
During the Global Financial Crisis, nations around the world had attempted hundreds of crisis
interventions, only a fraction of which had been studied by researchers. Going back further in
time, most research on past crises focused on macroeconomic issues, with much less attention
paid to the mechanics of crisis-fighting tools. To fill this gap, the YPFS launched the New
Bagehot Project in 2017, made possible by generous support from Jeff Bezos, Bloomberg
Philanthropies, Bill Gates, the Peter G. Peterson Foundation, and an anonymous donor.
The New Bagehot Project was named in honor of Walter Bagehot, the author of Lombard Street
(1873), still considered the seminal text on crisis fighting. Bagehot’s advice for central bankers
in a crisis can be summarized as “lend freely at a penalty rate against good collateral”. This
advice is still considered near-gospel by many central bankers, but it is insufficient to guide the
complex policy actions necessary to stabilize a 21st century financial system. The New Bagehot
Project aims to expand the crisis-fighting playbook through detailed case studies of specific
interventions, synthesizing these case studies into best practices, and then presenting this
synthesis across a variety of media.
Beginning in March 2020, the New Bagehot project shifted its focus to real-time analysis of
financial policies created in response to the ongoing COVID-19 pandemic and its economic
consequences. Posts are regularly published on YPFS’ Systemic Risk Blog, where individuals can
follow to read examinations of policies around the world—including lessons learned as programs
develop and are utilized.

COVID-19 Financial Response Tracker
In companion with the ongoing number of mini-cases written about policies worldwide, YPFS
launched the COVID-19 Financial Response Tracker (CFRT), which follows economic
interventions by central banks, fiscal authorities, and international organizations aimed at
combating the negative effects of the coronavirus pandemic and restoring financial stability. The
tracker will also highlight significant proposals from government representatives and
institutions. Each tracker entry will provide summary information and link to relevant press
releases or articles about the intervention. The COVID-19 Financial Response Tracker
Visualization (CFRTV) graphically depicts the CFRT’s entries according to country and type of
intervention. The intent of the Tracker and Visualization platform is to inform citizens,
policymakers, and government officials about state actions against COVID-19.
To date, there over 2,500 logged proposals, policy changes, and updates to existing policies in
response to COVID-19. While the Tracker and Visualization are not meant to be comprehensive
but we aim to track as many interventions as possible across the globe. A link to a 5/10/2020
version of the tracker in excel format is available here.
You can read more about the CFRT project in the Appendix.
Resource Guides
Finally, YPFS is putting together resource guides that gather and synthesize materials on crisis
response topics that are of particular interest in the present situation. A resource guide consists
of an overview and a spreadsheet that catalogs past and current examples of the intervention
type, identifies interesting program features, summarizes existing evaluations of programs, and
shares general resources on the topic. New resource guides will be added as they become
available.
• Bankruptcy Law and Macroprudential Policy

• Critical Industries
• Funding for Lending
• Insurance Regulation Measures
• International Institutions
• Macroprudential Policy: Capital
• Macroprudential Policy: Liquidity
• Macroprudential Policy: Regulatory Relief
• Macroprudential Policy: SMEs
• Market Liquidity Programs
• Residential Mortgage Relief
• Short-Selling Bans
• SME Credit Guarantee Programs
• Support to Individuals
• Swaps

Key Program Summaries
YPFS will be maintaining documents that provide up-to-date summaries of certain key
programs adopted in response to the current pandemic. Depending on the program, these
documents may include things like detailed timelines showing when a program was introduced
and when and how it was amended. They may also include data on usage to date.
• View Paycheck Protection Program (PPP) Timeline

• View Main Street Lending Program (MSLP) Timeline
• View Paycheck Protection Program Lending Facility (PPPLF) Timeline
• View Comparing Fed programs GFC and COVID-19
2020 YPFS Preliminary Discussion Drafts

Over the past few years, YPFS has written thousands of pages of summary materials on past
interventions, including the key design decisions that policy makers must consider. While not all
our case studies are complete, we are making our materials available at this time. The case
studies are written from a policymaker’s point of view and are meant to inform current decision-
makers. Most case studies have links to the relevant primary documents generated by the
financial institution that initiated the program as well as other documents relevant to the design
and implementation of the program.
• Explore YPFS Preliminary Discussion Drafts in our Resource Library

• View a list of our case studies of previous interventions
Contact
Authors on any piece can be contacted at the email address below:
Shavonda Brandon [email protected]
Mallory Dreyer [email protected]
Greg Feldberg [email protected]
Manuel Leon Hoyos [email protected]
Adam Kulam [email protected]
Aidan Lawson [email protected]
Christian McNamara [email protected]
Alexander Nye [email protected]
Kaleb Nygaard [email protected]
June Rhee [email protected]
Corey Runkle [email protected]
Priya Sankar [email protected]
Pascal Ungersboeck [email protected]
Vaasavi Unnava [email protected]
Rosalind Z. Wiggins [email protected]

Critical Industries
Critical industries play key roles in supply chains and transportation and are often vital to keep
the economy running smoothly. However, due to high fixed costs, these industries are also
highly vulnerable to targeted economic shocks. Policies targeted to aid these critical industries
must take account of the tools available, as well as obligations to protect taxpayers by attempting
to guarantee recuperation of funding.

Analysis
Aid to Airlines and other Critical Industries During Crises

By Rosalind Z. Wiggins and Vaasavi Unnava
Original post here.

The air transportation industry across the globe has been dramatically affected by the outbreak
of COVID-19. Government-issued travel bans and warnings to self-quarantine have forced the
cancellation of trips. Passengers are down more than 90%. Airplane manufacturers, such as
Boeing in the US, are facing assembly line shutdowns and possible delays of ordered planes.
Related businesses such as suppliers, airports, and duty-free stores are also facing serious
impacts.
Since February, several countries have provided support to help their airlines absorb the
economic impacts. These actions include: direct cash subsidies (China), tax rebates and
forgiveness (Australia), loan guarantees (Sweden, Finland), exemption from airport fees
(Taiwan), loss support, and direct aid to cover employee wages (Denmark). Several countries
offer a combination of interventions, such as South Korea and the US.
We consider the recent actions in the context of past assistance to airlines and other critical
industries and discuss what other countries might consider in providing such assistance.
Critical Industries
Airlines are critical industries that play key roles in transportation and supply chains for
passengers and cargo. Yet, they are characterized by high fixed costs and variable income
streams. The ability to adjust current expenses does not directly align with drops in revenue
creating cash flow challenges and making them especially vulnerable to economic
shocks. (Nolan, Ritchie and Rowcroft 2004). The terrorist attacks of 9/11, in which the US
closed its airspace, showed that the industry may need state aid to avoid bankruptcy and restore
operations to pre-shock levels. (Nolan, Ritchie and Rowcroft 2004). With credit markets drying
up, private liquidity was difficult to come by, layoffs began, leading the government to provide
assistance in the form of direct grants and loan guarantees through the Air Transportation
Safety and System Stabilization Act (ATSSA). Similar economic factors justified the
government’s facilitating mergers to stabilize the industry in the 1980s.
Other modes of transportation have also been deemed critical industries. During the current
COVID-19 pandemic, the UK has temporarily nationalized its railways in a preemptive move to
“provide stability and certainty” and ensure that they are available for essential travel.
Contractors will continue to operate their routes, but the government will collect all revenues
and take on all risk. In the US, the government provided $1 billion in grants to its government-
owned passenger railroad, Amtrak, 50% of the company’s 2020 budget.
Beyond transportation, governments have assisted other nonfinancial industries whose failure
might pose a systemic risk to the economy. During the global financial crisis (GFC) of 2007-09,
the US rescued two of its “Big Three” auto manufacturers, General Motors (GM) and Chrysler.
Factors cited in the decision to provide aid in those cases were the size of the firms; the

concentration of the industries within a specific region; the potential job losses; the potential
knock-on effects to suppliers in the highly integrated industry that might destabilize other
manufacturers; and the broader economic impacts in the midst of the financial crisis.
France, Russia, and Sweden also provided assistance to their auto industries during the
GFC. France provided a package of loans to manufacturers (Renault and Peugeot/Citroen), auto
finance companies, and suppliers. Russia provided a one-year interest=free loan and facilitated
the refinancing of investment projects. Sweden guaranteed significant loans.
Tools Available
Once a government decides to assist a critical industry, it needs to consider what tools it has
available, and how and when it will use them. Possible tools include loans, equity or warrant
purchases, loan guarantees, or some combination of these, to provide the necessary capital for
companies to maintain or achieve solvency. Equity can be especially useful to protect taxpayers,
although governments are often reluctant to take over the management of private companies, as
noted below.
In general, approaches appear to fall into three loose categories: (i) short-term liquidity relief,
where the aim is to provide liquidity and support wages; (ii) mid-term aid, which focuses on
providing liquidity relief for longer periods and or in larger quantities, through loans or loan
guarantees; and (iii) longer term aid, which provides sustained support and protects companies’
solvency through operational recovery and structural reform. Example of this last tool include
the multifaceted packages implemented by South Korea, the US, and Italy, which re-
nationalized Alitalia after efforts to find a buyer failed.
The COVID-19 pandemic is unique in that the economic shock has been largely government-
induced. Countries quickly deployed targeted relief focused on the airline industry. Their earliest
responses included:
• Direct cash subsidies or grants (China and US)
• Suspension or refund of taxes and or fees (Australia, South Korea, Taiwan)
• Direct absorption of losses
• Grants for payment of wages (Denmark).
Because the air travel industry is highly taxed, waiving, refunding or reducing some or all of
these taxes is a particularly quick way to funnel cash to the industry amidst the sudden drop in
ridership. Tax relief can be quickly implemented because it requires minimal administrative
start-up costs. Once airlines recover, taxes and fees can be reinstated gradually to provide a soft
cushion for recovery efforts.
Given the unique factors of the pandemic, other first-wave support has taken the form of grants
to support the continuation of wages for air industry workers or financial support for furloughed
workers. These may be in narrow targeted efforts (as in the case of the US) or as broad-based
plans that also apply beyond the industry (as Denmark has provided).
Governments also use loans or loan guarantees have to provide longer term and more
substantial support. Loans can also be used to “buy time” for private funding sources to recover,
to bridge temporary distortions to cash flows. Several countries made loans to industries

affected by 9/11. The US and France provided loans to the auto industry during the GFC. The US
used bridge loans to keep Chrysler and GM afloat during a presidential transition in 2008; the
government used the transition period to assess if the companies would need further assistance.
In extending loans, governments must decide:
• Amount of loan
• Interest rates
• Collateral
• Maturity
• Other commitments such as reporting, governance restrictions
Loans can be flexible, subject to the government’s capacity, and easily tailored, extended, or
increased as circumstances change.
Loan guarantees represent a commitment rather than an actual loan. They allow governments to
leverage their resources to extend more funding than they can directly. However, loan
guarantees depend on there being private lenders willing to lend. This may not always be the
case if banks are also distressed, as during the GFC. When there is no financial crisis, a
guarantee may help a distressed industry get the funds it needs.
Loans and loan guarantees may also be bundled with other forms of assistance and are often a
step-up from initial actions. In the current crisis, for example, Denmark first provided support
for wages, and then later announced (along with Sweden) up to $302 million in credit
guarantees for Scandinavian Airlines.
South Korea has also bundled the availability of loans into a comprehensive package of airline
industry support measures. Relief has been in place for Korea-China routes since early
February. In mid-February, the government made a major announcement—up to 300 billion
won in emergency loans, deferred fees for three months with gradual restart, guarantees to
replace aircraft lease deposits, and support in reestablishing business. In March the government
announced additional supports relating to the waiver of airport fees and assistance to terminal
operations for 3-6 months. The combined supports are designed not only to offset the cost of
lost passengers but also to promote a quick return to operating and rebuilding capacity. It is
formally divided into three phases: (i) emergency damage support, (ii) support for securing a
new market, and (iii) management stabilization support.
The US coronavirus rescue legislation provides $78 billion to the airlines in the form of direct
cash grants, loans, and loan guarantees available through March 2022. The bill also temporarily
suspends excise tax and kerosene taxes for air carriers through January 1, 2021. In return for
financial assistance, air carriers may not put employees on temporary furlough status, engage in
share buybacks, or issue dividends. Also, highly compensated employees are subject to
restrictions on their pay.
The current US assistance is similar in form but far surpasses the assistance provided to airlines
in the wake of the 9/11 attacks the US, when the government closed all US airspace. (Lewinsohn
2005). At that time, the government provided aid for airlines through the Air Transport Safety
and System Stabilization Act of 2001. That act provided $5 billion in direct grants for

compensation for federal actions and subsequent losses related to the attacks and the
subsequent shut down of air travel, and up to $10 billion in loan guarantees. Eligible airlines
used approximately 10% of the available guarantees. Although there were still airline
bankruptcies in the years that followed, some commenters believe that the assistance was
successful in that it prevented immediate bankruptcies during an economic downturn.
(Lewinsohn 2005 ).
Even if a crisis is short-lived, companies will need a period in which to recover to pre-crisis
levels. The assistance packages and loans offered by Korea and the US seem to acknowledge this
and anticipate challenges even after the epidemic subsides. Another example is Singapore
Airlines which, in response to the COVID-19 crisis, announced that it had secured a loan of S$4
billion from DBS Bank to cover its near-term liquidity needs. It also planned to raise S$14
billion from its existing shareholders through a rights offering (to purchase shares and bonds)
underwritten by its majority shareholder, the sovereign investment fund, Temasek Holdings.
This would provide capital that would not only help it weather the pandemic but would also
strengthen its return to operations after.
Should a crisis extend for longer than expected, governments may have to extend or increase aid
to forestall the further decline of weakened companies. In such instances, tools that may be
utilized include:
• additional or longer-term loans
• capital injections
• restructuring
• bankruptcy
• nationalization.
Some of these solutions, such as extended loans, are quicker to put in place than others, i.e.,
capital injections and restructuring. However, restructurings, whether through bankruptcy or
not may require additional funding directly from the government or from private sources,
potentially with further government guarantees. The availability and ease of implementation of
these later solutions usually depend on what standing powers the government has. In other
contexts, additional legislation may be needed, which would be more time consuming.
It should also be noted that there is always the possibility that the effects of a crisis may reveal
preexisting fundamental financial weaknesses that would need to be addressed upfront if
companies are going to be saved from collapse. Sometimes these are revealed upfront, as in the
case of Italy--which in response to the COVID-19 pandemic, has re-nationalized Alitalia; the
airline had been attempting to sell itself for a year and was thought to be unable to weather the
pandemic without assistance.
There are several types of nationalization. Governments can take control of a company or
industry e. through government fiat, using existing authority or new legislation; capital
injections; or as the result of providing funding for a restructuring. Italy nationalized Alitalia by
government fiat. The country had previously used a similar strategy in the aid provided to
Parmalat, an Italian dairy company, when the Italian government issued an emergency decree to
allow Parmalat to file for bankruptcy to receive financial aid and undergo intensive

restructuring. During the GFC, the US took control of GM as a result of funding its bankruptcy
and receiving equity in the company.
Taxpayer Protection
Another important issue for governments to consider is how to structure the intervention to
ensure repayment and protect taxpayer funds. Several elements can address this:
• Rates and fees that incentivize repayment once private funding is available
• Loan provisions that restrict share buybacks and paying dividends
• Loan provisions that affect desired policies
• Restrictions on executive compensation
• Collateral that secures the loan
• An equity interest for the government
A simple protection for lent funds would be to set the rate and terms of loans to incentivize
payoff when private credit avenues are again available. In accordance with Bagehot’s dictum to
lend at a penalty rate, setting a rate above the usual market rate will incent borrowers to pay off
or refinance the loan from private sources when the market recovers. Restrictive loan terms,
such as those relating to buyback of shares and payment of dividends, prohibit the firm from
misappropriating government funds. Terms may also require heightened government oversight
and reporting, which a firm may find burdensome, incentivizing accelerated repayment.
In the US, during the GFC and since, the payment of executive compensation at firms receiving
government assistance has been a controversial issue. Aid provided under the Troubled Asset
Relief Program (TARP) during the GFC was subject to these types of restrictions. There is some
evidence that these restrictions created incentives for companies to repay the government
early. Terms of the aid offered in the current COVID-19 programs also restrict certain executive
pay.
Loan terms have also been used as a means to interject industrial policy into a situation such as
during the GFC, when the restructuring of GM and Chrysler were conditioned on lowering labor
costs and producing energy efficient autos.
Loans may also be secured by collateral; however, this is not always available. A firm or industry
may be highly leveraged, having already granted security interests on much of its assets. In this
case, receiving equity interests may be an alternative that provides some potential upside to
taxpayers.
The theory behind equity interests is that the taxpayers can share in the company’s recovery,
which their assistance funded. This can be achieved through the grant of warrants that provide
the opportunity to purchase shares at a nominal price, preferred shares that are convertible into
common shares, or an outright purchase or grant of common shares.
US Treasury Secretary Mnuchin said that rather than make outright grants, the Treasury
intends to take equity stakes in airlines in exchange for the cash grants (which must be used for
employee wages, salaries, and benefits) contemplated by the COVID-19 assistance. Equity stakes
are common in government bailouts. Such “equity stakes” would in theory permit taxpayers to

benefit from the financial recovery of the firm. At this time, it remains unclear in what form this
equity interest would take.
In the GFC, the government received warrants to purchase stock (GM) and convertible preferred
stock (AIG). Another example is the actions of the New Zealand government which utilized
equity purchases as a means of cash injection when refinancing Air New Zealand after the 9/11
attacks. Another successful example, not during a financial crisis, was the utilization of a
combination of loan warrants and guarantees in the aid provided to Chrysler in 1980, which
resulted in a net profit for the US government.
Developing countries may rely on sovereign wealth funds, which store capital in investment
funds during high-income times to fund government policies in low-income times. Other
rescues rely on private sector solutions, such as the formation of a lifeboat fund via private
banks for the rescue of Pan Electric Corporation in Singapore. With the global demand shock
progressing rapidly through various industries almost simultaneously, a private sector solution
may not be the most effective in the current economic environment.
Some commenters have critiqued the use of warrants as financial injections for poorly managed
firms. Another sees the possibility of bankruptcies as necessary to prevent moral hazard if only
cash grants or loan programs are offered. (Casey and Posner 2015). Another critic argues that
one-off and full bailouts from the state are inefficient and should not be utilized; standard
bankruptcies, perhaps with government assistance, are preferred. (Couwenberg and Lubben
2018). Consistent with this argument, the Congressional Oversight Panel found that the use of
bankruptcy in the aid provided for GM and Chrysler prevented moral hazard as the companies
faced disincentives to apply for aid. The panel estimated that up to 1.1 million auto-related jobs
would have been lost if the companies had failed.
Conclusion
Various tools are available to countries that may need to provide assistance to critical industries
that experience distress in a crisis. The COVID-19 crisis has shown that direct grants and
industry-specific remedies such as the suspension or refund of taxes may be readily available as
a first response to quickly provide liquidity. However, as the crisis persists, additional assistance
may be needed to sustain companies. Loans and loan guarantees have often been applied at this
juncture. A prolonged crisis or the existence of fundamentally weak organizations pose a risk
that solvency issues may appear, requiring more intensive measures such as capital injections
and restructurings, with or without government assistance, if firms are to recover from the crisis
and avoid collapse.

Case Studies and Policy Changes
US Begins Airline and Aviation Interventions

By Alex Nye, Vaasavi Unnava, and Rosalind Wiggins
Original post here.

On April 20, the U.S. Treasury Department announced that it had finalized agreements with six
major airlines—Allegiant Air, American Airlines, Delta Air Lines, Southwest Airlines, Spirit
Airlines, and United Airlines—for $20.5 billion in assistance under the Payroll Support Program
(PSP) established by the CARES Act. It said five other airlines plan to participate, which would
bring participation to 95% of U.S. air carrier capacity.
Four airlines—Hawaiian Airlines, United Airlines, American Airlines, and Spirit Airlines—have
also announced their intent to apply for $10.4 billion under the Economic Relief Program
(ERP). The government has disbursed an additional $9.1 billion in aid to aviation-related
industries through other programs, which like the ERP, are authorized under the CARES Act..
Under the PSP, Treasury will provide grants and loans to support payroll for the carriers’
employees as the COVID-19 pandemic continues to depress demand. The PSP makes up to $25
billion available for passenger carriers in grants and loans. The ERP makes up to $29 billion
available in loans and loan guarantees.
Presently, the CARES Act is one of the only broad-based grant and loan programs for airlines
that governments have established during the current COVID-19 crisis. (See the earlier YPFS
blog on the CARES Act here and our blog on aid to airlines around the world here).
The government has standardized its approach in providing aid to larger carriers. Treasury has
decided to allocate 70% of funds through grants and 30% through low-interest, 10-year loans.
This ratio was hotly negotiated, as airlines had expected that the support would exclusively come
as grants. However, Treasury determined that larger airlines should compensate taxpayers for
the large sums allocated.
The table below shows the terms of the PSP awards announced publicly or filed through the
SEC, including announced expected agreements with the Treasury by Alaska Airlines, Hawaiian
Airlines, and JetBlue Airways. Note that data are not yet available for Frontier Airlines and
SkyWest Airlines, the two other airlines that Treasury expects to participate.
Airlines must use PSP funds exclusively to pay employee wages, salaries, and benefits. They
must also agree not to conduct involuntary layoffs or furloughs, or reduce pay rates and benefits
through September 2020; to not engage in stock buybacks or dividend payments through
September 2021; and to limit certain executive compensation through March 2022. The
government will not forgive PSP loans, which mature in ten years, but which may be prepaid
without penalty at any time.
The CARES Act provides that the government “may receive warrants, options, preferred stock,
debt securities, notes, or other financial instruments” from the airlines in exchange for PSP
support. The Treasury has decided it will only take equity interests in airlines that receive more
than $100 million in PSP aid. So far, the government has taken those equity interests in the

Assistance under the CARES Act Payroll Support Program
Grants Loans
(in (in
millions) millions) Warrants
Price per Related

Airline Amount Principal # Shares Share Preferred/Common Link
Alaska Airlines*** $725 $267 -- $31.61 Common Form 8-K
Allegiant Air $86 $21.6 25,898 $83.33 Common Form 8-K
American
Airlines** $5,815 $1,714 13.7 million $12.51 Common Form 8-K
Delta Airlines $3,800 $1,600 6.4 million $24.39 Common Form 8-K
Hawaiian
Airlines**,*** $233 $57 ~ 1% $11.82 Common Form 8-K
JetBlue Press
Airways*** $685.1 $250.7 -- -- -- Release*
United Airlines** $3,500 $1,500 4.6 million $31.50 Common Form 8-K
Southwest Press
Airlines*** ~$2,300 ~$1,000 2.6 million -- -- Release*
Spirit Airlines** $264.3 $70.4 143,541 $14.08 Common Form 8-K
Note: Amounts shown indicate the maximums agreed to by Treasury and carrier
(--) indicates data is not available.
(*) 8-K not yet available
(**) Airline has announced intent to apply or has applied (Hawaiian) for aid under ERP
(***) Airline has announced details but has not signed an agreement with Treasury
form of warrants exercisable for common shares at their April 9, 2020 prices, at any point over a
five-year period.
On April 20, the Treasury announced that it had released initial disbursements under the PSP,
totalling $2.9 billion, to two major airlines and 54 smaller ones. Over 230 airlines have applied
for assistance under the PSP, and Treasury is still processing applications. If applications exceed
the amount authorized for any category of eligible participants, the Treasury has stated that it
may adjust award amounts and related components on a pro rata basis.

Economic Relief Program
Four airlines have said they intend to participate in the ERP. Treasury has accepted the
application of one airline, Hawaiian Airlines; Treasury has yet to reach an agreement with two
others, United Airlines, American Airlines, and Spirit Airlines.
Loans under the ERP are secured, would bear interest at the market rate before the COVID-19
outbreak, and would be for a five-year term. ERP participants must establish that they have
exhausted other available credit. They must also agree to not engage in stock buybacks or pay
dividends until 12 months after they pay off the loan; maintain workforce levels at 90% of their
March 2020 levels until September 30, 2020; adhere to government restrictions on executive
compensation; and maintain certain specified services. The ERP also mandates that Treasury
receive warrants from participants whose stock trades on a national exchange (an optional
stipulation under the PSP). For other participants, receipt of an equity interest in the form of a
warrant or a senior debt instrument is at the secretary’s discretion.
Hawaiian Airlines applied for and received a secured loan of $364 million with a five-year term.
Once finalized, the airline will issue warrants to the U.S. government that are convertible into
6.7% ownership and exercisable at the price of $11.82 per share. United Airlines announced its
plans to apply for a secured loan of up to $4.5 billion, and it would issue warrants for up to 14.2
million shares in common stock, exercisable at $31.50 per share. American Airlines is seeking
$4.75 billion, and plans to issue warrants for 38.0 million shares of common stock, exercisable
at $12.51 per share. Spirit Airline expects to receive $741 million under the ERP and to issue
warrants exercisable into 5.3 million shares at a strike price of $14.08. Each warrant agreement
prices shares at market close as of April 9, 2020.
In line with requirements to exhaust all other sources of funding, two airlines, Alaska Airlines
and United Airlines, have secured external funding from major banks. Wells Fargo lent Alaska
Airlines $425 million via a senior secured loan with an interest rate based on LIBOR plus an
increasing margin over the duration of the loan. The loan extends for 364 days. Similarly, Bank
of American has lent United Airlines $250 million, with an interest rate no lower than 2% that
increases over the duration of the loan, to be extended through April 6, 2021. Through Citibank,
Spirit Airlines entered into a revolving credit facility for an initial commitment amount of $110
million, and borrowed an additional $25 million on April 20th.
Other Assistance
In addition to aid to airlines, the CARES Act allocates $17 billion for aid to Boeing (although not
explicitly named), the largest national defense contractor and aircraft supplier. Manufacturers
are feeling the reverberations of depressed demand, with cancelled orders for major suppliers
and cuts in production, leaving many manufacturers requesting aid from governments around
the world. The chart below visualizes the global connections between the top suppliers and the
largest airlines, and the number of airlines they supply.
Still under negotiation with the Treasury, a potential aid package for Boeing has hit a roadblock
as CEO Dave Calhoun opposed providing the US government an equity stake in exchange for
aid. It’s unclear whether negotiations will resume or conclude in the near future.
The US’s CARES Act also suspends an array of airline excise taxes through the end of 2020.
Although the tax relief is estimated to amount to $8 billion in aid, it is dwarfed by the other aid

Source: SNL. Node size is weighted by the number of connections to other nodes.
given to the industry under the CARES Act. Private jet companies are expected to be the greatest
beneficiaries of the suspension in excise tax.
Finally, Title XII of the CARES Act provides the Federal Aviation Administration (FAA) $10
billion in aid to be awarded as grants as economic relief to commercial service airports and
general aviation airports. All airports receiving funding through the FAA must maintain,
through December 2020, at least 90% of the individuals employed as of March 27. As of April
15, the FAA has awarded $9.1 billion to over 3,000 airports across the United States.

Aviation Interventions Continue Internationally
By Vaasavi Unnava and Alex Nye
Original post here.

Governments around the world have committed many billions of dollars to help the aviation
sector survive the COVID-19 crisis. This aid comes in the form of grants, loans, loan guarantees,
tax relief, and other subsidies. Some programs are targeted at specific firms and others provide
broad-based support. The US is implementing what it expects to be the largest targeted package
for the industry. Singapore's program appears to be the second most generous.
COVID-19 has buffeted the international and domestic aviation industries. On April 20, the
International Civil Aviation Organization (ICAO) predicted airlines will lose at least $160 billion
on international air travel over the first nine months of 2020. The suppliers for these airlines are
also suffering. Some are shuttering manufacturing facilities to conserve funds.
The U.S. CARES Act provides the industry with up to $78 billion in loans, loan guarantees, and
cash grants. Other countries have also begun to financially support their aviation industries (see
the earlier YPFS blog). Few other countries took a comprehensive approach like the US; most
offer one or two narrow facilities to their airlines instead of aiding the entire sector.
The United Kingdom has largely encouraged airlines to utilize the broader Covid Corporate
Financing Facility (CCFF), which provides credit by buying commercial paper issued
by businesses needing aid due to COVID-19 disruptions. Through the CCFF, the UK has
awarded £600 million to the British budget airline group, EasyJet. The CCFF
offers standardized terms on commercial paper purchases for any company requiring aid. In
particular, all commercial paper purchases require that the commercial paper matures within a
year and have at least an A- rating or the equivalent from a ratings agency as of March 1, 2020.
Nigeria has set up a Targeted Credit Facility, which aims to support companies especially
impacted by COVID-19, including airlines.
Not all airlines requesting state aid have received it. Virgin Atlantic requested £500 million in
the form of grants and loans from the UK government, but has yet to receive aid. Sir Richard
Branson, the head of Virgin Atlantic, is a tax resident of the British Virgin Islands and pays no
UK income tax. This has made the government hesitant to rescue Virgin Atlantic. UK
manufacturers Rolls Royce and Airbus UK have supported the aid to Virgin Atlantic.
They argued that the Virgin Atlantic plays an integral role in the UK’s manufacturing supply
chain. Virgin Atlantic is a major customer for Rolls Royce parts and the Airbus A330 (whose
wings are designed and manufactured in the UK).
A request for aid from Air France-KLM has hit a similar roadblock, resulting from a conflict
between its two government shareholders; the government of France has a 14.3% stake and the
government of the Netherlands has a 14% stake. The company appears to be nearing an
agreement with the French government. The rescue is reportedly an EUR 10 billion ($10.9
billion) deal under which the French government will guarantee 90% of bank loans to Air
France-KLM and provide some loans to the airline through a government emergency fund.
Norway used a NOK 6 billion loan guarantee program to support its airlines. It provides a 90%
government guarantee on lending to participants. Troubled carrier Norwegian Air Shuttle can

receive up to NOK 3 billion under the program. The program also guarantees NOK 1.5 billion in
loans for multinational airline SAS and NOK 1.5 billion for Widerøe and other airlines. In
Norway, a private-sector analyst argued that the aid provided to Norwegian Air Shuttle is likely
not large enough; he said it would only pay for 1.5 months of Norwegian Air Shuttle grounding
its aircraft.
Similarly, Sweden has provided a credit guarantee framework for its airlines, with a maximum
of SEK 5 billion ($500 million) to any airline. Finland has provided a €600 million state
guarantee for Finnair, a state-owned airline.
Some multinational airlines have coordinated aid from multiple governments. One example
is SAS, which is 14.82% owned by the Swedish government and 14.24% owned by the Danish
government. SAS received an EUR 137 million guarantee on a revolving credit facility from the
Danish government; a 90% credit guarantee worth NOK 1.5 billion from the Norwegian
government; and credit guarantees worth SEK 1.5 billion (about $142 million) from the Swedish
government (from its SEK 5 billion program).
Italy has chosen to re-nationalise Alitalia after the airline requested aid. The government plans
to downsize the airline to a quarter of its current size. The government had attempted to turn
around Alitalia and privatize it after a bankruptcy in 2009. That effort stalled until Etihad
Airways took a 49% stake in Alitalia in 2014. The company briefly improved, but lapsed back
into bankruptcy proceedings in 2017. The Italian government recently injected EUR 500 million
into a state-owned company it plans to use to execute the nationalization in June.
Singapore has offered a large amount of aid to its aviation industry. The government plans to
spend S$15.1 billion ($10.6 billion) on a program paying 75% of all employee wages in the
industry up to S$4,600 ($3,200) per month. Singapore’s state-owned investment
company, Temasek, said that it would underwrite the sale of S$15 billion worth of Singapore
International Airlines shares and convertible bonds. Singapore’s biggest bank, DBS, will provide
the airline with a bridge loan of S$4 billion ($2.8 billion). Temasek currently has a 56% stake in
the airline. The government also said it would provide S$350 million (~$246 million) in relief
from aviation taxes and fees.
Other governments have chosen to aid their airlines and aviation industries through their tax
code. The Republic of Korea offered tax measures supplementing 300 billion won of liquidity
support for budget carriers from the state development bank. Australia initially offered its ailing
airlines A$715 million in tax relief ($457 million). The Australian government eventually offered
A$160 million ($102 million) in other aid to its two biggest airlines (Qantas and Virgin
Australia) in exchange for the airlines maintaining a core set of regional flights. This was not
enough to save Virgin Australia, which entered voluntary bankruptcy after the Australian
government did not respond to its A$1.4 billion ($894 million) bailout request.
Around the world, governments and suppliers are still negotiating terms of any potential direct
aid to suppliers and airports. Officials from Airbus have asked for funding from the French
government, as the company cuts production by one third. So far, France has not allocated aid
to Airbus. The Hong Kong Airport Authority (HKAA) allocated HK$50 million ($6.5 million) to
fund retraining for up to 25,0000 airport staff on unpaid leave. The HKAA also reduced rents by
50-70% for shops within airports in a HK$630 million program ($81 million).

Liquidity and Market Liquidity
Central banks support will normally provide large amounts of liquidity to encourage credit
markets to operate in times where they tend to slow or completely freeze. Market and
emergency liquidity relief comes in various forms, such as increased central bank repurchase
agreement activity, large-scale direct purchases of obligations like government debt, corporate
bonds, or commercial paper on primary and secondary markets, and expanding the scope of
existing facilities and operations by increasing tenor and widening eligibility, to name a few.

Analysis
Central Banks Introduce Programs to Improve Liquidity in Key Markets

By June Rhee with Research Support from Aidan Lawson and Manuel Leon Hoyos
Original post here.

As the coronavirus crisis continues to disrupt global markets, several countries have adopted
new or revised programs to improve liquidity in specific credit markets that are critical to
households and businesses. Similar market liquidity programs were introduced during the
2007-2009 Global Financial Crisis (GFC) to backstop wholesale funding markets. Although
evaluations of these programs are limited due to the difficulty in isolating the independent
effects of these programs, studies report that most of these programs, regardless of size, were
helpful in reducing disruptions in these markets by assisting price discovery, restoring
confidence and catalyzing market volume.
When designing a market liquidity program, policymakers need to make key design decisions
about:
1. Legal authority - what is the legal authority of the central bank for intervening in these
markets?
2. Stigma problem - how do you ensure wide enough participation in the programs?
3. Loans: recourse or non-recourse and term - if the central bank is providing a loan, what
are specific features that the central bank should be mindful of?
4. Eligibility - which institutions are allowed to participate in the program?
5. Haircuts, interest rates, and fees - how will the central bank strike a balance between
incentivizing the participants to reenter the market and minimizing the risk to the
central bank?
6. Relief from regulatory requirements - what existing regulatory restrictions may restrict
the usage and efficiency of the program?
Below is a summary of how policymakers have approached these questions in the past.
Legal Authority
The legal authority of a central bank can influence the method by which it intervenes in credit
markets. During the GFC, central banks either purchased or made loans in market liquidity
programs. The Bank of England, ECB, and Bank of Japan directly purchased securities. Their
legal framework authorized them to make outright asset purchases and they had a history of
direct participation.
In contrast, in the U.S., section 13(3) of the Federal Reserve Act allows the Fed to lend to
nonbanks through its discount window only in “unusual or exigent” circumstances. Its power to
purchase market instruments is limited. For that reason, in designing several programs during

the GFC, the Fed lent funds to an intermediary, and the intermediary would then purchase
eligible market instruments and post them to the Fed as collateral for the loan.
Because of the legal limitations, the Fed’s Term Asset-Backed Securities Loan Facility (TALF)
provided term credit against newly issued ABS rather than making outright purchases.
Similarly, the Fed’s Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility (AMLF) lent funds to an intermediary such as a depository institution or a broker-dealer
so that entity could purchase asset-backed commercial paper (ABCP) from money market
mutual funds. The Fed has reintroduced revised versions of the TALF and AMLF recently in
response to the coronavirus crisis. Posts on the recent TALF can be found here and the recent
AMLF can be found here.
One study observed that the legal restrictions were the only reason the Fed used an intermediary
to purchase assets in the earlier GFC programs. The loan vs. purchase decision does not seem to
have made a noticeable difference on the effectiveness of these programs. Non-recourse loans
and purchasing are economically similar for central banks.
On the other hand, some countries’ central banks are able to use their regular or standing
operations to lend to nonbanks. These programs naturally took the form of loans, as seen
in Australia, Canada and Chile.
Limitation on legal authority also led the Fed to use special purpose vehicles (SPVs) as a third
party intermediary in these programs. A caution for using an SPV is that they can be complex.
Utilization of an SPV in the Fed’s GFC-era Money Market Investor Funding Facility
(MMIFF) may have delayed the Fed’s efforts to reach illiquid markets. The program took more
than one month to get off the ground. Certainly, response time is an element of effectiveness.
SPVs have advantages. South Korea has and is now using a fund jointly financed by the Bank of
Korea and private institutional investors to conduct market liquidity programs. Some
observers [p.42] argue that the existence of an intermediary vehicle separate from the central
bank can make it easier to use private institutions as agents, asset managers, and custodians.
Stigma Problem
These programs can only work if financial institutions participate. During a crisis, financial
institutions may be reluctant to draw on emergency lines of credit from the central bank if doing
so could signal weakness to others. Moreover, the perception of weakness does not need to be
based on reality to keep eligible institutions from participating in emergency lending programs
(see here [p.25]).
One way the Fed addressed stigma during the GFC was through auctions, as in its Term Auction
Facility. For that facility, auctions provided safety in numbers. Also, since the price was set by
the auction, it did not imply that borrowers were paying a penalty rate. Moreover, because
auctions were held only at certain times, unlike a standing facility, using the facility did not
imply a borrower had an immediate need for funding (see here).
Some programs were run as standing facilities and used other features to deal with stigma.
First, limited or lagging disclosure can prevent stigma: if the market doesn’t know a bank has
received government liquidity, that bank won’t suffer from stigma. In the U.S., however, post-
GFC disclosure requirements imposed on the Fed may raise stigma problems. The Fed now
must report to the Congress for any use of emergency lending authority under section 13(3) of

the Federal Reserve Act. Within seven days of establishment of any section 13(3) program, also,
the Board must report detailed transaction-level information to the Congress on any lending
activity it conducts under those programs.
Second, offering uniform access for all financial institutions, irrespective of their condition and
systemic importance, can prevent stigma. For that reason, central banks sometimes encourage
healthy institutions to participate.
The stigma problem is mainly relevant for government programs that financial institutions don’t
use in normal times. The ECB during the GFC was able to lend billions of euros in the early days
of the GFC in part because its facility was already available to hundreds of financial institutions
and had been used regularly. Banks could avoid stigma because that borrowing was seen
as unremarkable.
Loans: Non-recourse and Term
The advantage of recourse loans is that repayment is backed by the financial resources of the
borrower. Earlier programs by the Fed heading into the GFC were recourse but later ones were
non-recourse as the Fed was lending to new counterparties whose financial condition could not
be readily assessed. In other cases, the Fed found it would be counterproductive to expose
counterparties to the risk of a decline in the collateral’s value.
Non-recourse loans by the Fed generally accompanied a private loss-sharing arrangement to
mitigate the risk it took in collateralized non-recourse loans. In TALF, this created an incentive
for participants to establish sound collateral for the securities, since they took the first risk of
loss. In view of the long term to maturity of the loans, and wide-variety of newly issued spreads
and credit quality across the ABS market, it was desirable to have private investors’ scrutiny.
This involvement also avoided undercutting market mechanisms for allocating credit to
borrowers by relying on private structuring and pricing of new securitizations. Relying on
private investors in newly issued ABS and CMBS also provided benchmark pricing to the
market.
The terms of loans generally mirrored the terms of underlying collateral
(AMLF and Commercial Paper Funding Facility (CPFF)). In TALF, the term was initially one
year, which was shorter than that of underlying assets posted as collateral for the loan. This
mismatch meant that the financing would expire before the underlying debt securities were paid
back, leaving the investors to assume the full risk for the rest of the term left in the investment.
The Fed recognized that flaw and extended the term to three to five years, reflecting the maturity
of underlying assets.
Eligibility
Many U.S. programs during the GFC were limited to institutions the government was already
familiar with. In the case of the AMLF, to facilitate quick implementation of the program, the
Fed relied on institutions with which it had existing relationships (depository institutions and
broker-dealers) to act as intermediaries and to be the actual borrowers under the program.
Haircuts, Interest Rates and Fees
Setting haircuts, interest rates and fees are a balancing act. For a program to be effective and
ensure widespread use, these should be high enough to minimize moral hazard but not too high
as to deter participation.

The Bank of England’s GFC-era Commercial Paper Facility bought CP at spreads that were
significantly below market rates at the time, but significantly above those expected to prevail in
normal conditions. Initially this was to help drive market spreads down and provide a backstop.
This was set up to be self-liquidating as normal market conditions returned.
Haircuts and interest rates also represented the risks the central bank was taking on with
illiquid assets. In launching Outright Purchases of CP, Bank of Japan governor Masaaki
Shirakawa stated that the bid rate would be “more favorable than the market interest rates when
the market is malfunctioning;” since losses on any purchased CP come at a cost to the taxpayers,
a penalty rate would ensure that taxpayers were compensated for taking on the credit risk.
The CPFF used interest rate as a security feature where the accumulation of interest was
expected to absorb losses and provide additional protection for central banks (see here[p.197]).
However, the AMLF did not impose any haircuts. Under the AMLF, borrowers purchased ABCP
at amortized cost, not at depressed values. The Fed feared further market instability if another
money market fund were to “break the buck,” that is, to announce that the market value of its
assets had fallen below 99.5% of book value. The Fed, instead, to minimize the risk that it
undertook, only took high-quality ABCP as collateral and tightened the requirements as the
program progressed.
Fees should be sufficient to cover central banks’ costs of managing each program. A Bank of
England report emphasizes that fees in GFC programs were not designed to manage the risks to
the central bank or to the public—those risks should have been adequately covered by collateral
and haircuts (see here).
The Fed sometimes relies on private institutions to ensure the accuracy and efficacy of these
programs. In the TALF, agents were hired to handle administrative activities between the Fed
and the borrowers. Bank of New York Mellon, the program custodian, was responsible for
holding collateral, collecting and distributing payments and administrative fees, and validating
the pricing and ratings submitted for pledged securities. Collateral monitors, selected by the
Federal Reserve Bank of New York, provided data and modeling services used in risk
assessments and also validated collateral pricing and ratings.
Relief from Regulatory Requirements
To ensure the effectiveness of these programs to reach their intended markets, central banks
have at times exempted or limited existing legal restrictions.
In the AMLF, because the Fed protected borrowing banks from credit or market risk in holding
ABCP, the Fed assessed no regulatory capital charge on banks for those holdings. The Fed also
exempted banks from the maximum limit that Fed rules imposed on a bank’s “covered
transactions” with any single affiliate of the bank from 10% of the bank’s equity to 20%. This
allowed the AMLF borrowing banks to purchase ABCP from their affiliated money market
funds.
In the TALF, the government made it clear that the executive compensation restrictions that
Congress had mandated for companies receiving taxpayer support under the Troubled Asset
Relief Program (TARP) would not be applied to TALF sponsors, underwriters, and borrowers.
This was to encourage participation in the program. In another program, the Fed didn’t make
this clear, and some potential borrowers were unsure whether to participate.

Effect on Lending to Households and Businesses
Market participants and government officials have claimed that various market liquidity
programs succeeded in channeling credit to frozen markets, although empirical evidence is
limited. Post-GFC, some in the U.S. have attempted to compare programs to identify which have
been the most effective in channeling credit to households and businesses. One paper by Fed
economists argued that TALF had the most direct impact on consumers. They attribute TALF’s
success to its three features: (i) a non-recourse loan structure, (ii) longer maturities than
discount window and other lending programs, and (iii) availability to a wide set of market
participants, beyond the Fed’s traditional counterparties.

Treasury Backstop for Fed Lending under CARES Act: Lessons from 2008
TALF
By June Rhee with research support from Aidan Lawson
Original post here.

Section 4003(b) of the CARES Act appropriates $454 billion for the Treasury to backstop
Federal Reserve (Fed) lending programs aimed at supporting credit flows to businesses, states,
or municipalities in the midst of the coronavirus pandemic.
The week before the CARES Act was signed into law, the Treasury had already used $50 billion
in total from the Exchange Stabilization Fund (ESF) to backstop five Fed emergency lending
programs, including the reintroduced Term Asset-Backed Securities Loan Facility (TALF). In
2008 during the Global Financial Crisis (GFC) the Treasury backstopped the first TALF using
funds appropriated by Congress in the Emergency Economic Stabilization Act of 2008 (EESA).
The Fed has yet to determine the nature of any emergency lending programs (see here for
discussion on the Fed’s section 13(3) power) it will launch under this authority, but Fed
Chairman Jerome Powell said on March 26 that the Fed's emergency lending powers are
dependent on this Treasury backstop: “Effectively, $1 of loss-absorption is worth $10 worth of
loans.” The Treasury backstop certainly extended the Fed’s lending power during GFC but what
were the Treasury and Fed’s expectations in actually using this backstop? These expectations
certainly influenced the design of 2008 TALF and a recent report to Congress includes the Fed’s
expectation in the 2020 TALF.
Pre-CARES Act Treasury Backstop in 2020 TALF
On March 23, the Fed and the Treasury reintroduced TALF to support credit flows to
households and businesses in the midst of economic distress caused by the coronavirus
pandemic. Similar to the 2008 TALF, a special purpose vehicle (SPV) will make a total of $100
billion three-year nonrecourse loans to US companies that own eligible ABS. The SPV is funded
by a recourse loan from the Federal Reserve Bank of New York (FRBNY) and an initial $10
billion equity investment by the Treasury. The Fed relies on Section 13(3) of the Federal Reserve
Act (FRA) and the Treasury uses the Exchange Stabilization Fund to backstop the 2020 TALF.
On March 29, the Fed’s report to Congress pursuant to Section 13(3) revealed the Fed’s
expectation in using the Treasury backstop. The Fed “does not expect at this time that the TALF
will result in losses in excess of the Department of the Treasury’s equity investment”. Therefore,
it seems the Fed is interpreting the Treasury’s backstop as available to use. Similar language is
included in the report to Congress for the Primary Market Corporate Credit Facility,
and the Secondary Market Corporate Credit Facility.
Treasury Backstop in 2008 TALF
The Emergency Economic Stabilization Act of 2008, which Congress passed in the midst of the
GFC, established the Troubled Assets Relief Program (TARP) to help stabilize the US financial
system and restore credit flows to households and businesses. It enabled the Treasury “to
purchase and insure certain types of troubled assets for the purposes of providing stability to
and preventing disruption in the economy and financial system.” Initially, Congress authorized

$700 billion for TARP. It reduced TARP’s size to $475 billion in 2010 in the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
Structure of Treasury Backstop in 2008 TALF
The 2008 TALF was a joint program between the Treasury and the Fed aimed at restarting the
asset-backed securities (ABS) markets, which had come to a near complete halt in the fall of
2008 after the bankruptcy of the Lehman Brothers investment bank. The Fed, under Section
13(3) of the FRA, and the Treasury, using TARP funds, initially committed $200 billion. Later
on February 10, 2009, this commitment was expanded up to a potential $1 trillion. The FRBNY
made non-recourse loans to investors to purchase eligible ABS and the Treasury provided credit
support for these loans.
Initially the staff at the Fed settled on two possible models for the Treasury backstop. The Board
staff preferred market participants forming funds that would invest in ABS to which the Fed
would provide leverage, the Treasury would provide mezzanine financing, and private investors
would provide equity. A similar model without the leverage from the Fed was adopted by the
Treasury as the Public-Private Investment Program (PPIP) during the GFC. The FRBNY staff
favored a model under which the Fed would lend to private investors holding ABS, with the
Treasury providing the Fed credit protection for those loans. This model became TALF. An
important advantage of this model was that it would naturally sunset when credit risk spreads
normalized and alternative financing became more attractive than TALF loans. (see here)
The FRBNY created a special purpose vehicle (SPV, TALF LLC) to manage assets posted as
collateral for the loans. The SPV was initially funded by a $100 million drawing on the
Treasury’s $20 billion commitment to purchase subordinated debt issued by the SPV. $16
million of this initial funding was set aside for administrative funding. If the SPV needed further
funding beyond $20 billion committed by the Treasury, the FRBNY would lend up to $180
billion. The FRBNY’s loan to the SPV was senior to the Treasury’s subordinated debt, with
recourse to the SPV, and secured by all the assets of the SPV.
Loan repayments and proceeds from asset sales were distributed in the following order under
the credit agreement among the SPV, the FRBNY and the Treasury:
1. pay general TALF program administrative expenses,
2. repay the $16 million Treasury loan made to the SPV to cover administrative expenses,
3. repay outstanding principal on any FRBNY senior loans,
4. fund the cash collateral account,
5. repay outstanding principal on any Treasury loans,
6. repay FRBNY loan interest,
7. repay Treasury loan interest, and
8. repay any other obligations that may arise that have not been specified by the agencies.
Any residual returns were shared by the Treasury (90%) and the FRBNY (10%).
Expectations on Actual Usage of Backstop and Features of 2008 TALF

Unlike the 2020 TALF, testimonies by Treasury and Fed officials seem to suggest that neither
the Treasury nor the Fed expected that the Fed would need to resort to the backstop. William R.
Nelson, then Deputy Director of the Division of Monetary Affairs in the Board testified that
“[a]lthough the Treasury provided credit protection for the Federal Reserve, the risk controls
built into the TALF..., were designed to keep the risk for the US government as a whole very
low”.
For further discussion on the risk controls built into 2008 TALF reflecting the
Treasury and Fed’s expectation, see the YPFS case on the 2008 TALF.

Barriers to Access Impede Utilization of Municipal Liquidity Facility
By Vaasavi Unnava
Original post here.

Many states are facing barriers to access the Federal Reserve’s $500 billion Municipal Liquidity
Facility (MLF) due to constraints on general debt issuance in their constitutions.
Congress authorized the MLF in the CARES Act. The program authorizes the Fed to purchase up
to $500 billion in debt issued by states and counties and cities of a certain size and is intended
to help mitigate the economic impacts of the COVID-19 pandemic. The program represents a
new area for the Fed, which has not traditionally lent to government subdivisions The CARES
Act separately also provided for $150 billion in grants to states to offset direct costs of the
COVID-19 pandemic.
As originally implemented, the MLF provided limited opportunities for participation by cities
and counties, instead allowing states to procure funding and distribute it amongst political
subdivisions in their geographic area. However, as governors vocalized the extensive barriers to
access, the Federal Reserve expanded eligibility from 10 cities and 16 counties to 87 cities and
140 counties. The Fed also extended the program’s end from September to December in
response to states’ concerns.
Despite the changes, legal and practical hurdles still might limit utilization of the Fed’s program,
which Congress intended to be a key tool to help states and municipalities manage the impacts
of the virus. Many of these legal hurdles are written into constitutions to maintain fiscal
responsibility in state spending. Moreover, some states can’t issue debt without voter approval,
posing the challenge of conducting a ballot under extensive social distancing guidelines.
State Debt Issuance Caps
Many states have constitutionally-mandated caps on the amount of debt a government can issue
within a fiscal year. These caps can vary dramatically.
Oregon, for example, only allows the issuance of $50,000 of aggregate debt, a sum small enough
to render debt issuances unviable. Other states have much higher caps. For instance, South
Carolina can issue debt up to 5% of its revenues from the previous fiscal year--an estimated
$660 million for the state based on 2019 collections. Ohio utilizes a similar metric, requiring
that debt obligations not exceed 5% of its general revenue fund plus net proceeds from lottery
sales, making approximately $769 million its borrowing cap, based on 2019 revenues. Some
states, such as Nevada, set caps based on the total assessed value of property in the state.
Debt servicing caps can operate as an informal form of debt issuance caps, limiting the size of
debt issuances implicitly by limiting debt servicing costs. Debt servicing caps limit the size of
principal and interest payments on existing debt to some percentage of a state’s budget or
revenue. For example, Florida provides that debt servicing cannot exceed 6% of revenues
without legislative approval. Illinois has a relatively high debt issuance cap of 15% of general
revenues, and aggregate debt servicing cannot exceed 7% of appropriations from the general
revenues of the preceding year.
Voter Approval

In the context of COVID-19, the most pressing barrier to debt issuance is state requirements for
voter approval. Twenty-one states in the U.S. require some form of voter approval before debt
can be issued. Two types of voter approval are common: approval of the issuance or approval of
the size of an issuance beyond a debt cap.
South Carolina, as mentioned earlier, may issue a sizable amount of debt, but the issuance must
be preapproved by either two-thirds of the electorate or the legislature. Rhode Island may
exceed its debt cap of $50,000 only if approved through a referendum. Texas requires the
approval of a majority of voters, in addition to approval from the legislature.
Extensive social distancing guidelines have complicated voting procedures, leading many states
to delay or cancel their primary elections to prevent the spread of the virus. Without
opportunities to vote, some states cannot legally issue debt.
Legislative Approval
In addition to debt issuance caps, many states require that the legislature approve proposed
debt issuances of any amount; sometimes this approval is coupled with voter approval
requirements. Legislative approval requirements often need a supermajority to pass, which
creates a high bar.
Delaware, which is permitted to issue up to 5% of the estimated net revenues of that year
(approximately $210 million based on 2019 revenues) requires approval from three-fourths of
the legislature. Illinois requires either approval from a majority of voters or from three-fifths of
the legislature to allocate funding. Maine’s issuance cap of $2 million can be exceeded if passed
by two-thirds of both houses of the state legislature and approved by voters in a referendum.
Though Virginia only requires approval by a simple majority of both houses of the legislature, it
also has a referendum requirement.
Social distancing guidelines have affected the daily operations of many state
legislatures, temporarily suspending many sessions without means to operate remotely.
Combined with the inability to conduct referendums, current health and safety requirements
create barriers to states obtaining the necessary approvals for debt issuance.
Coverage
Practical difficulty in meeting requirements for legislative or voter approvals may prevent some
states from participating in the MLF. Some counties and cities are eligible to participate in the
MLF directly, although the scope of eligibility, even under the expanded criteria, has been
contested. The cities and counties eligible--even with the latest expansion in eligibility--are
largely urban centers; many cities and municipalities in rural or suburban settings must
therefore rely on state aid to receive funding for their local coronavirus response mechanisms,
as seen in the chart below.
Eligible counties and cities may also face similar logistical barriers preventing debt issuances on
a local level. City councils or governments must adhere to strict social distancing guidelines and
are unable to hold referendums in their jurisdictions while maintaining public safety.
While some Federal Reserve officials acknowledged the limitations of the facility prior to the
expansion, they have made no indication of additional expansions to the facility. As the first
facility the Fed has created in this crisis to provide liquidity to municipalities, the MLF may
expand or change as the COVID-19 crisis continues.

Smaller cities and counties ineligible for direct access to the MLF must rely on allocations from
state governments for MLF aid. However, as noted above, several states face legislative and
logistical barriers that impede access to the MLF. Presently, it’s unclear how smaller counties
and cities within those states’ jurisdictions could receive aid if liquidity help cannot reach the
states allocating funds. Congressional proposals for using federal government funds for
municipal coronavirus expenses have received bipartisan support.
Summary
With direct state applications hampered through multiple barriers to debt issuances, it is
unclear whether states will be able to fully participate in the program to cover the additional
scores of counties and cities ineligible for the MLF. To issue debt, many states must pass
legislation or receive approval by a supermajority of voters, both logistically challenging while
adhering to social distancing guidelines. Other states, though able to issue debt, have low debt
issuance caps, preventing them from issuing debt to the extent needed to address municipal
funding needs.
It is also unclear whether the original $500 billion allocated will be enough to fund all the
financial needs of states and municipalities as many states report large estimated deficits due to
COVID-induced budgetary shortfalls. Inflexible barriers to access may exacerbate this issue,
allocating aid to states that can more easily issue debt.

As social distancing guidelines relax, it is possible that state legislatures may be able to return to
sessions and pass debt issuances. With the facility extending into December 2020, there are still
opportunities to provide coverage to municipalities that need aid in fighting the COVID-19
pandemic.

Use of Federal Reserve Programs - 06/18/2020
By Pascal Ungersboeck
Original post here.

Below we report on operational Fed programs, based on the Fed’s weekly H.4.1
release. Since last week, the Term Asset-Backed Securities Loan Facility has
started operations; however, no funds have been extended so far. The ECB, BoE
and BoJ further decreased their use of the swap lines established with the Fed in
March.
Note on the Term Asset-Backed Securities Loan Facility and Treasury contributions
The Treasury announced on April 9 that it intended to use funds available under the CARES Act
to purchase equity in special purpose vehicles established under Fed lending programs. On June
16, the Federal Reserve Bank of New York received the most recent contribution of $10 billion
to TALF. In total, the Treasury has invested a total of $114 billion in six facilities. Per the facility
agreements, 85% of the equity contributions to the CCF, CPFF, MLF and MSF have been
invested in nonmarketable Treasury securities; $31.9 billion for the CCF, $8.5 billion for the
CPFF, $14.9 billion for the MLF and $31.9 billion for the MSF. The funds contributed to TALF
have not been invested yet.
For the MSF and MLF, the current balance largely reflects the purchase of Treasuries, rather
than facility-specific assets. For the MLF, Treasuries purchased with equity constitute $14.9
billion out of $16 billion total. The facility began purchasing municipal notes on June 2. As of
June 18, there are $195 billion outstanding across 10 facilities (Figure 1); $107 billion out of the
total has been used to purchase targeted assets.
Note on Federal Reserve Swap lines
Over the last two weeks, the European Central Bank (ECB) significantly decreased its use of the
USD swap line established with the Fed in March. The decrease is due to the expiration of two
84-day swaps the ECB entered on March 18 and March 25. As the contracts reached maturity on
June 11, the ECB’s position decreased by over $100 billion. As of June 18 its total amount still
outstanding is $45 billion. The position is expected to decrease further over the next week as
another $16 billion swap matures. The Bank of England’s position decreased from $20 billion to
$7.7 billion during the same time period as two of its large 84-day swaps expired.
The Bank of Japan (BoJ) also decreased its position in the last week. It currently stands at $171
billion, down from $212 billion last week after a $73 billion agreement matured on June 18. This
was the second-largest swap agreement the Federal Reserve entered during the current crisis.
The largest was a $75 billion swap with the ECB that expired on June 11.

Liquidity Swap Lines
The USD swap lines are bilateral agreements between the Fed and foreign central banks. They
allow foreign central banks to exchange domestic currency for US dollars. The Fed currently
maintains swap line agreements with 14 central banks.
Money Market Mutual Fund Liquidity Facility
The MMLF allows the Fed to fund the purchase of money market mutual fund assets. The
program is established under section 13(3) of the Federal Reserve Act.
Discount Window
The DW is a standing facility that allows the Fed to provide collateralized loans to
depository institutions.
Primary Dealer Credit Facility
The PDCF allows the Fed to extend collateralized loans to primary dealers. The facility was
established under section 13(3).
Paycheck Protection Program Liquidity Facility
The PPPLF allows the Fed to provide financial institutions with liquidity backed by loans to
small and medium businesses extended under the federal government’s Paycheck Protection
Program and guaranteed by the Small Business Administration. The Program is established
under section 13(3).
Commercial Paper Funding Facility
The CPFF provides a liquidity backstop to issuers of commercial paper and was also established
under section 13(3). It is operated by the FRBNY through a special purpose vehicle, the
Commercial Paper Funding Facility II LLC.
Primary and Secondary Market Corporate Credit Facility
The PMCCF and SMCCF were set up under section 13(3) to support credit to employers through
purchases of newly issued bonds and support market liquidity for outstanding corporate bonds.
These facilities operate through a special purpose vehicle, the Corporate Credit Facility LLC
(CCF LLC).

Federal Reserve Programs Involve More Risk than in GFC
By Rosalind Z. Wiggins and Greg Feldberg with Research Support from Pascal Ungersboeck
Original post here.

In this post we consider the risk profiles of the programs that the Fed has implemented during
the COVID-19 crisis as compared to those it adopted during the global financial crisis of 2007-
09 (GFC) and the role of the Treasury's backstop in each instance.
In earlier posts, we considered how the Treasury’s use of $454 billion authorized by the United
States CARES Act to backstop Federal Reserve (Fed) programs might leverage the funds into
trillions of liquidity for the economy. Thus far, this strategy has seen the Fed launch nine
programs potentially offering up to $1.950 trillion of loans backed by $215 billion of Treasury
funds, or roughly 47% of the available amount. Consistent with the CARES ACT, these facilities
were launched pursuant to Section 13(3) of the Federal Reserve Act, which requires, among
other things, that the Fed be secured and that it seek to protect taxpayers. As of June 11, the
Treasury has made investments into all SPVs for all programs except the TALF, and loans have
been extended under the Municipal Liquidity Facility, the Corporate Credit Facility, and the
Commercial Paper Funding Facility.
The Fed also launched two other Section 13(3) facilities without Treasury backing, the Primary
Dealer Credit Facility, which provides recourse loans to primary dealers, and the Paycheck
Protection Program Lending Facility, which finances Paycheck Protection Program loans
guaranteed by the Small Business Administration. Loans have been extended under both these
programs.
Fed Taking on more Credit Risk
Four of the Section 13(3) programs implemented by the Fed are variations of programs that it
implemented during the GFC. However, as Chairman Powell has acknowledged, this time the
Fed is taking on more risk. An April letter from the Congressional Budget Office (CBO) also
concluded that, this time, the Fed is taking on “substantial additional credit risk for the
government.”
Because of the wide impact of the government’s shutdown orders in response to the COVID
pandemic, the programs that the Fed has implemented with Treasury support aim to distribute
liquidity across wide swaths of the economy and reach borrowers to whom the Fed has not
traditionally lent. These include corporations (Primary and Secondary Market Corporate Credit
Facilities), political subdivisions (Municipal Liquidity Facility), and small and medium-sized
businesses (Main Street Facilities).

Some of the programs are accepting riskier collateral than the Fed accepted under its GFC
programs. The Fed’s GFC programs provided collateralized loans and required that such loans
be “secured to the satisfaction of the lending reserve bank,” i.e., that there be a high degree of
likelihood that the Fed would be repaid and not experience losses, as required by the Fed’s then
interpretation of Section 13(3). See this YPFS blogpost for a discussion of Section 13(3).
Acceptable collateral under most GFC programs was limited to Treasuries, agency securities,
and other investment-grade securities. Only after Lehman’s bankruptcy did the Fed expand the
categories of eligible collateral under some programs to include riskier securities. For example,
the collateral eligible to be pledged at the Primary Dealer Credit Facility (PDCF), which provided
recourse loans, was originally limited to limited to investment-grade debt securities. It was then
expanded to closely match all types of collateral that could be pledged in the tri-party repo
systems of the two major clearing banks. The collateral for the Term Securities Lending Facility

(TSLF) was also expanded to include all investment-grade debt securities, whereas, previously it
accepted only Treasury securities, agency securities, and AAA-rated mortgage-backed and asset-
backed securities.
The most significant question of risk that arose under Section 13(3) during the GFC was with
respect to the Commercial Paper Funding Facility (CPFF), under which the Federal Reserve
Bank of New York provided loans to a special purpose vehicle to purchase newly issued
commercial paper from issuers. The loans were non-recourse to the participating issuers and
secured by the commercial paper. To resolve any issues of adequacy of security, the Fed required
issuers to pay an insurance fee as extra security for the loan. Scott Alvarez, former Board
General Counsel and his legal team penned a memo concluding that such a mechanism was
sufficient to meet the requirements of Section 13(3).
The Fed was repaid all amounts of loans under its GFC programs, earned interest and fees on its
loans, and experienced a net profit with respect to its programs. (CBO Ltr p. 20).
By comparison, the COVID-19 Section 13(3) programs have more risk built into them, as they
are accepting a wide range of assets as collateral, including accepting lower quality collateral
than the Fed has accepted in the past.
Several Fed programs will accept as collateral, “fallen angels,” bonds that were initially given an
investment-grade rating, but which have since lost their investment grade rating due, in part, to
the economic slowdown brought on by COVID-19. The following programs show the range of
collateral that is being accepted:
• TALF can buy new AAA CLO tranches
• PMCCF can buy syndicated loans, and “fallen angels”
• SMCCF can buy HY ETFs and high-yield bonds, including “fallen angels”
• The Main Street facilities could help smaller leveraged loan issuers (<$150mn), the
middle-market, that have depended on private equity lenders.
With the exception of the PDCF, the COVID-19 program loans are non-recourse to participants;
in the event of default, the Fed would be able to take possession of the collateral to make itself
whole. The Fed programs also seek to manage risk by varying the interest rates charged and the
haircuts that are applied to different collateral. For example, under the 2020 TALF, there are
three levels of interest rates. There are also three levels of haircuts ranging from 5% for ABS
backed by prime credit card debt of less than a year duration, to 22% for 6-year leveraged
loans.
By comparison, the 2008 TALF initially accepted only newly issued, highly rated ABS backed by
new or recently extended auto loans, credit card loans, student loans, and small business loans.
The program was later expanded twice to accept a wider range of collateral, but securities were
required to have triple-A ratings from two or more rating agencies and were subject to an
additional risk assessment by the Federal Reserve. The collateral was also subject to a haircut
that depended on its riskiness. The Fed considered accepting other types of securities, such as
residential mortgage-backed securities and collateralized loan obligations, but ultimately
decided they would present an unacceptable risk. At its highest, the 2008 TALF was authorized
to purchase up to $1 trillion of ABS and was backstopped by $100 billion of Treasury funds from
the TARP. See this YPFS blogpost for a discussion of the two TALF programs.

A Treasury Backstop for COVID Facilities
When one reviews the testimonies by Treasury and Fed officials regarding the 2008 TALF, they
seem to suggest that neither the Treasury nor the Fed expected that the Fed would need to
resort to the backstop. The recent CBO report noted that the Fed did not sustain losses on its
GFC Section 13(3) program lending and that the interest and fees under such programs resulted
in a profit to the Fed.
With respect to the COVID-19 lending, the CBO concluded that a broader range of lending was
expected and that the Fed would likely take on greater risk under the new programs than it had
during the GFC. Despite these factors, it concluded that in aggregate, the result would be
similar to that of the GFC programs in that “income and costs will roughly offset each other [on
average].”
However, the CBO also added important nuance to its analysis:
That additional lending will result in substantial additional credit risk for the government,
however, which could have a wide range of budgetary effects. In CBO’s assessment, there is a
high probability that the lending will result in a small net profit for the government, thus
reducing the deficit, but there also is a small probability that the provisions could result in a very
large loss—an outcome that would significantly increase the deficit. Finally, CBO expects that
the performance of loans and assets will vary across facilities, with some realizing net losses and
others net gains. (emphasis added.) (CBO Ltr 03/2020, p.20-21).
With the possibility of losses being discussed, the CBO also concluded that if losses were to
occur, the Treasury's equity investments would be “available to cover loan defaults or other
losses” (CBO Ltr 03/2020, p.20).
Former Secretary Timothy Geithner has earlier posited that it would be acceptable for a central
bank to accept losses when fighting a crisis: “Of course the central bank should be prepared to
take losses. In fact, it is highly likely given all the risk and uncertainty in panics that the
appropriate use of the lender of last resort authority might well result in some losses.”
During the current crisis, statements by Chairman Powell and the Fed have expressed the
position that the Treasury’s investments in the Section 13(3) programs were available to act as
loss backstops. Messages from Secretary Mnuchin were not so clear until May 18, when during
testimony to the Senate Banking Committee, he clarified that the Treasury was willing to absorb
losses from the Section 13(3) programs. (See a YPFS blog discussing this point.)
Prior to Secretary Mnuchin’s testimony, some legal and media commentators[1] had coalesced
around a similar interpretation. Professor Kathryn Judge of Columbia Law School wrote in a
blogpost that, “Although not statutorily required, [the Treasury backstops] signal the Treasury’s
willingness to share in the losses given the credit risk that these programs may entail.” (Blue Sky
Blog Post). While not definitive, broad-based discussion regarding the possibility of losses may
provide the Fed and Treasury some coverage against later scrutiny, at least with respect to those
programs authorized by the CARES Act. In March, before the CARERS Act passed, Professor
Judge urged Congress to endorse the Fed’s early actions: “An additional benefit of having
Congress bless the Fed’s action and focus on ex post accountability is that it could stop any
opportunistic denials of legal authority later in this crisis.” The CARES Act provisions do seem
to provide some coverage by laying out guidelines.

The Treasury's willingness to absorb losses will ultimately be judged by what occurs. As the key
shareholder of the special purpose vehicles supporting many of the Fed’s programs, it has the
ability to influence the Fed’s administration of programs to minimize credit risk. Any moves to
tighten terms, however, may impact participants negatively and may create friction with the
overall intent of the programs to shore up the economy. There have already been questions
about whether some of the Feds requirements are too strict to achieve its broad goal. It has
responded to such criticism with respect to the Municipal Liquidity Facility, for example, by
expanding it twice, significantly expanding the number of eligible municipalities including some
with less than 500,000 residents.
The COVID-19 programs are still very new and some of them have not yet become operational.
There may be additional changes to the terms and risk profiles of these programs as they are
brought on board and possibly expanded if the economic effects of the shutdown persist even as
the country starts to reopen. Ultimately, these questions will be answered by future
developments, including usage and how the economy responds.
[1] See for example the law firm Skadden Arps “A key purpose of Treasury's investment in
certain of these programs is to mitigate credit risk to the Federal Reserve in order to satisfy
these legal conditions. Treasury's equity investments in those programs protect the credit
extended by the Federal Reserve by absorbing first losses. “), WNBC ( “The program is
structured so the Treasury takes the first hit if there are any losses. Taking on those risks places
it on top of the credit stack so that the Treasury, in essence, becomes the top shareholder of
deals totaling $4 trillion.” ), and NY Times (“Treasury Secretary Steven Mnuchin has a favorite
talking point. . . Because the Fed expects most borrowers to pay back, it does not need one-for-
one support. As a result, a mere $10 billion from the Treasury can prop up $100 billion in Fed
lending. And voilà — the $454 billion Congress dedicated to Fed programs in the aid bill can be
multiplied many times.”).

Fed Introduces Modified Primary Dealer Credit Facility

By June Rhee
Original post here.

On March 17, the Federal Reserve authorized the Primary Dealer Credit Facility (PDCF) “to
support the credit needs of American households and businesses” by enabling primary dealers
to support normal market functioning.
The Fed used its authority under section 13(3) of the Federal Reserve Act to implement the new
program (see here). Section 13(3) allows the Fed to lend to nonfinancial organizations when the
Federal Reserve Board determines there are “unusual and exigent circumstances.”
The Fed last employed a PDCF in March 2008 during the Global Financial Crisis to improve the
ability of primary dealers to provide financing to participants in securitization markets and
promote the orderly functioning of financial markets.
The terms of the current PDCF (see here) closely follow the terms of the 2008 PDCF (see here).
As in 2008, the Federal Reserve Bank of New York will offer loans to primary dealers. The loans
will be made available for terms of up to 90 days at a primary credit rate or discount rate. Loans
can be secured by collateral eligible for pledge in the Fed’s open-market operations. Also eligible
are investment-grade corporate debt securities, international agency securities, investment
grade commercial paper, municipal securities, mortgage-backed securities, asset-backed
securities, and equity securities. The Fed will accept commercial mortgage-backed securities
(CMBS), collateralized loan obligations (CLOs), and collateralized debt obligations (CDOs) that
are AAA-rated.
The Fed plans to make the PDCF available for at least six months and may extend the facility if
conditions warrant. The primary dealers will be able to access the facility starting on March 20,
2020.
Click here to read a YPFS case study that discusses the 2008 PDCF in detail and
provides access to the key documents utilized with that facility.

Fed Reintroduces Commercial Paper Funding Facility
By Rosalind Z. Wiggins
Original post here.

On March 17, the Federal Reserve announced that it would implement a Commercial Paper
Funding Facility (CPFF) to support the flow of credit to businesses and households during the
coronavirus pandemic.
The Fed used its authority under section 13(3) of the Federal Reserve Act to implement the new
program (see here). Section 13(3) allows the Fed to lend to nonfinancial organizations when the
Federal Reserve Board determines there are “unusual and exigent circumstances.” This is the
Fed’s first use of that authority since the Global Financial Crisis of 2007-09.
The Fed last employed a CPFF in October 2008, when in the midst of the Global Financial Crisis
outstanding CP had dropped by roughly $300 billion. At that time, the market experienced
severe shortening of maturities and increased rates making it difficult for issuers to place new
paper.
The language in the terms of the new CPFF closely follows the language in the earlier CPFF. As
in 2008, the Federal Reserve Bank of New York (FRBNY) will make loans to a special purpose
vehicle that will purchase highly-rated US dollar-denominated, three-month unsecured and
asset-backed commercial paper from eligible US issuers. As before, eligible issuers are U.S.
issuers of commercial paper, including U.S. issuers with a foreign parent company. The program
will purchase commercial paper until March 17, 2021. The Fed could extend the facility past that
date. The 2020 CPFF Terms and Conditions can be found here and the 2008 CPFF Terms and
Conditions and FAQs can be found here and here, respectively.
The new program is supported by $10 billion in credit protection provided by the U.S. Treasury
Department, using the Exchange Stabilization Fund (ESF). The earlier CPFF was also supported
by $50 billion from the Treasury.
The 2008 CPFF’s role in helping to revive the term-lending market has been debated. However,
in its first weeks it was highly utilized and purchased the overwhelming majority of new term
CP. At its highest level in January 2009, the CPFF held $350 billion of CP, 20% of all
outstanding CP. Evidence suggests that the 2008 CPFF provided market participants a rollover
option for maturing paper and helped restore lending by CPFF participants to their non-
financial corporate borrowers.
Click here to read a YPFS case study that discusses the 2008 CPFF in detail and

Fed Provides Liquidity Options to Cities and States
Original post here.

Over the past couple of weeks in response to the stresses of the COVID-19 pandemic the bond
markets that states and cities traditionally access to raise funds have recently stalled; the
“primary market that has all but shut down” as rates have followed Treasuries downward and
many investors sell to await a rebound. (Funk 03/23/2020) (Oh 2020). In addition, many of
the financial institutions that usually buy these bonds and make markets in them have been
reluctant to do so because they are holding large quantities. (Oh 2020). Further, the commercial
paper market has been experiencing runs. (Tumulty 03/23/2020)
Hoping to provide a safety net for states and cities which are facing increased costs from fighting
the health crisis while having to continue to fund payroll, pensions and debt service, the Federal
Reserve (the “Fed”) has in the past three days provided three facilities aimed at assisting these
entities with accessing liquidity.
• On March 20th, the Fed expanded the recently announced Money Market Mutual Fund
Liquidity Facility (MMLF) to permit financial institutions to also borrow from the
Federal Reserve Bank of Boston (FRBB) to purchase highly rated US municipal short-
term debt with maturities of 12 months or less (“municipal debt”) from eligible single-
state or other tax exempt money market funds (“state and city funds”). The FRBB will
make nonrecourse loans to eligible financial institutions (including depository
institutions, bank holding companies and US branches of foreign banks) anywhere in the
country to facilitate the purchases. The MMLF would continue to provide loans to
financial institutions to purchase designated high-quality assets from money market
mutual funds (“money funds”).
• In another move, the Fed announced today that it would expand the MMLF further to
permit the purchase of (i) negotiable certificates of deposits issued by states,
municipalities, or banks, and (ii) highly rated municipal variable rate demand notes
(VRDNs) with maturities of 12 months or less. The MMLF will begin accepting
certificates of deposits and VRDNs as of March 25. However, such items purchased on
March 23 and 24 may be accepted if pledged on March 25th.
• MMLF loans secured by municipal debt or VRDNs would be made at a rate equal to the
primary rate plus 25 bps. Loans secured by Treasuries or agency securities would be at a
rate equal to the primary rate, and loans secured by other collateral would be at a rate
equal to the primary rate plus 100 bps.
• Also, as of today the Fed has expanded the (Commercial Paper Funding Facility (CPFF))
(reintroduced on March 17th) to include as eligible securities high-quality, tax-exempt
commercial paper providing purchasers for municipal issuers. Under the CPFF, the
Federal Reserve Bank of New York provides loans to a special purpose vehicle that
purchases high-quality commercial paper from eligible issuers.
• For additional details see the updated MMLF Term Sheet.
• For additional details see the updated CPFF Term Sheet.

The Fed is employing all its tools to maintain the flow of funds to states and municipalities that
may be experiencing liquidity constraints and or having difficulty placing new debt. During the
Global Financial Crisis (GFC), many cities experienced severe economic stress as they suffered
reduced tax revenues, losses on portfolios and higher unemployment. Several major cities, with
Detroit, MI and Stockton, CA being the largest, filed for bankruptcy protection.
The Fed’s efforts provide some avenues for states and cities needing liquidity but the Fed’s
arsenal in this area is not the broadest. Pursuant to Section 14 of the Federal Reserve Act, the
Fed can purchase municipal debt with maturities up to six months through its Open Markets
Operations. This has led some commentators to state that what is also needed is action from the
Congress to provide such broader authority to the Fed. Senator Bob Menendez, (D-NJ) has
proposed “The Municipal Bonds Emergency Relief Act” that would amend the Federal Reserve
Act to allow the Fed to buy municipal bonds of any maturity under “unusual and exigent
circumstances.” The bill would also include coverage for hospitals and colleges that issue tax-
exempt bonds. The bill has received support from the Securities Industry and Financial Markets
Association and the National League of Cities, but was not included in the bill proposed by the
Senate and was cited as one of its weaknesses by the Democrats. (Tumulty 03/23/2020)
The MMLF and the CPFF were both established under Section 13(3) of the Federal Reserve Act,
with approval of the Treasury Secretary (see here). Section 13(3) allows the Fed to lend to any
“individual, partnership or corporation” when the Federal Reserve Board determines there are
“unusual and exigent circumstances”. Using the Exchange Stabilization Fund, the Treasury has
provided credit protection to the Fed for both programs.
Both the MMLF and CPFF are similar to programs that the Fed utilized during the GFC,
however, then, municipal debt, certificates of deposits, VRDNs, and tax-exempt commercial
paper were not included in the programs. These recent amendments demonstrate that the plans
have some flexibility and can be easily expanded if the Fed determines circumstances warrant.

Fed Reintroduces Term Asset-backed Securities Loan Facility
By Aidan Lawson
On March 23, the Federal Reserve reintroduced the Term Asset-Backed Securities Loan Facility
(TALF), one of its many programs used in the Global Financial Crisis (GFC), to further support
households, businesses, and the U.S. economy overall.
The Fed used its authority under Section 13(3) of the Federal Reserve Act to implement the new
program (see here). Section 13(3) allows the Fed to lend to any “individual, partnership or
corporation” when the Federal Reserve Board determines there are “unusual and exigent
circumstances” with the Treasury Secretary’s approval. The Treasury used the Exchange
Stabilization Fund (ESF) to make a $10 billion equity investment to the new TALF.
Under the new TALF, the Fed, "to help meet the credit needs of consumers and small
businesses” will use a special purpose vehicle (SPV) to make a total of $100 billion in three-year
nonrecourse loans to U.S. companies that own eligible asset-backed securities (ABS). The SPV
will be funded by a recourse loan from the Reserve Bank of New York and the Treasury’s equity
investment. The new TALF is to be open through September 30, 2020, unless the Fed extends it.
The terms and conditions of the new TALF mostly follow the language of the $200 billion TALF
that was announced in November 2008 and in operation in March 2009 during the GFC.
However, while the 2008 TALF progressed to include newly issued and legacy commercial
mortgage-backed securities, the 2020 TALF only includes non-mortgage asset-backed
securities, such as those backed by student loans, small business loans guaranteed by the Small
Business Administration (SBA), and automobile loans, among others.
The Fed also continues to purchase Treasury securities and agency mortgage-backed securities
as part of its open market operations. On March 23, the Fed expanded these operations to
include the purchase of agency commercial mortgage-backed securities and increased their
purchases from a total of $700 billion to an amount “needed to support smooth market
functioning and effective transmission of monetary policy to broader financial conditions and
the economy” (see here). Loans will be priced based on the collateral pledged with the
appropriate LIBOR swap rate, and haircuts will be applied based on sector, weighted average
life, and historical volatility of the ABS (see here).

Bank of England activates the Contingent Term Repo Facility
By Manuel Leon Hoyos
Original post here.

On March 24, 2020, the Bank of England activated a liquidity “insurance” facility that it created
after the 2007-09 Global Financial Crisis to be available in a crisis such as the current one.
The Contingent Term Repo Facility (CTRF) aims to “help alleviate frictions observed in money
markets in recent weeks, both globally and domestically, as a result of the economic shock
caused by the outbreak of Covid-19.” Financial institutions will be able borrow cash from the
central bank reserves for a 3-month term in exchange for less liquid assets. CTRF operations will
run for the next two weeks and the Bank of England will announce further operations as needed.
The CTRF was established in 2014 and replaced the then existing facility that aimed to mitigate
risks to financial stability arising from a market-wide shortage of short-term sterling liquidity.
The CTRF forms part of the Sterling Monetary Framework and serves as a temporary
enhancement for firms that need “cheap, plentiful cash at term.” The Sterling Monetary
Framework provided a “liquidity upgrade” in that it allows firms to swap less liquid collateral for
the most liquid assets in the economy.
The contingent nature of the CTRF allows the Bank of England to provide liquidity against the
full range of eligible collateral at any time, term and price it chooses, in response to actual or
prospective exceptional market-wide stress. Institutions eligible for the Bank’s Discount
Window Facility (DWF) are eligible to participate in the CTRF.
Under the terms and conditions, the program size is unlimited. The minimum bid is £5 million
and allocations have a fixed price (Bank Rate plus 15bps) with full allotment. Eligible collateral
consists of the full range of SMF collateral – Levels A, B and C. Level A collateral comprises
assets expected to remain liquid, such as high-quality sovereign debt. Level B consists of assets
that would normally be liquid, such as sovereign debt, supranational and private sector debt and
the highest-quality asset-backed securities. Level C consists of typically less liquid assets, such
as securitizations, securities delivered by the same entity that originated the underlying assets,
and portfolios of loans, including mortgages.
The Bank of England can lend in major currencies through its standing bilateral swap lines with
the Federal Reserve, Bank of Canada, European Central Bank, Bank of Japan, and Swiss
National Bank.

Federal Reserve Supports Corporate Bond Markets
Original post here.

On March 23, the Federal Reserve introduced two new facilities to support credit to large US
companies. One will purchase newly issued bonds and loans on the primary market and the
other will purchase outstanding corporate bonds and exchange-traded funds (ETFs) on the
secondary market. The Fed used its emergency authority under section 13(3) of the Federal
Reserve Act to create these programs.
Under both facilities, the Federal Reserve Bank of New York will lend to a special purpose
vehicle (SPV) on a recourse basis. These loans will be secured by all assets of the SPV. The US
Treasury, using the Exchange Stabilization Fund (ESF), will provide $20 billion in equity—$10
billion for each SPV.
Under the Primary Market Corporate Credit Facility, the SPV will transact directly with US-
based companies with material operations in the US. The SPV will purchase investment-grade
(BBB-/Baa3 or higher) corporate bonds with maximum maturities of four years. It will also
grant loans at interest rates informed by market conditions. The Fed designed the facility to help
companies “maintain business operations and capacity” during the coronavirus disruption.
The Fed set limits on each issuer’s total borrowing while it participates in the program,
including its borrowing from the SPV. The limits are based on the issuer’s credit rating. An
AAA/Aaa1-rated issuer’s total outstanding bonds and loans may not exceed 140% of its
maximum outstanding bonds and loans on any day during the 12-month period ending March
22, 2020. For BBB-/Baa3-rated companies, the limit is 110%.
Borrowing companies may defer interest and principal payments for the first six months of their
loans, which may be extendable at the Fed’s discretion. The commitment fee will be set at 100
bps. Bonds and loans will be callable at any time at par. (See the term sheet).
Under the Secondary Market Corporate Credit Facility, a separate SPV will purchase investment
grade (BBB- or higher) corporate bonds with maximum maturities of five years. As with the
primary market facility, issuers must be US-based and have material operations in the US.
Companies that receive direct financial assistance under the new federal CARES Act will not be
eligible.
The SPV can also purchase US-listed exchange-traded funds (ETFs) whose investment objective
is to provide broad exposure to the market for US investment-grade corporate bonds. The SPV
will purchase corporate bonds at “fair market value” and up to a maximum of 10% of the issuer’s
maximum bonds outstanding. It will purchase ETFs up to a maximum of 20% of an ETF’s
assets. Amidst price dislocation in the ETF market, rather than purchase at fair market value,
the Fed says in its term sheet: “The Facility will avoid purchasing shares of eligible ETFs when
they trade at prices that materially exceed the estimated net asset value of the underlying
portfolio.” (See the term sheet).

ECB Unveils Pandemic Emergency Purchase Programme
By Aidan Lawson
Original post here.

On March 18, the ECB unveiled a temporary program to purchase up to €750 billion in public
and private-sector securities until the “crisis phase” of the COVID-19 crisis is over, but at least
until the end of 2020.
The Pandemic Emergency Purchase Programme (PEPP) is an expansion of the ECB’s Asset
Purchase Programme (APP), a package of asset-purchase measures that the ECB initiated in
2014 to support monetary policy. The PEPP, like the earlier APP, includes programs to
buy sovereign debt, covered bonds, asset-backed securities , corporate bonds, and commercial
paper. As with the APP, the ECB will make available for lending any securities that it purchases
under the PEPP.
Purchasing conventions are based on the type of asset purchased. They generally follow the
guidelines for the relevant ECB APP. For instance, purchases of sovereign debt under the PEPP
would generally follow the same rules as purchases made under the APP’s sovereign debt
program, unless otherwise specified in the PEPP framework.
The table below shows eligible securities for the PEPP, as announced on March 18. However, the
ECB may waive some requirements to allow for wider participation. For example, the ECB
waived the eligibility requirements for Greek debt because Greek financial markets have been
severely destabilized, and previous commitments by the Greek government to achieve structural
reform would be more difficult if it could not access the PEPP.
Security Minimum Credit Maturity Purchase Limits

Rating
Sovereign debt Credit Quality Step 3 70 days – 30 yr + 364 33% of total debt if issued by sovereign
days
50% of total debt if issued by international
institution
Corporate bonds Credit Quality Step 3 6 mo. – 30 yr + 364 70% per ISIN[1]
days
Covered bonds Credit Quality Step 3 Unspecified 70% per ISIN

30% per ISIN for Greece + Cyprus
Asset-backed Credit Quality Step 3 Unspecified 70% per ISIN

securities
30% per ISIN for Greece + Cyprus
The ECB published details of the new program in the Journal of the European Union on March
26. It had changed some details. Most significantly, it removed the limit to buy no more than

33% of any country’s bonds, which was in the initial announcement (see here, point number (6),
and here, Article 5). This has given the ECB the authority to essentially purchase unlimited
amounts of sovereign debt, up to the €750 billion limit.
In the updated publication, the ECB said that it would “not tolerate any risks to the smooth
transmission of its monetary policy in all jurisdictions of the Euro area.” While a wide range of
securities are eligible for purchase under PEPP, the vast majority of securities purchased under
the APP have been government debt (see here).
Generally, the allocation of purchases will be proportionate to the amount of ECB capital
subscribed to by euro-area national central banks. Therefore, it is likely that Germany, France,
and Italy will obtain a sizable share of the ECB funding (see here).
Still, the language allows the ECB some discretion. The ECB can make purchases “in a flexible
manner allowing for fluctuations in the distribution of purchase flows over time, across asset
classes and among jurisdictions.”
The decision to remove the purchase limit on government debt suggested that the ECB prefers
to use the PEPP instead of the Outright Monetary Transactions (OMT). The ECB has
confirmed this. OMT, which would allow the ECB to buy essentially unlimited quantities of an
individual nation’s sovereign debt, has not been used since the ECB introduced it in 2012.
Countries are required to apply for aid, leading to concerns about stigmatization of OMT aid,
and assistance comes with “strict conditionality,” sometimes taking the form of a
macroeconomic adjustment program or even the involvement of the IMF (see here).
The ECB earlier created two covered-bond purchase programs—in 2009 during the Global
Financial Crisis and in 2011 during the sovereign debt crisis. The ECB purchased €60 billion and
€16.4 billion in bonds in the two programs, respectively. The purpose of the two programs was
to restore liquidity to the market, tighten credit spreads, ease bank funding costs, and promote
lending. Observers view the first program as a modest success, while the impact of the second is
less clear. See the YPFS case for more.
[1] An International Securities Identification Number (ISIN) is a 12-digit code used to unify different ticker symbols
and identifications that can vary across exchanges, currencies, and countries. As such, a 70 percent purchase limit on
an ISIN indicates that the ECB can purchase up to 70% of the outstanding issue of that particular security or debt
instrument (see here).

Federal Reserve Expands Support to Corporate Bond Markets
Original post here.

On April 9, the Federal Reserve (Fed) updated and expanded the corporate bond-buying
programs originally announced on March 23 to support credit to riskier corporations.
The Fed used its authority under Section 13(3) of the Federal Reserve Act to implement
the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate
Credit Facility (SMCCF) (see here). For both facilities, the Federal Reserve Bank of New York
lends to a special purpose vehicle (SPV) on a recourse basis. These loans are secured by all
assets of the SPV. The Treasury, using the Exchange Stabilization Fund (ESF), increased the
amount of equity it will provide from $20 billion to $75 billion—$50 billion for the PMCCF’s
SPV and $25 billion for the SMCCF’s SPV. The combined size of both facilities can now be up to
$750 billion; the Fed has not provided any allocation between the two programs. Further
discussion on the Treasury backstop can be found here.
Under both facilities, companies that receive direct financial assistance under the new CARES
Act or other subsequent federal legislation are not eligible. Eligible institutions must satisfy the
conflict-of-interest requirements of section 4019 of the CARES Act. Both facilities are to be open
through September 30 unless the Fed and Treasury extend it.
Under the PMCCF, the SPV transacts directly with US-based companies with material
operations in the US. The SPV purchases investment-grade corporate bonds with maximum
maturities of four years. The latest revision includes purchases of portions of syndicated loans or
bonds at issuance.
The Fed set limits on each issuer’s total borrowing under the PMCCF. The limits are based on
the issuer’s credit rating. Initially, for an AAA/Aaa1-rated issuer, the total outstanding bonds
and loans were not to exceed 140% of its maximum outstanding bonds and loans on any day
during the 12-month period ending March 22, 2020. The latest revision, however, reduces this
limit to 130%. Additionally, the maximum amount of instruments that both the PMCCF and the
SMCCF combined can purchase from an eligible issuer is limited to 1.5% of the combined
potential size of both facilities.
Under the SMCCF, the SPV has purchased investment grade corporate bonds with maximum
maturities of five years at a fair market value up to 10% of the issuer’s bonds outstanding. As
with the PMCCF, issuers must be US-based and have material operations in the US. The SPV
also has purchased US-listed exchange-traded funds (ETFs) whose investment objective is to
provide broad exposure to the market for US investment-grade corporate bonds. The latest
revision adds ETFs whose primary investment objective is exposure to US high-yield corporate
bonds. Purchases of ETFs are limited to 20% of an ETF’s assets. Amidst price dislocation in the
ETF market, rather than purchase at fair market value, the Fed says in its term sheet: “The
Facility will avoid purchasing shares of eligible ETFs when they trade at prices that materially
exceed the estimated net asset value of the underlying portfolio.”

Federal Reserve Broadens Range of Eligible Collateral for TALF
By June Rhee
Original post here.

On April 9, the Federal Reserve (Fed) broadened the range of eligible collateral for the Term
Asset-Backed Securities Loan Facility (TALF) to include riskier assets such as legacy commercial
mortgage backed securities (CMBS) and collateralized loan obligations (CLOs).
The Fed reintroduced TALF on March 23. It was one of the many programs the Fed used in the
2007-09 Global Financial Crisis to support households, businesses, and the economy. Under the
original TALF, the Federal Reserve lent on a non-recourse basis to holders of highly rated asset-
backed securities (ABS) backed by newly and recently originated consumer and small business
loans.
The 2020 TALF initially only included newly issued non-mortgage asset-backed securities, such
as those backed by student loans, small business loans guaranteed by the Small Business
Administration, and automobile loans as eligible collateral. However, the expanded 2020 TALF
now accepts the triple-A rated tranches of both legacy CMBS and newly issued static CLO as
eligible collateral. Single-asset single-borrower CMBS and commercial real estate CLOs are
excluded. The other terms and conditions of the new TALF mostly follow the language of the
$200 billion TALF that the Fed announced in November 2008 and implemented in March
2009 during the GFC.
Under the 2020 TALF, the Fed, "to help meet the credit needs of consumers and small
businesses,” will use a special purpose vehicle to make a total of $100 billion in three-year
nonrecourse loans to US companies that own eligible collateral. The SPV will be funded by a
recourse loan from the Reserve Bank of New York and the Treasury’s equity investment. The
new TALF is to be open through September 30, unless the Fed and Treasury extend it, and
participating borrowers and issuers will be subject to conflict-of-interest requirements
under section 4019 of the CARES Act.
The Fed used its authority under Section 13(3) of the Federal Reserve Act to implement the
2020 TALF (see here). Section 13(3) allows the Fed to lend to any “individual, partnership or
corporation” when the Federal Reserve Board determines there are “unusual and exigent
circumstances,” with the Treasury Secretary’s approval. The Treasury used the Exchange
Stabilization Fund to make a $10 billion equity investment in the 2020 TALF. Further
discussion on the Treasury backstop and the 2008 TALF can be found here.
The Fed will haircut collateral based on the riskiness of underlying assets, as in the 2008 TALF.
The haircuts range from 5% for short-term Small Business Administration loans to 22% for
longer-term leveraged loans.
The Fed also continues to purchase Treasury securities and agency mortgage-backed securities
as part of its open market operations. On March 23, the Fed expanded these operations to
include the purchase of agency commercial mortgage-backed securities and increased their
purchases from a total of $700 billion to an amount “needed to support smooth market
functioning and effective transmission of monetary policy to broader financial conditions and
the economy” (see here). Loans will be priced based on the collateral pledged with the

appropriate LIBOR swap rate, and haircuts will be applied based on sector, weighted average
life, and historical volatility of the ABS (see here).
Click here to read a survey post on market liquidity programs including the TALF
and here to read a YPFS case study that discusses the 2008 TALF in detail and

Federal Reserve Announces New Municipal Liquidity Facility
By Vaasavi Unnava and Rosalind Z. Wiggins
On April 9, the Federal Reserve announced the Municipal Liquidity Facility (MLF) as part of a
new series of facilities providing up to $2.3 trillion in loans to support the economy. The facility
aims to ease cash flow pressures on state and local governments as they adjust to a decline in
municipal and state revenues and face greater than expected public health costs due to
the COVID-19 pandemic .
The Federal Reserve established the MLF pursuant to its Section 13(3) authority under the
Federal Reserve Act (FRA); it was approved by the Treasury Secretary.
The Federal Reserve will operate the facility by recourse lending to a newly-established special
purpose vehicle (SPV). The SPV will then purchase eligible notes directly from eligible issuers.
The SPV may purchase up to $500 billion of eligible notes. The Treasury Department will fund
the facility with an initial equity investment of $35 billion from funds appropriated to its
Exchange Stabilization Fund under the CARES Act. This structure is similar to that of
the Commercial Paper Funding Facility, which the Fed first used during the Global Financial
Crisis in 2008-09 (GFC) and which it has recently reintroduced.
Eligible issuers under the MLF include all the states and the District of Columbia, cities with
greater than one million residents, and counties with greater than two million residents. Only 10
cities and 16 counties meet the above criteria, according to the latest Census data. To provide aid
to municipalities ineligible to participate in the MLF, participating states may utilize the
proceeds generated through the issuance of eligible bonds to purchase similar notes from
municipalities within their jurisdictions. An eligible state, city, or county may participate
through a related entity that normally issues notes on its behalf, but only one issuer per state,
city, or county is eligible.
In addition to utilizing proceeds to purchase similar notes from political subdivisions, localities
may use proceeds from the sales of eligible notes to the MLF for mitigation of reduced cash
flows from income tax deferrals due to extensions to the tax filing deadlines. They may also be
used to address reductions in revenues due to COVID-19 or for payments of principal and
interest on other obligations.
Notes that are eligible for purchase under the MLF include tax anticipation notes (TANs), tax
and revenue anticipation notes (TRANs), bond anticipation notes (BANs), or other short-term
debt that matures no later than 24 months after issuance. The price of notes purchased will be
based on the issuer’s rating at the time of issuance. Issuers are required to pay an origination fee
equal to 10 basis points (0.1%) of the principal amount of the notes being purchased by the SPV.
The fee will be deducted from the proceeds of the issuance.
The SPV may purchase multiple note issuances from an eligible issuer but the total amount
purchased from any one issuer cannot exceed 20% of the issuer’s 2017 revenues from their
government’s own sources and utilities revenues. However, a state may request that the SPV
purchase more than the 20% limit to assist municipalities ineligible to participate in the MLF.
The purchased notes are callable by the issuer at any time before maturity at par value.

The Federal Reserve plans to stop purchases under the MLF on September 30, although the
facility may be extended if needed. The Fed plans to continue funding the SPV until all
underlying assets mature or are sold.
Establishment of the MLF follows previous Federal Reserve efforts to provide liquidity
to municipalities. On March 23, the Federal Reserve began accepting highly-rated municipal
bonds, commercial paper, and other securities as collateral under the Commercial Paper
Funding Facility (CPFF) and the Money Market Liquidity Facility (MMLF). The CPFF and
MMLF are similar to programs that the Fed utilized during the GFC, however then municipal
debt, tax-exempt municipal commercial paper and municipal securities were not included in the
programs. Notably the Fed chose to implement the MLF under its FRA Section 13(3) emergency
authority rather than utilize its authority under FRA Section 14, which provides that the Fed can
purchase municipal debt with maturities up to six months through its Open Markets Operations.
Commenters had called for broader authority than that, a gap that the CARES Act seems to have
filled.
During the current pandemic, other countries have also made adjustments to aid municipalities
with cash flow needs. Canada has provided a similar expansion allowing the purchase of
municipalities’ commercial paper by its Commercial Paper Purchase Program. Other countries
have pursued fiscal responses to liquidity squeezes in municipalities, such as Finland’s €100
million allocation to municipalities to support business owners affected by COVID-19.

Bank of Canada Establishes Series of Programs to Promote Market Liquidity
By Aidan Lawson
Original post here.

Since the beginning of April, the Bank of Canada (BoC) has launched three market-liquidity
programs. Two are new asset purchase programs, under which it will buy commercial paper and
government bonds. The third is an activation of a standing repurchase agreement (repo) facility
to get cash to market participants.
COMMERCIAL PAPER PURCHASE PROGRAM (CPPP)
The BoC announced its intent to directly purchase commercial paper under a new Commercial
Paper Purchase Program (CPPP) on March 27, with purchases commencing on April 2. The BoC
buys commercial paper (including asset-backed commercial paper) with up to a 3-month
maturity on both the primary and secondary markets.
To be eligible, the commercial paper must be issued by Canadian businesses, municipalities, and
provincial agencies through already-existing commercial paper programs. Issuers must have a
minimum short-term credit rating of R-1 High/Mid/Low from DBRS Morningstar as of April 2,
though the BoC can approve issuers that are downgraded after that date or are not rated by
DBRS, so long as they have ratings from Fitch, Moody’s, or S&P. The BoC limits individual
purchases to 1.25 times the largest amount of Canadian dollar-denominated commercial paper
that an issuer had outstanding on any day in the last year. The CPPP is expected to last for 12
months.
Purchases are made daily and priced at a fixed rate based on the 3-month Canadian overnight
index swap (OIS) rate, which is the Canadian Overnight Repo Rate Average (see here, pp. 17).
Pricing varies based on the credit risk of the issuer (see here). Aggregate results are published
weekly by the BoC, but individual transaction data are not. As of April 8, the facility has
purchased CAD$1.9 billion of commercial paper (see here).
The BoC has enlisted the help of Blackrock Financial Markets Advisory, TD Asset Management,
and CIBC Mellon to act as advisor, asset manager and custodian, respectively.
SECONDARY MARKET BOND PURCHASE FACILITY
On April 1, the BoC launched a program to purchase at least CAD$5 billion in government bonds
on the secondary market. These purchases are via reverse auction and conducted across the
yield curve.
The BoC announced the program on March 27. So far, the BoC has conducted six auctions for a
total of CAD$7.15 billion. It is planning on purchasing another CAD$500 million in 30-year
government debt today (see here). The BoC releases details about the date and maturity of
bonds it will purchase every two weeks. It announces more specific operational details closer to
the date of each auction (see here).
CONTINGENT TERM REPO FACILITY (CTRF)
On April 3, the BoC activated the Contingent Term Repo Facility (CTRF). The CTRF is an
unlimited emergency repo facility designed to counter severe liquidity stresses. It engages in

one-month repurchase (repo) agreements with market participants that “demonstrate
significant activity” in Canadian dollar money markets or fixed income markets. The BoC has
considerably increased its presence in repo markets since the beginning of April, nearly
doubling its repo activity from CAD$64.8 billion to CAD$110.7 billion as of April 8 (see here).
This is the most the BoC has participated in the repo market, including at the height of the
Global Financial Crisis.
All government and government-guaranteed bonds are eligible, as well as Canada Mortgage
Bonds and National Housing Act (NHA) MBS, which are two types of mortgage bonds insured
and guaranteed by the Canada Mortgage and Housing Corporation (see here, pp. 57). The CTRF
began operation on April 6 and is open for a year. The CTRF is similar to the Bank of England’s
facility of the same name.

Federal Reserve Expands Eligibility for Municipal Liquidity Facility
By Vaasavi Unnava
Original post here.

On April 27, the Federal Reserve announced an expansion in scope and duration of
the Municipal Liquidity Facility (MLF), a new facility established on April 9 to alleviate the
funding needs of cities, counties, and states as municipalities fight the ongoing threat of COVID-
19 across the United States and bond markets stall.
The new terms of the MLF allow the 50 states, counties of 500,000 residents or more, and cities
of 250,000 residents or more to sell their debt issuances directly to a special purpose vehicle
created and funded by the Federal Reserve. The new rule is significantly more inclusive than the
previous standard, as seen in the table below.
Number of Population Covered Number of Population Covered

Cities (City) Counties (County)
Original MLF 10 ~26,000,000 16 ~54,000,000

Terms
Revised MLF Terms 87 ~62,000,000 140 ~162,000,000

Source: Census City and County Population Estimates
In addition to the changes in participation, the Federal Reserve revised standards for eligible
notes. Eligible notes may now have maturities of up to 36 months after issuance, twelve months
longer than the original 24 month maturity.
New guidelines regarding ratings also affect eligibility of issuances. Eligible issuers must have
“investment grade” ratings--ratings of at least a BBB-/Baa3--as of April 8, by two or more
nationally recognized statistical ratings organizations (NRSRO), such as Standard and Poor’s or
Fitch. If an NRSRO subsequently downgrades an issuer after April 8, the issuer must raise their
ratings to at least BB-/Ba3 by the time the MLF makes a purchase.
The Federal Reserve has also expanded participation in the facility to multi-state entities, such
as the Port Authority of New York and New Jersey. The MLF will hold multi-state entities to
higher standards. Multi-state entities must have ratings of A-/A3 as of April 8 by two or more
NRSROs. Should NRSROs downgrade the entity, it must raise its ratings to BBB-/Baa3 by the
time of purchase.
Multi-state entities may issue, in one or more issuances, up to 20% of the entity’s gross revenue
in 2019; however, unlike states, multi-state entities may not issue in excess of the applicable
limit and transfer the funding to political subdivisions within their jurisdictions.
Finally, the Federal Reserve has changed the facility’s termination date from September to
December 2020.

Elected officials widely criticized the original terms of the MLF as too restrictive, making the
funds unavailable to many cities and counties that needed aid. The previous iteration of the
facility only allowed 10 cities and 16 counties to participate directly in the funding mechanism.
Some senators complained that their states would qualify for aid, but their states’ towns or
counties were exempt. The previous iteration of the facility appeared to attend to this issue by
allowing states to issue bonds and distribute the funding directly to municipalities within their
jurisdictions. However, it appears this mechanism may not be direct enough, as some states
struggle to issue debt based on state constitution barriers.
The Federal Reserve also said that it is considering allowing some governmental entities that
issue revenue bonds to directly participate in the MLF as eligible issuers. However, it’s unclear
whether the Federal Reserve will approve this.

India Extends Special Liquidity Facility to Mutual Funds
By Priya Sankar
Original post here.

On April 27, the Reserve Bank of India (RBI) announced a ₹ 500 billion ($6.6 billion) special
liquidity facility for mutual funds (SLF-MF), in response to increased volatility in capital
markets due to the COVID-19 pandemic. The SLF-MF operated for two weeks and closed on
May 11.
The RBI reports that the program had ₹24.3 billion outstanding as of May 11, of which ₹20
billion was allotted on April 27 and ₹4.3 billion was allotted on April 30. The Indian mutual
fund industry has about $300 billion in total assets under management, according to an
industry association website. More than half of those assets are in debt funds.
In the midst of increased client redemptions and drained liquidity in the debt market due to the
COVID-19 crisis, concerns around the potential contagion effects were accelerated after Franklin
Templeton’s Indian arm halted withdrawals and shut six high-risk debt funds, trapping over $3
billion of investor money.
To address this concern, the RBI established the SLF-MF. In a statement, the RBI said that
market stress was “confined to the high-risk debt [mutual fund] segment at this stage; the larger
industry remains liquid.” The SLF-MF is a 90-day repo operation at the fixed repo rate of 4.4%.
The SLF-MF was open from April 27 to May 11 to liquidity adjustment facility eligible banks.
Borrowing banks must use these funds to meet liquidity needs of mutual funds by (i) extending
loans, or (ii) undertaking outright purchase of and/or repos against the collateral of investment
grade corporate bonds, commercial papers (CPs), debentures and certificates of deposit (CDs)
held by mutual funds..
Liquidity support provided by the funds obtained through the SLF-MF is eligible to be classified
as held to maturity (HTM) in excess of 25% of the total investment permitted to be included in
the HTM portfolio. It is also exempt from banks’ capital market exposure limits.
Responding to the requests from banks, these regulatory benefits also became available to all
banks providing liquidity support to mutual funds regardless of whether they used funds from
the SLF-MF or from their own resources as of April 30. A bank claiming the regulatory benefits
was required to submit a weekly statement containing consolidated information on its support
as long as the SLF-MF was open.
Some commentators view the SLF-MF as a step in the right direction, easing liquidity concerns
and providing a psychological signal to mitigate investor panic. However, the measure is small
relative to the asset management sector as a whole. According to the RBI’s most recent Financial
Stability Report (p.51), mutual funds are “the largest net providers of funds to the financial
system.”
India faces a substantial crisis of confidence, as its economy has been at a standstill since the
nationwide lockdown implemented in early March. Even before COVID-19 concerns, rising
corporate defaults, the collapse of lenders, and questionable lending practices in the mutual
fund industry raised questions about the resilience of the financial system in India. On May 12,

India’s Prime Minister Narendra Modi announced a $260 billion economic rescue package, an
amount equal to 10% of India’s GDP, but currently short on details.

Bank of Japan Increases Liquidity Measures
Original post here.

On May 22, the Bank of Japan (BOJ) extended and expanded its “Special Program to Support
Financing in Response to the Novel Coronavirus (COVID-19)” to 75 trillion yen (about $700
billion). This includes three programs: (1) $186 billion in Outright Purchases of Commercial
Paper and Corporate Bonds, (2) $233 billion for the Special Funds-Supplying Operations, and
(3) $279 billion for the recently launched New Fund-Provisioning Measure to support small and
medium-sized enterprises. The duration of the measures was extended by six months from
September 30, 2020 to March 31, 2021. On March 16, the BoJ had announced emergency
measures to facilitate corporate financing that included the first two measures (For details on
the third measure, see this YPFS blog post).
On April 27, the BoJ increased its upper-limit on Outright Purchases of Commercial Paper and
Corporate Bonds to $186 billion. This is a standing facility the BoJ has used for many years to
conduct its monetary policy. Eligible counterparties must have a current account at the BoJ and
be deemed sufficiently creditworthy. The mechanism requires counterparties to bid in
competitive auctions the yield at which they desire to sell commercial paper or corporate bonds.
The updated terms and conditions can be found here.
On April 27, the Special Funds-Supplying Operations was expanded from $72 billion to $233
billion. It also increased the number of eligible counterparties to include member financial
institutions of central organizations of financial cooperatives (rules published on May 1) and
expanded the range of eligible collateral to private debt in general, including household debt.
The BoJ now applies a positive interest rate of 0.1% to the outstanding balances of current
accounts held at the BoJ. The program lends against corporate debt at a 0% interest rate, with
maturities up to one year. The original terms and conditions can be found here.
Additionally, the BoJ has further incorporated active purchases of Japanese government bonds
(JGBs) and Treasury discount bills (T-Bills) to maintain stability in the bond market and
stabilizing the yield curve at a low level.
During the 2007-09 global financial crises, the BoJ introduced both the Special Funds-
Supplying Operations and Outright Purchases of Commercial Paper. Both of these programs had
intended to facilitate corporate financing and were thought to have contributed to lowering
interest rates in the commercial paper market.
Click here to read a YPFS case study on the BoJ Outright Purchase of Commercial
Paper and here for the Special Funds-Supplying Operations during the GFC.
These cases provide details of the program and access to key documents.

The Bank of Mexico Plans to Inject $30 billion to Provide Liquidity
Original post here.

On April 21, the Bank of Mexico (Banxico) unveiled a series of liquidity measures totaling $30
billion to “foster an orderly functioning of financial markets, strengthen the credit channels and
provide liquidity for the sound development of the financial system.”
The market liquidity measures total 3.3% of last year’s GDP. So far, only the government
securities swaps have been in operation; rules for additional facilities were published last week.
In addition to these measures, Banxico cut interest rates by 50 basis points, and again on May
14 to 5.5%—its lowest level since December 2016. So far, Banxico has cut 175 basis points this
year.
Mexico, the second largest Latin American economy, has been hit hard by the COVID-19 crisis.
Since February, the Mexican peso has depreciated by over 20%. The country has experienced
shortages in foreign exchange liquidity and a sharp fall in commodity prices—particularly crude
oil prices. According to Banxico, the crisis has brought “the greatest contraction ever recorded of
holdings of emerging economies’ assets, especially of fixed-income instruments.” Additionally,
Mexico’s sovereign credit rating and Mexico’s national oil company Pemex have been
downgraded. Mexico’s central bank expects the Mexican economy to contract by 5% in the first
half of 2020—a forecast that might be revised in the next quarterly report at the end of May.
The IMF currently expects a 6.6% contraction in 2020.
The $30 billion in liquidity includes programs financing SMEs and individuals, the corporate
debt market, the government debt market, and other domestic debt markets. In addition,
existing facilities have been expanded to provide greater liquidity and foreign exchange hedges.
Banxico published rules for financial institutions on these measures in Mexico’s Official
Journal Circular 15/2020 on May 13 and Circulars 16/2020, 17/2020, and 18/2020 on May 19.
For SMEs funding:
• A $10 billion financing facility directed to support micro, small-, and medium-sized
enterprises, and individuals will operate through commercial and development banks.
Resources will come from Banxico’s Monetary Regulation Deposits (DRM) or, if
necessary, the Banxico will provide financing at terms of 18-24 months, at the overnight
interbank interest target rate. The DRMs are mandatory long-term deposits from
national credit institutions in the Banxico and have an indefinite maturity date and
generate yields equivalent to the interbank funding rate. They differ from the reserve
requirement used by other central banks in that the DRM is not continually adjusted
according to fluctuations in the benchmark liabilities of the banks. The DRM may be
used as collateral in Banxico’s transactions with banking institutions such as in
liquidity–providing auction. (see here on DRM). Securities eligible for the Ordinary
Additional Liquidity Facility (FLAO) will be eligible for this facility. The FLAO has been
available since 2008 and offers liquidity to commercial banks through collateralized
credits or repos, at a reduced cost of 1.1 times the Bank of Mexico’s target overnight
interbank interest rate.

• A $4 billion temporary collateralized financing facility is directed for commercial banks
holding corporate loans of micro, small- and medium-size enterprises. The facility will
provide financing at a term of 18-24 months, at the target overnight interbank interest
rate. The financing will be guaranteed by the SME corporate loans held by the
commercial banks, with credit ratings of at least “A” at local scale, by at least two rating
agencies.
For the corporate debt market:
• A $4 billion Corporate Securities Repurchase Facility (FRTC) aims to support the
corporate debt market by providing liquidity for short-term corporate securities and
long-term corporate debt. Eligible securities include those issued by nonfinancial private
companies that reside in Mexico and comply with FLAO criteria. The cost of the repos
will be 1.1 times the average of the overnight interbank interest rate.
For the government debt market:
• A $4 billion facility to repurchase government securities at longer terms than in regular
open market operations aims to facilitate intermediation of government securities.
Financial institutions holding government debt will obtain liquidity without the need to
dispose of their securities in stressed financial markets. The cost of repurchase
agreements will be set at 1.02 times the average of the overnight interbank interest rate.
• A $4 billion facility for auctions of government securities swaps will trade long-term
securities of at least 10 years in exchange for shorter maturities of up to 3 years to
promote proper functioning of the government debt market. The terms for each swap
will be determined in each auction. The first auctions occurred on April 29.
For the general domestic debt market:
• A $4 billion temporary debt securities swap facility is to promote an orderly behavior of
Mexico’s debt market. The facility aims to provide liquidity for securities that have
become illiquid in the secondary market. Eligible institutions can exchange debt
securities exchange for government securities. FLAO criteria apply for Peso-
denominated securities eligible for the facility.
Other extensions of existing facilities:
• The Bank of Mexico widened the eligibility of debt securities in FLAO repos and of
collateral for foreign exchange hedges settled by differences in US dollar credit auctions.
Securities eligible in Mexican pesos must have credit ratings of at least “A” in the local
scale or “BB+” in the global scale (for securities denominated in foreign currency), from
at least two agencies.
• In order to foster a sound functioning of the money market, Baxico has preserved excess
liquidity during trading hours. To foster the orderly operating conditions in the
MXN/USD exchange market, particularly when markets in Asia and Europe operate, by
instruction of the Mexican Foreign Exchange Commission, the Bank of Mexico will
conduct hedge transactions settled by differences in US dollars at hours when Mexican
markets are closed.

• Banxico reduced the DRM by $2 billion. The resources will improve the liquidity of these
institutions and their capacity to grant credit.

Federal Reserve Expands Support to Corporate Bond Markets Again
Original post here.

On June 15, the Federal Reserve (Fed) updated and expanded the Secondary Market Corporate
Credit Facility (SMCCF), one of the Fed’s corporate bond-buying programs, to support market
liquidity and the availability of credit for large employers. The recent change allows the facility
to buy U.S. corporate bond portfolios that track a broad market index.
Bonds eligible for the Broad Market Index must:
• have remaining maturity of up to 5 years
• be issued in the U.S. or under the laws of the U.S
• meet the same rating requirements for eligible individual corporate bonds under the
SMCCF
• not be issued by an insured depository institution, depository institution holding
company, or subsidiary of a depository institution holding company, as defined in the
Dodd-Frank Act.
Ratings are subject to review by the Fed. This expansion will complement the Fed’s purchases of
exchange-traded funds. As of May 19, the Fed’s total outstanding amount of loans under the
SMCCF was $1.29 billion. For more information about the SMCCF and the Primary Market
Corporate Credit Facility, see the previous YPFS blog post.

Japan Begins Capital Injections for Financial Institutions in Response to COVID-19
By June Rhee with research assistance from Vaasavi Unnava
Original post here.

***The author would like to thank Junko Oguri for exceptional research support
and comments.
On June 13, the Japanese Diet passed an amendment to the Act on Special Measures for
Strengthening Financial Functions (ASFF) extending the period of government capital injection
to financial institutions from March 31, 2022 to March 31, 2026 and expanding the available
public funds for the injection from ¥12 trillion to ¥15 trillion.
The ASFF, first introduced in 2004, has injected ¥674.84 billion into 30 institutions over the
past 16 years. A YPFS case on the previous ASFF can be accessed here. ¥474.34 billion remains
outstanding as of September 2019. (see here) The first amendment was during the 2007-09
global financial crisis (GFC) introducing a focus for SME-support. Under this amendment, the
government had injected ¥309 billion to various financial institutions.
In proposing the new amendment this month, the Japan Financial Services Agency
(JFSA) emphasized that the domestic financial system is currently sound and this is a
preemptive measure ensuring the long-run soundness of the financial system so that it can
continue to support small and medium-sized enterprises (SMEs) impacted by the COVID-19
crisis and revitalize the economy.
All financial institutions are eligible for capital injections, however, as the amended ASFF
specifically focuses on SME lending, the main recipients of the capital injection are expected to
be regional banks. Institutions must first submit an application to the JFSA. The application will
include: (i) numerical targets for an institution’s profitability and efficiency, and means to
achieve those targets, (ii) related commitments by the management, and (iii) measures the
institution will take to facilitate credit to SMEs and revitalize the local economy. (see here)
The Financial Functions Enhancement Examination Committee, currently composed of five
members from the private sector, then will review each application. It will evaluate: (i) the
feasibility of the targets, (ii) whether the institution will be able to repay within 15 years, and (iii)
current asset value. (see here) The review meeting minutes and participants’ list will be
posted here.
However, the amended ASFF allows financial institutions “affected by coronavirus” to apply for
an injection without meeting the first two hurdles. Such institutions must meet only the third
hurdle, to describe measures they will take to facilitate credit to SMEs. “Affected” institutions
are those whose “financial statements have gotten considerably worse due to the coronavirus or
measures to prevent coronavirus, or if the financial institution needs to lend to companies that
are affected by coronavirus or measures to prevent coronavirus.”
Moreover, the review process for these “affected” institutions will neither consider the feasibility
nor the 15-year deadline but only consider the best possible asset value of the institution based
on available information. (see here) However, a news report notes that the JFSA had expressed
intentions to set repayment dates for each bank receiving capital injection.

Once the application is approved, the Deposit Insurance Corporation of Japan (DICJ) will
purchase preferred shares, as consistent with injections under the previous ASFF. However, the
amended ASFF further allows the DICJ to purchase common stocks and subordinated debt from
the “affected” institutions. It is not clear whether the common stocks will be voting or non-
voting.
The JFSA notes that a wider variety of capital will meet the needs of different financial
institutions. The JFSA also announced lower dividend rates than normal for shares purchased
from affected financial institutions. (see here) The DIJC has existing guidelines on exercising
voting rights and disposing of preferred shares but these have yet to be updated. The capital
injection for affected financial institutions does not require recipient companies to limit
dividend payments to existing shareholders.
A commentator questions the amended ASFF as it no longer sets a repayment deadline.
Regional banks have already been struggling with the decline in population and in the number
of borrowers. Some market observers are skeptical about whether banks receiving ASFF capital
will be able to repay.
The same commentator notes that Mr. Toshihide Endo, the Commissioner of the JFSA, had
denied that the amended ASFF would lead to nationalization. Although the JFSA has promised a
rigorous review process for the application and its best efforts to improve profitability and
management of the assisted institutions, the commentator remains pessimistic about the future
of regional banks.
Takahide Kiuchi, a former Bank of Japan Policy Board Member, acknowledges that this
amended ASFF may carry a risk of moral hazard in the long run but emphasizes that it is
justified under the current unusual economic environment. Kiuchi also commends the
government for implementing this difficult policy early on.
Ogawa and Tanaka examine the nature of the shocks that hit the SMEs during the GFC and how
they responded to these shocks. They find that the capital injection under the ASFF may have
acted to strengthen the role of financial institutions as a buffer for SMEs against these shocks.

Macroprudential Policy
Central banks do not just support the economy using their ability to set interest rates and
provide lender-of-last-resort financing. They, and their financial supervisory colleagues, also
have a set of tools to keep financial markets and institutions from running too hot or too cold.
These are known as macroprudential policies. With these policies, governments might allow
financial institutions to do things like use their capital buffers, allow payment standstills on
loans, or use their liquidity buffers. Authorities typically use macroprudential policies to
complement fiscal policy and monetary policy.

Analysis
Countries Implement Broad Forbearance Programs for Small Businesses,

Sometimes with Taxpayer Support
By Greg Feldberg and Alexander Nye with research support from Kaleb Nygaard
Original post here.

The government-mandated lockdowns in many countries responding to the coronavirus
pandemic have threatened the financial health of small businesses, who typically have sufficient
cash on hand to cover just one month of fixed cash-flow needs. Banks, utilities, landlords, and
other creditors responded early with temporary payment holidays and other forbearance efforts,
often at the urging of regulators. Creditors can grant limited forbearance to assist debtors in
normal times. As the lockdown continues, however, private-sector creditors won’t be able to
afford forbearance alone. To avoid widespread nonpayment from sparking a systemic financial
crisis, governments are turning to taxpayers to help small businesses meet their fixed-cost
obligations.
When designing a loan forbearance program for small and medium-sized enterprises (SMEs),
policymakers consider:
1. Eligible institutions/obligations – Which creditors should offer forbearance, for which
types of obligations?
2. Borrower eligibility – What borrowers will be eligible to participate?
3. Implementation – How will the program be implemented?
4. Duration – How long will the program last?
5. Support – Will the taxpayers foot the bill, and if so, how?
Eligible institutions/obligations
In a few cases, government programs have covered all types of fixed-cost obligations that
distressed companies face. Denmark plans to directly pay 25% to 100% of the reported fixed
costs for SMEs whose revenues fall by more than 25% during the coronavirus pandemic. More
commonly, programs have targeted specific types of obligations to specific types of creditors.
SMEs can have fixed-payment obligations to entities in the public sector, financial private
sector, and nonfinancial sector.
Public-sector payment obligations can include government-owned utilities and other services,
government-sponsored entities, and, of course, taxes. It may be relatively easy for a government
to waive such payments for a short period. On March 18, for example, Dubai and Abu
Dhabi reduced 15 different customs fees, taxes, and other costs for businesses, including an
across-the-board 10% reduction in water and electricity bills owed to the government-run
utility.
Banks typically have procedures for working with borrowers who are experiencing temporary
financial stress. In this crisis, some of the largest banks voluntarily created forbearance

programs. A broad, government-initiated moratorium on loan payments to banks and other
financial institutions could effectively protect small businesses during a crisis. Several
governments encouraged bank forbearance on loan principal or interest payments. But U.S.
banks, though well-capitalized compared to the beginning of the last global financial crisis, may
not be able to bear the cost of an unprecedented number of nonperforming loans for very long.
And nonbank financial institutions are typically less prepared than banks for a surge in
nonpayment by SME debtors.
SMEs also may have obligations to creditors in the nonfinancial private sector, such as
landlords, employees, and suppliers. Government programs to help SMEs with these costs are
rare, to date. Denmark’s direct financial support program pays a proportion of eligible SMEs’
bills regardless of the type of creditor. France’s current program allows SMEs to apply to defer
rent and utility payments. Programs that target employees, by using government funds to prop
up SME payrolls, can become difficult to distinguish from unemployment insurance. In the
context of COVID-19, they have become more common. Three examples are the
UK’s Coronavirus Job Retention Scheme, the Republic of Ireland’s COVID-19 Wage Subsidy
Scheme, and Germany’s Emergency Aid Grants.
Borrower eligibility
While past forbearance programs typically responded to natural disasters just in affected
regions, most programs this year have been national, reflecting the nature of the current crisis.
Eligibility can be extended very broadly or limited to borrowers meeting specific criteria.
On March 19, Korea’s Financial Services Commission (FSC) announced a fixed-cost forbearance
program that appears to offer blanket eligibility. Under the program, SMEs can access a six-
month minimum extension on existing loans and guarantees from both banks and nonbanks.
Blanket eligibility may be most efficient in a pervasive crisis such as the current one, in which
the sheer number of affected SMEs is so large as to challenge systematic efforts to distinguish
the truly needy. However, blanket eligibility, as seen in some of India’s farm loan waiver
programs, can also be susceptible to abuse due to the moral hazard.
Recent small-business programs in Europe have tended to limit eligibility to borrowers that
meet certain criteria. Greece’s loan principal-repayment holiday restricts participation to
businesses in sectors directly impacted by the pandemic that were current on their obligations
when the program was announced. France and Denmark link eligibility to lost revenues.
Denmark’s program determines how much support to offer a given business by looking at that
business’s expected decline in revenues. France conditions eligibility for its rent forbearance
program on a company having less than €1 million in turnover and having either been ordered
closed by the government or losing over 70% of turnover in March 2020 compared to March
2019.
Parts of Denmark’s program are only available to companies with 10 or fewer employees. But
strictly using a business’s number of employees to determine eligibility may encourage some
SMEs to lay off employees before joining the program. Perhaps for this reason, Denmark’s
program disqualifies businesses that fire workers before joining the scheme.
Implementing restrictive eligibility requirements can impose a significant administrative burden
on government resources, which can limit the speed and effectiveness of a program. European
governments can track sales that are subject to the value-added tax, which can help businesses

illustrate their need, as in the case of Denmark’s program. A sufficiently detailed quarterly
income tax system could provide similar information.
How does a government implement such a program?
Creditors sometimes voluntarily decide to grant forbearance, even in normal times. This
happens when the creditor believes a borrower is viable as a going concern, but can’t meet
payments due to temporary difficulties. In response to the COVID-19 pandemic, many
individual creditors and creditor associations like the Thai Bankers’ Association have announced
forbearance programs for SMEs unilaterally.
Government supervisory authorities (like the ECB) can incentivize forbearance. As noted,
several authorities have advised banks not to be too quick to mark a loan as nonperforming
when the borrower has been affected by the COVID-19 crisis. This can free bank capital for
lending in the short run. In the long run, though, it can drain bank capital. Supervisors are faced
with a dilemma: “On one hand, protecting the financial system by forcing banks to correct
weaknesses in how they assess and manage their loans[;] ...on the other hand, causing a credit
crunch for the real economy by being too strict with banks.” Credit crunches can be especially
dangerous for forbearance programs that do not protect the credit ratings of participating
borrowers. Participants in those programs will already have a more difficult time accessing
credit with a poor credit rating, and a credit crunch would make this problem worse.
Authorities can outright require forbearance. In some cases, governments pass laws that require
creditors to restructure SMEs loans. The Japanese government passed such a law during the
GFC. The law stipulated: “When debtors asked financial institutions to ease repayment
conditions (e.g., extend repayment periods or bring down interest rates), the institution would
have an obligation to meet such needs as best as possible.” Finance ministries are often
responsible for implementing these programs. This was the case with Italy’s year-long debt
moratorium during the GFC and Germany’s current program. Moratoria are sometimes
accompanied by subsidies to the financial institutions for the cost of deferring payments (Saudi
Arabia) or providing some of the funds directly to SMEs (Denmark).
A government can order related organizations, like state-owned development banks or agencies,
to offer forbearance on their loans to businesses. After the natural disasters in 2006 and 2011
the SME Development Bank of Thailand provided six-month debt moratoria to SMEs in the
affected regions.
Governments can also negotiate forbearance programs with creditor associations for institutions
like banks and non-banks, then bind them to the program. The Central Bank of
Ireland announced one such agreement in response to the COVID-19 pandemic. France and
Belgium have government credit mediation programs that individual creditors can use, put in
place in 2008 during the Global Financial Crisis. The credit mediator helps distressed
businesses negotiate with banks, credit insurers, supplier credit companies, and other financial
institutions.
Duration
Typically, payment forbearance programs operate for a short and specified time period tied to
the nature of the crisis. In cases of natural disasters, like destructive floods in Thailand, these
programs can last for just a few months, as affected regions return to normalcy. These programs
rarely extend beyond six months.

Financial crises are different. Governments that introduce programs as only temporary can end
up extending them under political pressure or simply because the economic stress has continued
longer than expected. During the GFC, the Italian government, in collaboration with a creditor
association, imposed a loan forbearance program for SMEs in August 2009.
The program accepted 200,000 applications and rolled over €13 billion in SME debt by
December 2010. But as the economic situation did not improve, Italy continued to extend and
modify the program through at least 2014. Japan extended its 2009 SME Financing Facilitation
Act for several years. Some critics say the government’s ongoing forbearance helped
perpetuate Japan’s problem of “zombie” SMEs.
Taxpayer Support
Some programs directly subsidize the costs of SMEs. A government can seek to limit these costs
by only covering losses the SME may suffer due to COVID-19. Denmark’s programs do this. But
predicting these impacts is extremely difficult. Governments might make a program less
generous if they find an SME’s actual performance is better than expected.
Northern Ireland offered some amount of taxpayer support as well, although it narrowed
eligibility to three sectors especially affected by COVID-19: hospitality, tourism and
retail. Germany and the US have tried a more blanket approach to providing taxpayers support.
In Germany’s program, employers with up to five employees receive a grant of €9,000 and
employers with up to fifteen employees receive a grant of €15,000. The CARES Act, as passed by
the US Senate on March 25, provides $10 billion for Small Business Administration (SBA)
emergency grants of up to $10,000 to provide immediate relief for small business operating
costs and appropriates $17 billion to cover six months of payments for current SBA borrowers.
Other programs, like Saudi Arabia’s recent program and India’s farm loan waiver system,
provide support to SMEs indirectly. They subsidize banks and other creditors for the losses they
bear in supporting SMEs. Programs that put losses on banks and other creditors can be costly to
financial stability in the long run. Taxpayers may end up footing the bill if the financial and
economic distress caused by the coronavirus response is protracted and affects confidence in
bank solvency.
Authorities Restrict Short Sales during COVID-19 Crisis

By Greg Feldberg and Adam Kulam
The COVID-19 pandemic has created extraordinary uncertainty; it is too early to predict how
bad it will get or how it will impact the world economy. This uncertainty has substantially
elevated the volatility in bond and equity markets. In response, several countries have placed
restrictions on short sales. In short sales, an investor sells a security she doesn’t own, hoping to
profit when its price falls. Economists generally find that the benefits of short selling to market
efficiency and liquidity outweigh the potential costs, most of the time. But authorities argue that
short sales amidst extreme uncertainty can excessively deflate market prices and lead to further
market contagion in a crisis. We discuss: (i) short-sale restrictions during the COVID-19 crisis,
(ii) similar actions in earlier crises, and (iii) key design decisions that authorities face in
restricting short sales.

Note that, while we focus here on short-sales bans, they are not the only tools authorities have
used to address market volatility in the current crisis. Authorities have expanded the mandatory
disclosure of net-short positions (Europe), introduced new circuit breakers to halt trading as
prices fell (Thailand), and even briefly banned all trading for a few days (Philippines).
2020 Actions
In the COVID-19 crisis, several European countries, such as Spain and Italy; South Korea; and
three Gulf States have banned short-selling. The Stock Exchange of Thailand
(SET) and Securities and Exchange Commission of Pakistan (SECP) imposed uptick rules, which
only allow short sales to occur just after a stock price has risen. Turkey’s Capital Markets
Board and Indonesian authorities adjusted domestic circuit-breaker rules, which temporarily
halt trading on an exchange if a specified index significantly declines in price. The Johannesburg
Stock Exchange (JSE) Settlement Authority raised settlement obligations, and pledged to force
short-sellers to borrow securities in the open market if it appeared that their short-sales would
fail.
Actions in Earlier Crises
For as long as stocks have traded, authorities have blamed short-sellers for market stress and
periodically banned their activities (McGavin (2010), p. 207). Bans can be instituted either by
a financial regulator or a self-regulating organization (SRO) such as a stock exchange.
During the Global Financial Crisis, the United States’ Securities and Exchange Commission
(SEC), in concert with the United Kingdom’s Financial Services Authority (FSA), banned short-
selling of nearly 1,000 financial stocks in 2008. At the same time, the SEC introduced a
temporary requirement that all money managers publicly report any short sales. Amidst the
Eurozone debt crisis, several countries banned short selling for three weeks in August 2011.
When China’s stock market suffered from turbulence in 2015, the Securities Regulatory
Commission imposed a new rule requiring short sellers to wait one day before covering their
short positions and paying back loans used to buy shares.
Studies of historical uses of short-sales bans haven’t found them to be very successful (Battalio
et al. (2012), p. 4). Scholars argue that short-sales elling bans decrease market efficiency,
impede price discovery, and bring unintended negative effects, such as price inflation
(Hendershott et al. (2013), p. 6). One study found that the US ban in 2008 did succeed at
significantly reducing shorting activity. But the ban worsened market quality, as measured by
quoted and effective spreads, price impacts, and realized spreads (Boehmer et al. (2013), p.
1398, 1399).
Key Design Decisions
Regulators face the following key design decisions in restricting short sales:
• Communicated Purpose – How will the authorities explain the ban?
• Nature of the Ban – Will the ban cover all shorts, or just uncovered or “naked” shorts?
Will the authority use other tools, like an “uptick” rule?
• Scope – Will the ban cover shorts on all stocks, or selected companies or sectors?

• Exemptions – Will some market participants, particularly market-makers, be exempt
from the ban?
• Timeframe – Will the ban be for a short term, longer term, or indefinite?
• Coordination of Measures – Will the ban apply to other types of bearish activity, and will
other countries cooperate?
Communicated Purpose
Authorities’ documents and press releases suggest an attempt to curb price decline, control
volatility, or bolster market confidence. Authorities typically express the concern that excessive
short-selling might misrepresent a company’s true value and eventually damage the
fundamentals of the underlying company – especially for companies whose counterparties treat
the stock price as a proxy for long-term financial health. So they use short-sales bans to avoid
a “crisis of confidence,” as the SEC said in 2008.
Short-sales bans in 2008 focused on shares of financial institutions “whose health may have an
impact on financial stability” (IOSCO, 2008). Regulators in that crisis were concerned about
financial contagion, as counterparties took falling share prices to indicate weakness in these
companies. “In the context of a credit crisis, where some entities face liquidity challenges but are
otherwise solvent, a decrease in their share price induced by short-selling may lead to further
credit tightening for these entities, possibly resulting in bankruptcy” (IOSCO, 2008).
The SEC’s September 18, 2008 prohibition of short sales was the first of several around the
world. South Korea’s Financial Supervisory Service (FSS) banned short sales of all South Korean
stocks on September 30, 2008, citing “malignant rumors” in its financial markets (Bohl et al.
(2014), p. 265). Germany, France, Australia, and the United Kingdom followed similar policy
agendas soon after.
Nature of the Ban
In some cases, authorities have banned all short sales. In other cases, they have banned only
“naked” or uncovered short sales. In a “naked” short sale, the short seller neither borrows nor
arranges to borrow the underlying security by the settlement date. This introduces a settlement
risk that the seller will fail to deliver the security when it is due. If a trade fails, the short seller
will not receive any cash, and the buyer will not receive any security. These “failures to deliver”
(FTDs) are a key measure of naked short-selling, and scholars suggest that naked short sales
result in higher levels of volatility than covered short sales (McGavin (2010), pp. 204-6).
Authorities also have to make judgments about how a short sale can be covered (Howell (2016),
pp. 15-6). During the “close-out” portion of the short sale, the short seller “covers” their position
by re-obtaining the security and returning it to the original lender by the date of settlement.
Regulators can set the degree of ownership that satisfies minimum “coverage” thresholds.
Authorities may require a short seller to wholly possess the security, to obtain a legal contract
entitling the short seller absolute ownership of the security, or use a “locate” requirement, which
is more or less a promise from the short seller that they reasonably expect to obtain the security
from a third party before the settlement date. There is some evidence that stringent covering
requirements can increase the ratio of informed to uninformed short-sellers.
Another way to regulate short-selling is through uptick rules, which permit traders to short-sell
securities only at prices above the current market price. Simply put, short-sales can’t go through

until the security’s price rises. Authorities aim to limit the contribution of short-selling
to market abuse or bear raids, which may result in steep and sudden price declines (McGavin
(2010), p. 214). Authorities also rely on uptick rules to communicate that there are active buyers
in the market (Howell (2016), p. 34).
Uptick regimes have re-entered both the public discussion and the active macroprudential
toolkit in the current crisis. The Stock Exchange of Thailand (SET) employed a temporary,
three-month uptick rule “to cope with high uncertainties” and volatility related to the COVID-19
outbreak. The Securities and Exchange Commission of Pakistan (SECP) imposed an uptick rule
on 36 shares listed on its futures market “in the wake of COVID-19 and its unprecedented effect
on global stock markets.”
Also, rather than restrict short sales, authorities have on some occasions sought to limit the
possible negative impacts by requiring more disclosure. The UK FSA argued that disclosure-
induced transparency would prevent market manipulation and ward off speculation and market
overreaction (McGavin (2010), p. 237).
Scope
A short-selling ban can span groups of securities, indexes, or country-wide stock markets and
exchanges. In 2008, the SEC first banned short sales on the stocks of the two mortgage
government-sponsored enterprises in July. It later extended the ban to 799 financial companies’
stocks. In announcing the expanded list, the US SEC noted that it had focused on financial
institutions because of “the essential link between their stock price and confidence in the
institution.”
Of course, short sales are not the only way for investors to take bearish positions on equities.
Some authorities have more broadly prohibited all net-short positions, thereby extending the
ban to derivative securities and other “bearish operations” that profit from the problematic
securities’ price-decline. Several European countries such as Spain and Italy recently banned
net-short positions, but exempted credit default swaps, corporate debt instruments, and
balanced hedging activity.
One study of the 2008 short-sales bans in the US noted that options markets continued to
function. The authors were able to show that banning short-selling slowed the flow of negative
information into stock prices, relative to the options markets that weren’t covered.
Participant Exemptions
Rather than ban all short-selling, authorities may prohibit or exempt specific market
participants. One academic paper classified short-sellers as algorithmic traders, market-makers,
or long-term profiteers (Battalio et al. (2012), p. 2). Market makers are participants that
facilitate the purchase and sale of stocks “on a regular and continuous basis at a publicly quoted
price.” Expansive prohibitions have made it difficult for specialists such as market makers to
provide liquidity by short-selling (Jones (2012), p. 27). When the NYSE banned all market
participants from short-selling in 1931, it included market makers and “provoked something
akin to a short squeeze” and accidentally permitted short-term buyers to ratchet up prices
(Boehmer et al. (2013), p. 1367). In 2008, the SEC included algorithmic traders in its ban; some
saw this as a mistake, because those traders could not act as informal market makers while the
ban was in force. With less competition, the exempted formal market makers collected greater

rents from those demanding liquidity. In most recent cases, authorities have exempted market
makers.
Timeframe
Temporary short-selling and net-short bans might function as extreme macroprudential tools if
they could limit panic selling. During the Global Financial Crisis, “Temporary short selling
restrictions were imposed as a means to try and restore financial stability: the constraints could
be swiftly introduced; they were easy to sell to the public; and they demonstrated the regulators
were taking action to try and control the situation” (Howell (2016), p. 10). Still, temporary bans
can cause uncertainty because market participants do not know what is included in the ban
(Howell (2016), p. 28-9). Recently, international regulators have clarified the length and scope
of their short-selling restrictions by publishing answers to frequently asked questions (FAQs) on
their websites.
Coordination of Measures
In some instances, authorities have coordinated short-sales restrictions across jurisdictions. On
September 18, 2008, the Securities and Exchange Commission (SEC) and the Financial Services
Authority (FSA) consulted one another before prohibiting the short-sale of domestic financial
stocks (Boehmer et al. (2013), p. 1366-7). After the GFC, the European Securities and Markets
Authority (ESMA) was established to promote supervisory convergence across the European
Union. Recently, the ESMA ensured that the short-sales bans of foreign securities were
consistent across markets in multiple nations (France, Belgium, Greece, and Italy). Regulators
coordinate to make their policies transparent and harmonize them with the policies of other
regulators. In another recent example, ESMA strengthened the EU’s short-sale disclosure
requirements, and the UK’s Financial Conduct Authority (FCA) imposed a reciprocal rule to
avoid the migration of share-specific short-selling from one market to another. Coordination can
be essential to prevent regulatory arbitrage or exploitation by short-sellers (McGavin (2010), p.
238).

Easing Liquidity Regulations to Counter COVID-19
By Priya Sankar, Alexander Nye, and Greg Feldberg
Original post here.

Many countries are easing liquidity regulations to help banks get cash to their customers and to
prevent liquidity shortages from spreading across financial markets. Countries are addressing
liquidity shortages using two main tools: the liquidity coverage ratio (LCR), which most
developed countries implemented in recent years as part of the Basel III agreements, and the
more traditional reserve requirement ratio.
LCR rules require banks to hold high-quality liquid assets (HQLA) sufficient to meet their needs
through a 30-day liquidity stress scenario. Most countries that have an LCR rule have now eased
its enforcement, encouraged by the Basel Committee itself in March. Other countries have
lowered their reserve requirements, the amount of cash relative to liabilities that banks must
hold on reserve with their central bank. A few countries have taken other measures, such as
easing rules on foreign exchange liquidity. All of these tools are countercyclical and
macroprudential, in that regulators are now using them to spur broad-based lending during a
difficult crisis.
This blog discusses options for easing liquidity regulations:
1. Which tool to use?
2. How long will the change last?
3. Will the government provide a backstop?
4. Are there targets or conditions for use?
Which tool to use?
Reserve requirements
Central banks have used reserve requirements to pursue monetary, macroprudential, and other
policy goals for a very long time. Since central banks generally pay less than other cash-like
instruments, reserves are costly for banks to hold. By raising the reserve ratio, a central bank
can impose a tax on banks, tightening credit; by lowering it, the central bank can reduce that
tax, incentivizing banks to lend. From the 1930s until the 1990s, the U.S. Federal Reserve used
the reserve ratio frequently as a countercyclical tool, typically in conjunction with its monetary
policy.
But reserve requirements lost favor in the U.S. and other developed countries amidst the
deregulatory trend in the 1990s and 2000s. In recent years, it is primarily emerging
economies that have used reserve requirements as a countercyclical policy tool. Since 2004, no
advanced economy has actively managed its reserve ratio countercyclically; 90% of developing
countries with reserve requirements have done so, including during the 2007-09 global financial
crisis.
This trend has held in the current crisis. According to the YPFS Financial-Intervention Tracker,
22 countries, mostly developing countries, have lowered their reserve ratios or otherwise eased

their reserve policies this year. The Democratic Republic of the Congo and Iceland have cut their
ratios to zero, from 2% and 1%, respectively. Others have made larger cuts. The United Arab
Emirates (UAE) cut its reserve ratio from 14% to 7%; Croatia cut its reserve ratio from 12% to
9%.
Some countries made multiple cuts. Brazil cut its reserve ratio from 31% to 25% and later to
17%. The Philippines reduced reserve requirements from 14% to 12% and signaled up to another
2% of cuts. China cut its reserve ratios three times since the beginning of 2020.
Liquidity Coverage Ratio (LCR)
Global regulators developed the LCR after witnessing extraordinary, systemic wholesale funding
runs in the global financial crisis. Its purpose is both microprudential and macroprudential,
although some viewed it more as a microprudential tool before the current crisis. By requiring
every bank to hold sufficient liquidity to make it through 30 days of stress, the LCR reduces the
potential for asset fire sales and wholesale funding runs to spread across banks.
While the decision to ease the LCR is up to the discretion of supervisors or financial stability
committees, the wording in the 2013 Basel agreement on the LCR strongly suggests supervisors
should do so in a systemic crisis. The concern is that the actions banks may take to maintain
their LCRs above 100% could lead to the very financial contagion supervisors seek to avoid. “[I]n
a situation of sufficiently severe system-wide stress, effects on the entire financial system should
be considered.”
The members of the European Union and more than a dozen other countries have eased their
LCR policies in response to the COVID-19 crisis. In explaining its policy easing on April 3,
the European Central Bank (ECB) noted: “It is key that banks make use of the buffer under
stress, even if that means falling substantially below the minimum 100% level, in order to
ensure liquidity in the system and avoid contagion effects and chain reactions that might trigger
liquidity problems in other institutions.”
The UAE, South Africa, and Korea have set new targets of 70%, 80%, and 85%, respectively. The
U.S., ECB, and most others that eased their LCRs did not specify a new target below 100%. Some
experts have argued that this lack of specificity will limit the usefulness of easing the LCR in
these countries.
A few countries with LCRs, including Australia and China, have not eased them during the
COVID-19 crisis. China has aggressively eased its reserve requirements. Australia is unusual in
that it allows banks to use a committed liquidity facility from the central bank to stand in for a
substantial portion of high quality liquid assets in calculating their LCRs.
Net Stable Funding Ratio (NSFR)
Global regulators also included the net stable funding ratio (NFSR) in Basel III. The NFSR
requires banks to maintain sufficient stable funding to meet maturing liabilities and other needs
for one year. This helps to prevent banks relying on wholesale funding during booms and
encourages them to better assess liquidity risk on and off their balance sheets.
A handful of countries have adjusted their NSFRs or related policies during the COVID-19
crisis. Singapore has lowered its NSFR for loans to households and businesses maturing in the
next six months from 50% to 25% until September 2021. India has delayed implementation
from April to October. Malaysia is sticking to its July implementation date, but will require an

NSFR of 80% rather than 100%. Australia has allowed banks to include their initial allowance
under the central bank’s Term Funding Facility in their calculation of the NSFR.
Foreign Exchange Measures
There is no lender of last resort to help borrowers whose debts are denominated in foreign
currencies. During a crisis like the current one, liquidity shortages can propagate across borders,
as happened in the Asian financial crisis of 1997-98. Since then, several emerging-market
countries have foreign currency reserve requirements or liquidity coverage ratios to address
currency mismatches. A few countries raised those requirements prior to the global financial
crisis and later eased them. This year, some countries have eased these rules. South
Korea lowered its foreign exchange LCR from 80% to 70% for banks until
May. Indonesia expanded the range of transactions foreign investors could use to hedge their
holdings of rupiah.
Measures changing the assets that can be counted for reserve ratios, LCRs, or NSFRs
A few countries changed their definitions of HQLA for the LCR calculation or of assets
acceptable as reserves for determining reserve requirements. For example, Brazil’s central bank
increased the amount of central bank reserves that financial institutions can count in calculating
their LCRs. This had a similar effect as lowering the LCR. Similarly, Iceland’s 1% reserve ratio
reduction effectively boosted the HQLAs, and thus the LCRs, for some banks.
The Dominican Republic revised the rules around its reserve ratio so that financial institutions
could count central bank and finance ministry securities for up to 2% of their reserve ratios. This
had a similar effect as a reduction in banks’ reserve requirements.
In cases where an asset class has become or might become less liquid, governments might allow
those previously liquid assets to count as HQLA for a longer period of time. Canada activated
its hardship exemption for the LCR. This allows institutions to permit early outflows from retail
and small business term deposits without imposing a penalty since they are not required to write
down these withdrawals as LCR outflow.
How long will the change last?
Policymakers have to think about how long a liquidity easing tool will be in place, but how they
choose to communicate the length of a program can be just as important. In 2012, the Bank for
International Settlements (BIS) suggested that easing is more likely to be effective if authorities
make a credible commitment to maintain loose policies for a “pre-specified period of time, or
conditionally until the threat [...] has passed.”
Some countries have been very specific about the duration of their reserve requirement
changes. Chile said its change allowing banks to fulfill the foreign exchange reserve requirement
using Chilean pesos, euros, and Japanese yen would end September 8. India lowered its cash
reserve requirement for one year. The Philippines framed its easing as conditional on “the
impact of COVID-19 on domestic liquidity.” Others, like Turkey, Sri Lanka, and the UAE, did not
say anything about how long they would maintain relaxed reserve requirements.
Most countries easing their LCRs were though not specific about the duration of the measure.
The ECB only specified that it would “allow banks to operate temporarily below” the LCR. South
Africa said its LCR cut would last “for the duration of the crisis.” An exception was South Korea,
which lowered its foreign exchange LCR only through May.

The 2013 Basel agreement said that supervisors should have a range of tools for dealing with a
bank whose LCR drops below the target, depending on factors such as the severity and duration
of the decline and whether the problem is idiosyncratic or systemic. At a minimum, a bank
should report to the supervisors with an assessment of its liquidity position. “Potential measures
to restore liquidity levels should be discussed, and should be executed over a period of time
considered appropriate to prevent additional stress on the bank and on the financial system as a
whole.”
The U.S. took such a flexible approach. The central bank said that a bank that falls below the
LCR “must submit a plan to its supervisor. But there is no requirement to rebuild high-quality
liquid assets within a specific time period.” The Bank of England made a similar statement.
Will the government provide a backstop?
The BIS said authorities should coordinate the easing of liquidity buffers with central bank
liquidity support. The availability of central bank support can help reassure markets and make
financial institutions more likely to actually use the liquidity buffers they have built above the
required amounts. In describing first-quarter results to analysts, the CEO
of JPMorganChase said the company’s “liquidity position remains strong” even as it prepares to
use internal buffers, reflecting that JPMC has “significant liquidity resources beyond HQLA
including the discount window if need be.”
Governments frequently coordinate reserve requirements changes with other liquidity-easing
tools. Kenya cut its cash reserve ratio (CRR) from 5.25% to 4.25% in the same announcement in
which it lowered its central bank rate from 8.25% to 7.25%. India coordinated a cut in its CRR
with a targeted long term repo operations, an expanded marginal standing facility, and several
regulatory changes. Governments might structure programs so that they support one-
another. Australia allowed financial institutions to count some of their assistance from the
central bank’s Term Funding Facility toward their LCR.
Policymakers modifying their LCR or NSFR in response to COVID-19 have nearly always chosen
to announce the measures at the same time as other policy initiatives. Singapore announced its
NSFR changes and its policy relaxing capital buffers at the same time. The UK said banks could
use their countercyclical capital buffers and liquidity buffers in the same announcement, which
also included monetary policy easing and a funding scheme for small businesses.
Are there targets or conditions for use?
Several countries have sought to tie liquidity easing with lending goals during the COVID-19
crisis. The U.S. said it encouraged banks “to use their capital and liquidity buffers to lend and
undertake other supportive actions in a safe and sound manner.” Other countries made similar
statements.
Reserve requirements are easier to use for such targeted policies. Authorities can set higher or
lower requirements on various types of liability for policy reasons. They can also guide banks to
a particular type of lending by lowering the reserve “tax” if banks meet lending targets.
China is a good example. On March 13 (following up with more information on March 17), China
said it would cut its required reserve ratios by 50-100 basis points for large and medium-sized
banks that met government criteria for financing small companies. It cut the separate reserve
ratio for larger joint-stock banks by 100 basis points, noting: “The funds released are required to

be used to issue inclusive finance loans, and the interest rates of these loans would drop
significantly, thereby increasing credit support for the inclusive financial areas, such as MSEs
and private enterprises.” On April 3, the central bank cut the reserve ratio for the country’s
4,000 small and medium-sized banks from 7% to 6%. It also reduced the interest it paid on
excess reserves from 72 to 35 bps to further incentivize lending.
Indonesia aimed to help its export-import sector by cutting rupiah reserve requirements (local
currency reserve requirements) by 0.50% “for banks financing export-import activity in
coordination with the Government.”

COVID-19 Liquidity Measures
Reserve Requirements (RR)
Lowered: Algeria (10% to 8%), Aruba (12% to 11%), Brazil (31% to 25% to 17%), China (1.0% cut and then a 0.5%
cut) Croatia (12% to 9%), Democratic Republic of the Congo (2% to 0%), Iceland (average RR lowered from 1% to
0%) India (4% to 3%), Kenya (5.25% to 4.25%), Malaysia (3% to 2%), Moldova (41% to 38.5% for Moldovan lei and
other nonconvertible currencies), Philippines (14% to 12% and authorized to lower to 10%), Peru (5% to
4%), Poland (3.5% to 0.5%) Sri Lanka (5% to 4%), United Arab Emirates (14% to 7%), United States (eliminated
reserve requirements)
Lowered but with no new target specified: Belize
Change to Policy: Argentina (lowered for bank-loans to households and SMEs), Chile (FX reserve requirements can
now be fulfilled by euros, Japanese yen, and Chilean pesos, in addition to US dollars) Indonesia (lowered RR 50bp for
firms financing import-export) Hungary (exempted credit institutions subject to reserve requirements from their
domestic counterparties), Moldova (increased 20% to 21% for freely convertible currencies), Dominican
Republic (Central Bank and Finance Ministry securities can count for up to 2% of the reserve ratio; a portion of this
figure must be used to finance MSMEs and households in strategic sectors)
Foreign Exchange: Indonesia (8% to 4%), Peru (50% to 9% for instruments with terms of two years or less; additional
FX reserve requirements suspended), Turkey (lowered by 500bp)
Liquidity Coverage Ratio (LCR)
Lowered: Korea (100% to 85%), South Africa (100% to 80%), United Arab Emirates (100% to 70%)
Allowed banks to fall below LCR, but with no new target specified: Basel
Committee, Canada, Croatia, Denmark, European
Union, Finland, Germany, Italy, Japan, Lithuania, Malaysia, Malta, Netherlands, Norway, Poland, Portugal, Romania,
Russia, Spain, Sweden, United Kingdom, United States
Changes to Policy: Australia (portion of aid from the Term Funding Facility in the calculation of the LCR), Brazil (a
larger portion of reserves now count as HQLA when calculating the LCR), Canada (withdrawals by depositors related
to a new hardship exemption will not change the treatment of deposits when calculating the LCR), Chile (decided not
to modify the regulatory limit applicable to the LCR), Denmark (institutions can count the ability to roll-over short
term borrowing from the Danish Central Bank in the LCR), Mexico (any asset that counted as liquid asset for the LCR
as of February 28, can be counted toward the LCR for a period of six months and may be extended for a maximum
period up to six additional months), Russia (eased requirements for one method used to calculate an alternative to the
LCR, the irrevocable credit line)
Foreign Exchange: Republic of Korea (80% to 70%)
Other Liquidity Ratios
Lowered: Aruba (18% to 15%)
Net Stable Funding Ratio (NSFR)
Lowered: Singapore (for loans to individuals and businesses 50% to 25%)
Policy Change: Australia (included the benefit of the Initial Allowance from the Term Funding Facility in the
calculation of the Net Stable Funding Ratio)

Countries Ease Bank Capital Buffers
By Priya Sankar and Greg Feldberg
Original post here.

Countries around the world are easing bank capital requirements to help banks absorb losses
and to allow them to maintain the flow of credit during the COVID-19 crisis.
Most of these measures involve the Basel III capital standards that global regulators agreed to
implement after the 2007-09 financial crisis. Thanks to Basel III and like measures, banks
across the world have substantially more capital than they had heading into that crisis.
However, the current crisis threatens to quickly eat into those capital cushions. Banks are
already reporting substantial credit losses and growing balance sheets, as they meet existing
commitments and extend new loans. Easing capital standards today is a form of
macroprudential policy, because regulators’ focus is on maintaining the health of the financial
system as a whole.
This blog discusses options for easing capital standards:
1. Which buffer to adjust?
2. Constraints on capital distribution – Do countries enforce them when reducing their
capital buffers?
3. How long will the change last?
4. Conditions for use of capital – Does the capital need to be used for a particular purpose?
5. Quality of Capital - Any change in the capital usually required to meet a buffer?
6. Changing risk weights - What kind of assets get their risk weights changed?
Which buffer to adjust?
Under Basel III, all banks must hold high-quality capital equal to 4.5% of their risk-weighted
assets, plus a 2.5% capital conservation buffer (CCB). The purpose of the CCB is to encourage
banks to conserve capital. When the buffer is breached, banks must limit bonuses to managers
and distributions to shareholders. Before the current crisis, about a dozen countries had also
imposed a countercyclical capital buffer on their banks (CCyB). The CCyB is a buffer under Basel
III that countries can build during boom times and draw down during busts to absorb losses and
mitigate the increase in risk-weighted assets; they may set it as high as 2.5%. In addition to the
CCB and CCyB, many countries also impose additional buffers on systemically important banks.
During the current crisis, most countries that had earlier activated their CCyB have now cut it.
But countries without a CCyB have found other ways to ease capital requirements. Several have
told banks they can use their CCBs, resulting in automatic consequences for bonuses and
dividends. Others have reduced the surcharge they had imposed on domestic systemically
important banks (D-SIBs), their broader systemic risk buffers (SRBs), or other company-specific
buffers.
Countercyclical capital buffer (CCyB)

To combat the COVID-19 crisis, close to 20 governments have released, reduced, or delayed
planned increases in their countercyclical capital buffers. As regulators had designed it as a
countercyclical tool, it is the easiest to deploy in a crisis.
Ten countries have released their entire CCyB, according to Yale’s Financial-Intervention
Tracker. The size of the decrease determines its impact. Sweden reduced its buffer the most,
from 2.5% to 0%, freeing SEK45 billion (US$4.5 billion) in capital; that much capital could
make roughly $60 billion available for lending, or more than 10% of Sweden’s GDP. Denmark
and France had planned to raise their buffers, but instead cut them to zero.
Bulgaria and the Czech Republic left their buffers at zero, canceling planned increases. In the
United States, the Federal Reserve Board is responsible for setting the CCyB, and has
maintained it at zero since 2016. Most countries, including 18 in Europe, have also kept their
CCyBs at zero since 2016.
Capital Conservation Buffer (CCB)
For countries that had not raised their countercyclical capital buffers before the crisis, the
capital conservation buffer (CCB) is a common alternative.
Nine authorities, including the European Central Bank, have allowed banks to use their CCB in
the current crisis, according to our tracker. Of these, four replaced it with a new, lower target,
and five have encouraged banks to use their buffers without specifying a new target. The United
Arab Emirates lowered it the most—from 2.5% to 1%. Brazil and Oman cut their buffers in half,
from 2.5% to 1.25%. Sri Lanka lowered it more for large banks (to 1.5%) than for others (to 2%).
By international agreement, the CCB is 2.5% of risk-weighted assets, but countries typically
allow their banks a few years to build capital to that level. India and Ukraine had been on the
way to building their banks’ buffers to 2.5%. With COVID-19, they have delayed further
implementation. India has said it will hold its CCB at 1.88%, and Ukraine will hold its CCB at
0.63%.
Domestic Systemically Important Bank (D-SIB) Surcharges and Systemic Risk Buffers (SRBs)
Basel III also introduced capital surcharges for systemically important banks. The purpose of
these surcharges is to force banks to internalize the costs of their potential failure on the broader
financial system. The Financial Stability Board, which is made up of leading national central
banks and finance ministries, determines the “global systemically important banks” (G-SIBs). G-
SIBs are subject to a G-SIB capital surcharge, based on international agreement. Regulators
have not revised G-SIB surcharges so far in the crisis.
However, prior to this crisis, many countries had introduced capital surcharges for domestic
systemically important banks—banks in their jurisdiction that didn’t make the global list, but
which they considered important to their own economies. During the COVID crisis, at least a
half-dozen countries have lowered those surcharges. For example, Canada lowered its surcharge
on D-SIBs from 2.25% to 1%.
Some countries reduced D-SIB buffers that applied to individual banks. This is the case in
the Netherlands, which reduced the systemic buffer of 3% for three of its five systemically
important banks to 2.5% for ING, 2% for Rabobank, and 1.5% for ABN Amro. This will free up
EUR 8 billion in capital to back more lending. Hungary’s D-SIB buffers ranged from 0.5% to
2.0% for its largest banks before the crisis; it has cut all of those to zero.

Under Pillar 2 of the Basel capital accords, supervisors also may set company-specific capital
requirements on top of those that apply to all banks. The ECB, among others, has advised banks
it directly supervises that they may operate temporarily below the level of capital defined by
their Pillar 2 guidance.
Some countries also have a systemic risk buffer (SRB) to cover systemic risks that other aspects
of the capital requirements don’t cover. Poland—whose systemic risk buffer applies to all
domestic banks—appears to have eased its SRB the most, from 3% to 0%. Finland reduced its
systemic risk buffer to zero; it had previously set the systemic risk buffer at 1%-3%, depending
on the bank. Finland also lowered its D-SIB buffer for one out of three D-SIBs.
Similarly, Australia’s regulator, in 2017, had set benchmark capital targets above minimum
regulatory requirements to enable banks to be regarded internationally as “unquestionably
strong.” During this crisis, it said it “would not be concerned if they were not meeting the
additional benchmarks announced in 2017 during the period of disruption caused by COVID-
19.”
In mid-March, the US Federal Reserve and Japan’s Financial Service Agency said they were
encouraging banks to use their buffers, without specifying which buffers or to what extent.
Constraints on Capital Distribution
Basel standards dictate that banks that do not maintain their CCB standard will face automatic
constraints on capital distributions, that is, dividends and share buybacks. These policies are
enforced when a bank’s capital dips below its “expanded” CCB, which includes the CCyB and
systemic risk buffers.
Many countries that eased capital buffers—including Australia, Canada, Denmark, Estonia,
Finland, Iceland, Norway, Sweden, and the U.K.—set an expectation that banks should halt or
not increase their dividends. The ECB has suggested that banks use their additional capital to
support the economy and not for capital distributions.
Russia demanded that credit institutions “comply with the set limits for the share of profits to be
distributed in accordance with the buffers’ size, including dividend payouts and compensations
(incentives) to be paid to management.” The Czech Republic has explicitly required that banks
refrain from making dividend payments or anything else that may compromise their resilience.
US regulators have not imposed a freeze on dividends or other shareholder distributions. The
eight US-based G-SIBs voluntarily suspended stock buybacks in the second quarter of 2020. Fed
Chair Jerome Powell said on April 9 that the Fed is watching “to see how things evolve” but does
not yet think a dividend freeze is appropriate. Similarly, Japan’s regulators have encouraged
banks to use buffers but have also not commented on dividends.
How Long Will the Easing Last?
Most countries have eased their buffers indefinitely, and many that have maintained or reduced
their buffers have acknowledged the possibility of further decreases in capital buffer
requirements. However, some have established plans for recovery and reestablishment of their
capital buffers. Norway does not anticipate increasing their CCyB until at
least 2022. Ukraine eased its CCB by no longer requiring banks to adhere to capital buffer
guidelines, and plans on rebuilding it to the full 2.5% by 2023. Malaysia said it “fully expects”
banks to restore their buffers “within a reasonable period” after the end of 2020. Hungary, as

noted, has reduced its D-SIB buffers to zero, but has outlined plans for increasing them, starting
in 2022.
Conditions for Use of Capital
More than 25 countries cited increased support for lending to businesses and households and
maintaining financial stability as primary reasons for freeing up capital by reducing capital
buffers. In the words of the Hong Kong Monetary Authority’s chief executive: “Lowering the
countercyclical capital buffer at this juncture will allow banks to be more supportive to the
domestic economy, in particular those sectors and individuals that are expected to experience
additional short-term stress due to the impact arising from the outbreak.”
Some countries, like Belgium and Estonia, said they were releasing their buffers to absorb the
impact of greater loan losses that may occur during the expected COVID-19 recession. France,
Sweden, Poland, and others cited expanding credit to small businesses as the goal of reducing
their CCyBs. Sweden’s central bank head said: “[W]hat we are doing is freeing up significant
lending capacity for the banks."
Quality of Capital
The European Central Bank said it will allow banks to use lower-quality Additional Tier 1 or Tier
2 capital to meet their core-capital requirements. Slovenia took that advice. However, we are not
aware of other countries, either in Europe or elsewhere, that have pursued this option.
Changing Risk Weights
Risky assets have higher risk weights than safe assets like Treasuries and consequently require a
bank to hold higher capital buffers to mitigate potential losses. By reducing the risk weight
calculations of certain categories of assets, governments can ease a bank’s regulatory capital
requirements and support the supply of credit to those assets.
The Netherlands has postponed the implementation of a floor on the risk-weighting of
mortgages; this means there is no minimum risk weight for mortgages, as planned, which would
have required holding a higher capital buffer. The Russian central bank recommended that
banks and other credit institutions, when calculating their capital adequacy ratios, disregard
adjusting the risk weights of loans to individuals that have been infected with coronavirus. Like
the Netherlands, Russia has reduced the add-ons to risk weights for mortgage loans. Russia is
also eliminating risk weights for foreign currency loans until the end of September for
companies making pharmaceutical or medical products.
Kazakhstan has reduced risk weights for loans to small and medium-sized enterprises from 75%
to 50%, and for foreign-exchange loans from 200% to 100%, to support lending.
The Federal Reserve changed its supplementary leverage ratio rule to exclude Treasury
securities and deposits held at the Federal Reserve banks from the calculation of the leverage
ratio for bank holding companies. This temporarily reduces the Tier 1 capital requirements for
financial institutions with over $250 billion of assets by about 2% relative to their 3% minimum.
The United States has also recently passed legislation to implement the Paycheck Protection
Program, which will support provisioning of partially forgivable loans to SMEs. New loans made
under this program will have a zero risk weight.

Similarly, the Japanese central bank and regulator said they would temporarily revise the
leverage ratio to exclude banks’ accounts at the Bank of Japan.
Countercyclical Capital Buffer (CCyB)
Released: Belgium (from 0.5%), Denmark (1.0%), France

(0.25%), Germany (0.25%), Iceland (2%), Ireland (1%), Lithuania (1%), Sweden (2.5%), Switzerland (remains 2% on mortgage
exposures), UK (1%)
Lowered: Hong Kong (from 2% to 1%), Norway (2.5% to 1%)
Cancelled planned increase: Bulgaria (held at 1%), Czechia (1.75%), France (0.25%)
Set at zero indefinitely: India, Italy, Russia, Spain
Capital Conservation Buffer (CCB)
Specifically lowered: Brazil (to 1.25%), Oman (1.25%), Sri Lanka (1.5% for large banks, 2% for others), UAE (1%)
Lowered but with no new target specified: European Central Bank, Malaysia, Russia, Slovakia, South Africa
Delayed implementation of full buffer: India (now at 1.88%), Ukraine (0.63%)
Systemic Risk Buffer (SRB) and Domestic Systemically Important Bank (D-SIB) Surcharge
Lowered: Australia (various to 0%), Canada (from 2.25% to 1%), Estonia (1% to 0%), Denmark (3% to 2% for Faroe Island
exposures), Finland (range of 1%-3% to 0%), Hungary (0.5%-2.0% range to 0%), Netherlands (3% to range of 1.5%-2.5%), Poland (3% to
0%), UAE (various to 0%)
Maintained: United Kingdom
Other capital easing
Aruba (lowered capital adequacy ratio from 16% to 14%), US (allowed bank holding companies to exclude Treasuries in calculating the
supplementary leverage ratio; lowered leverage ratio for community banks from 9% to 8%), Japan (allowed banks to exclude central bank
accounts in calculating the leverage ratio)
Generic statements on use of buffers
US , Japan

Governments Provide Financial Regulatory Relief
By Aidan Lawson and Greg Feldberg
Original post here.

The COVID-19 crisis has led governments across the world to temporarily ease the operational
burden of supervisory and regulatory activities on the financial institutions they regulate. These
regulatory relief efforts can be broken down into three major categories:
1. Reducing supervisory activities such as stress tests and bank examinations.
2. Delaying the implementation of new rules or laws.
3. Reducing reporting requirements.
The YPFS Financial-Intervention Tracker shows 85 such regulatory relief measures to date, as
summarized in our Resource Guide. As the COVID-19 crisis unfolds, regulators have pledged to
continue to find new ways to help financial companies focus on their COVID-19 response in a
safe and sound manner.
Reducing supervisory activities
In many cases, supervisors have reduced the scope of their annual stress tests and other
supervisory activities.
The U.S. Federal Reserve announced on March 24 its intent to significantly scale back its annual
examination activities. The Fed will not conduct examinations on-site at the banks it supervises
“until normal operations are resumed at the bank and Reserve Banks.” Instead, it will focus on
off-site monitoring. “Monitoring efforts will concentrate on understanding the challenges and
risks that the current environment presents for customers, staff, for firm operations and
financial condition, and for the largest firms, the risks to financial stability.”
The Fed has deferred “a significant portion” of examinations for institutions with greater than
$100 billion in total consolidated assets. However, the Fed did not suspend its annual stress test
exercise, conducted only by the largest bank holding companies (see here, pp. 2). It has ceased
all regular exam activity for smaller institutions, “except where the examination work is critical
to safety and soundness or consumer protection, or is required to address an urgent or
immediate need” (see here). Banks that are not highly rated, or have existing liquidity, asset
quality, consumer protection, or miscellaneous issues will continue to receive regular
examinations. The Fed also said that banks will have an additional 90 days to remediate existing
supervisory findings, unless otherwise specified.
Many countries similarly curtailed regular supervisory activities. For example, the Central Bank
of Hungary (MNB) postponed on-site inspections unless absolutely necessary and said it would
not use its supervisory powers if banks breached their Pillar II capital buffers. South
Korea, Egypt, and others have suspended ongoing investigations during the
crisis. Romania postponed the deadline for collecting contributions to its Bank Resolution
Fund for three months, with a possible extension of up to six.

The Bank of England cancelled its 2020 stress tests, cut back on in-person supervisory visits,
and postponed the publication of its 2019 biennial exploratory scenario on liquidity buffers and
facilities to “alleviate burdens on core treasury staff at banks.”
The European Banking Authority postponed its Europe-wide stress test exercise to 2021 to
“allow banks to focus on and ensure continuity of their core operations, including support for
their customers.” In place of the stress test, the EBA will carry out an additional transparency
exercise to update information about banks to market participants. The ECB also
published guidance indicating that affiliate supervisors would be postponing on-site inspections,
certain compliance measures, and reviews of internal models for six months.
While the Bank of Russia did not cancel its stress tests, it advised non-governmental pension
funds to use a scenario as of September 30, 2019, rather than a more recent one. The National
Bank of Ukraine reduced the number of scenarios it required banks to submit as part of their
annual stress testing, but added COVID-19 risk assessments to those scenarios.
The Financial Action Task Force (FATF), which acts as an international standard-setter for illicit
financing, money laundering and financing of terrorist groups, simplified due diligence and
emphasized flexibility in using their risk-based approach in combating these illegal activities
(see here).
Delays in Implementing New Laws and Rules
Many countries have also deferred the effective dates of recently passed regulation or even
suspended ongoing discussions about potential regulatory improvements.
The European Central Bank said it would consider “extending deadlines for certain non-critical
supervisory measures and data requests.” The Bank for International Settlements (BIS) pushed
back for one year the implementation of the final phases of its framework for margin
requirements for non-centrally cleared derivatives. These requirements were put in place to
reduce systemic risk and promote central clearing by imposing higher costs on market
participants holding non-standard derivatives, which make up a sizable portion of the market
(see here, pp. 2 – 4). The effective implementation date is now September 1, 2021, for entities
with non-centrally cleared derivatives totaling more than €50 billion outstanding, and a year
later for smaller market participants (see here).
The Fed postponed for six months the implementation of policies regarding the provision of
intraday credit, as well as its revised control framework. The changes to the intraday credit
provision would modify how the Fed evaluated net debit caps, which are the maximum amounts
of overdrafts institutions could incur in their Federal Reserve accounts (see here, sec. 2). The
revised control framework “simplifies and increases the transparency of [the Board’s] rules for
determining when one company controls another company,” so that if a company has control
over any banking organization, it would generally be subject to Fed regulations (see here).
New Zealand has deferred several new initiatives and programs. These include reviews of
existing supervisory and stress testing policies and increases in capital requirements
(see here). Russia is delaying certain compliance requirements for non-governmental funds that
will be participating in stress tests until January 2021, and Canada has suspended “all
consultations on regulatory matters,” including the publication of its new benchmark rate for
qualifying uninsured mortgages. Australia has “suspended the majority of its planned policy and
supervision initiatives” and deferred the implementation of new reporting standards for fee

structures and derivatives until April 2021. Peru has deferred new reporting standards for
parallel credit lines, or secondary lines of credit, until January 2021.
Regulators have also taken steps to reduce the operational burden on regulatory staff. Australian
regulators, for example, suspended issuing new banking, insurance, and superannuation fund
licenses for at least six months.
Reduced Reporting Requirements
Many of the more substantial measures outlined above have also been accompanied by
reductions or complete moratoriums on the required publication of financial data, such as
annual and quarterly reports. According to our tracker, at least 15 countries, as well as EU
regulators and the BIS, have reduced reporting requirements.
The European Securities and Markets Authority (ESMA) has provided substantial guidance to
member states on how to approach reporting during the crisis. On March 27,
it recommended that all National Competent Authorities (NCAs), which are government
institutions designated by their individual nations to be points of contact with the ESMA about
specific policy areas, defer publication of all financial reports. The ESMA also delayed reporting
obligations for Securities Financing Transactions, which involve the use of securities to borrow
cash or other investment-grade securities, for all transactions settled until July 13. However,
ESMA said it expects reporting for these activities to resume by July 13.
In the U.S., the Securities and Exchange Commission (SEC), Commodities Futures Trading
Commission (CFTC), and Fed have all either reduced requirements or extended deadlines for
reporting financial information. The SEC provided a 45-day extension for publicly traded
companies to file disclosure reports that would have been due between March 1 and July 1, so
long as they file a form explaining “why the relief is needed in their particular circumstances for
each periodic report that is delayed.” The CFTC has granted 30-day forbearance for furnishing
compliance reports, exempted dealers and brokers from recording oral communication and
timestamping, and provided longer-term forbearance from periodic reporting for commodity
pool operators. The U.S. federal banking agencies indicated they would not take supervisory
action against financial institutions that needed additional time to file their quarterly Call
Reports, so long as these reports are submitted within 30 days of the official filing deadline.
The BIS has reduced reporting requirements for its 2020 global systemically important bank (G-
SIB) assessment exercise. The exercise instead will be based on 2019 data, and the BIS will not
collect memorandum data, which are used to “assess if changes should be made to the overall G-
SIB framework” (see here, pp. 23). Memorandum data include items that measure
interconnectedness, complexity, foreign exposures, and short-term funding (see here, pp. 23 –
28). There are 30 G-SIBs.
Several other countries have implemented similar measures. Italy (60 - 150 days), Malaysia (30
days), Sri Lanka (14 – 30 days), Denmark (90 days), South Africa (60 – 120 days), New
Zealand (60 days) and Russia all have provided some form of deferral or lessening of reporting
requirements. On March 21, the U.K. requested an immediate moratorium on the publication of
any preliminary financial statements for at least two weeks. The Bank of Russia indicated that it
would not apply its supervisory measures to companies violating reporting requirements and
also reduced supervisory reporting requirements for the second quarter of 2020

(see here). Brazil has temporarily prohibited both reporting and increases in remuneration for
managers and executives of financial institutions until September 30.
Regulatory Relief Jurisdictions

Category
Reducing supervision Bank for International Settlements, Denmark, European

Union (1) (2) (3), Egypt, Hungary, Korea (1) (2), Romania, Russia, Sri
Lanka, Ukraine, United Kingdom, United States (1) (2) (3)
Delaying Australia, Bank for International Settlements, Brazil (1) (2), Canada, New
Implementation of Zealand, Peru, Russia, United States
new regulation
Reducing reporting Australia, Bank for International Settlements, Brazil (1) (2), Denmark, European
requirements Union (1) (2), Indonesia (1) (2), Italy, Malaysia (1) (2), Romania, Russia, South Africa, Sri
Lanka (1) (2), Sweden, Ukraine, United Kingdom (1) (2) (3) (4) (5), United
States (1) (2) (3) (4), Vietnam

Conventional Monetary Policy and the Zero-Lower-Bound
Original post here.

Central banks across the world have eased monetary policy to facilitate smooth market
functioning during the Covid-19 crisis. Interest rate cuts are their primary policy tool. Global
interest rates are now at historic lows, with 14 of the 38 central banks in a Bank for International
Settlements (BIS) database setting their nominal key policy rates at or below 0.25 percent; three
are below 0.
This post provides an overview of recent policy rate trajectories and discusses the constraints
that policymakers face, as well as possible avenues for further accommodation through the
interest-rate channel, with nominal rates at or approaching zero in many countries.
Global interest rates
All countries in the BIS database with positive policy rates before the crisis have announced cuts
since the beginning of the year, with the exception of Hungary and Croatia. The United States
and Canada have cut their rates the most among major economies, both by 150 bps. Canada
lowered its overnight target rate from 1.75 percent to 0.25 percent in three announcements
between March 4 and March 27. The current target rate is lower than the rate of 0.5 percent that
the bank targeted at the height of the Global Financial Crisis (GFC) between April 2009 and May
2010. Similarly, the Fed lowered its target for the federal funds rate by 150 bps following two
unscheduled FOMC meetings on March 3 and March 15. With a target range between 0 and 0.25
percent, the funds rate returned to the level it stood at in the wake of the GFC, before the Fed
engaged in a series of interest rate hikes starting in December 2015.
Most countries have cut their target rates in one or two announcements, with only a small
number of central banks making three or more successive cuts. Among countries that have only
made a single announcement, India and New Zealand made the largest adjustments to their
policy rate; both countries cut their target rate by 75 bps. The Reserve Bank of New Zealand cut
its official cash rate from 1 to 0.25 percent on March 15, the lowest target in the bank’s history.
Argentina and Turkey cut their rates the most. The central bank of Argentina has cut its rate by
1700 bps since the beginning of the year. However, those adjustments don’t constitute an
immediate reaction to Covid-19, but reflect the slowdown of inflation in the country; they are
part of an ongoing effort to normalize monetary policy. Turkey announced four successive cuts
between January 17 and April 23, lowering its target rate by 325 bps from 12 percent to 8.75
percent. While the first two announcements were made in the context of an ongoing disinflation
process, the central bank mentioned a need to address weakening economic activity due to the
Covid-19 crisis in its two most recent announcements.
Some central banks have not cut rates at all. This is the case for the Swiss National Bank (SNB),
the Bank of Japan (BOJ), and the European Central Bank (ECB). All three had a target rate at or
below zero at the onset of the crisis and did not provide further accommodation through this
policy channel. The central bank of Hungary also maintained its target rate despite having a
positive policy rate at 0.9 percent. The central bank of Croatia uses the exchange rate of the euro

against its domestic currency to guide monetary policy, it did not include an interest rate target
in its response to the current crisis.
Denmark was the only central bank to raise its target rate. Danish policymakers raised the target
rate from negative 0.75 to negative 0.60 percent on March 19 to ease downward pressure
against the Danish crown and maintain its fixed exchange rate with the euro.
The Zero Lower Bound constraint
Negative interest rates are one possible avenue for further accommodation through the policy
rate channel at the Zero Lower Bound (ZLB). Another avenue is forward guidance, that is,
expressing the central bank’s commitment to maintain rates at a low level for a prolonged period
of time.
As the nominal interest rate approaches zero, central banks’ ability to cut interest rates through
open market operations is limited as investors can choose to hold currency instead of securities.
Currency holdings carry zero interest and thus provide a natural floor to interest rates. In
practice, however, large cash holdings have associated risks and costs, allowing some central
banks to set negative interest rates.
Currently, Switzerland, Japan, and Denmark have the only central banks with a negative
interest rate target, which all three implemented before the current crisis. The central bank
of Sweden had a negative policy rate since February 2015 but returned to a target at a nominal
rate of zero on January 8, 2020.
The Swiss National Bank (SNB) has the lowest target rate globally. Its policy rate has stood at
negative 0.75 percent since January 15, 2015, to counter the upward pressure on the Swiss franc
and to maintain its exchange rate with the euro within an appropriate range. The BOJ has
maintained a low rate since the Asian financial crisis. Its policy rate has not exceeded 0.5
percent since September 8, 1995; it has been negative since September 21, 2017. The ECB has
maintained its key policy rate, the rate on main refinancing operations (MRO), at zero since
March 2016.
Finally, a number of central banks recently set policy rates at or below 0.25 percent, leaving
them with limited room for further accommodation through conventional rate cuts. This is the
case for the central banks of Australia, Canada, Israel, New Zealand, Norway, Peru, the United
Kingdom, and the US.
Banks that do not set negative policy rates can provide further relief to market participants by
communicating a commitment to maintain accommodative policy rates for some time. This can
be explicitly stated as a period of time during which the bank commits to maintain its rate or
implicitly by communicating that rates will be maintained until a policy objective is achieved.
The Reserve Bank of New Zealand issued explicit forward guidance with its most recent rate cut,
promising to maintain the target rate at 0.25 percent for 12 months. Meanwhile, the ECB tied
expectations to a quantified policy objective, committing to announce no further changes in
interest rates until “the inflation outlook robustly converges to a level sufficiently close to, but
below, 2%.” In the US, the Fed promised to maintain its range until “it is confident that the
economy has weathered recent events and is on track to achieve its maximum employment and
price stability goals.”

Authorities Urge Prudence in Loan Loss Accounting
By Aidan Lawson, Arwin Ziessler, and Greg Feldberg
Original post here.

Banks and government authorities have tried to help struggling borrowers during the COVID-19
crisis, through widespread payment moratoria and modifications in the terms of loans.
But such efforts are costly to banks. Accounting standards require lenders to set aside reserves
against borrowers who are unable to meet payments. Setting aside reserves diminishes banks’
income and equity. Nonpayment of interest also hits their income and cash flow.
Meanwhile, recently implemented accounting standards based on lifetime expected credit losses
could require banks to sharply increase their loan-loss reserves, further impacting capital.
Of course, credit losses will likely be substantial during this severe economic crisis. Authorities
would like to encourage banks to keep working with borrowers, while easing pressure on their
earnings and capital to the extent possible.
This blog discusses measures that bank supervisors have taken in two categories:
• Flexibility in classifying individual loans as troubled or nonperforming.
• Easing the capital impact of the transition to lifetime expected loss accounting.
The blog then describes key concerns about the flexibility that supervisors have granted.
The discussion illustrates the tradeoff supervisors face. On the one hand, they want to prevent
the procyclicality inherent in regulatory and accounting standards from worsening an already
severe credit crunch. On the other hand, they have a responsibility to maintain the integrity and
transparency of financial-institution accounting for the long run.
Global regulators, through the Bank for International Settlements, recommend that any
regulatory relief to banks should: (1) be effective in supporting economic activity in the long-
run; (2) ensure that banks remain well-capitalized, liquid, and profitable; (3) avoid undermining
the long-run credibility of financial policies.
Policy options for flexibility in troubled-asset classification
Borrowers who are experiencing financial hardship may need the terms of their loans eased
through restructurings or modifications. Authorities across the world have sought to help such
borrowers through payment moratoria and regulatory relief. Loan forbearance, a common form
of relief, typically lasts three to six months, in the hope that borrowers’ cash-flow issues will be
temporary. (See YPFS’ discussion on forbearance for businesses and individuals).
But accounting standards typically require banks to reclassify modified loans into higher-risk
categories, which means that they must set aside additional capital to compensate for the
increased risk. Although a modification may increase the long-run likelihood that a borrower is
able to repay, the increased provisioning and lower capital levels that result can disincentivize
lenders to work with borrowers.

To reduce that disincentive, governments and regulators have introduced a number of policies,
including:
• Guidance stating payment moratoria can be excluded from the number of “past-due”
days for a loan.
• Guidance stating that loans for borrowers benefiting from government assistance
programs should not automatically be reclassified as nonperforming or in forbearance.
The Basel Committee on Banking Supervision (BCBS) has endorsed these strategies, so long as
supervisors make sure banks use the flexibility prudently (see here, pp. 5).
In the U.S., financial regulators issued an interagency statement on March 22, emphasizing that
lenders should work with borrowers affected by the virus and providing guidance on accounting
for loan modifications and reporting of past-due loan balances.
On March 27, the U.S. Congress passed the CARES Act. Section 4013 of the Act gives financial
institutions the option not to classify modified loans as troubled debt restructurings (TDRs),
provided that the borrowers were adversely affected by COVID-19 and that they were current on
their payments at the end of 2019. Section 4013 applies to modifications made between March 1
and the end of 2020, or later if the national emergency is still in effect. Under the CARES Act,
lenders are also not required to report loans affected by Section 4013 as TDRs in reports to
regulators or calculate impairment losses that would normally be associated with such
modifications.
After the CARES Act passed, regulators revised the March 22 guidance to incorporate the
language in Section 4013. The revised guidance was more flexible than the law. Even
modifications that do not qualify under Section 4013 are still not automatically classified as
TDRs. The regulators -- with the support of the independent accounting standard-setter,
the Financial Accounting Standards Board (FASB) -- stated that “short-term modifications made
on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief
are not TDRs” (see here, pp. 3).
Many countries -- for example, Sri Lanka, Romania, Estonia, Kenya, Brazil, South
Africa, Australia, Hungary, Nigeria, and Indonesia -- have explicitly stated that loans modified
to help borrowers affected by COVID-19 should not be automatically classified as restructured.
Romania’s rule applies to non-bank financial institutions (NBFIs) as well as banks. South
Korea allows banks to not label loans to closed businesses as “sub-standard,” provided the
owners have demonstrated sufficient repayment capabilities.
Banks in the Philippines can receive similar relief, but only if they have used or are planning to
use the central bank’s (BSP) rediscounting facility. Both Russia and Vietnam recommend that
lenders assess loans affected by COVID-19 by using a date that precedes the pandemic. Russia
also recommends that restructurings or reassessments should not show up on credit histories
(see here).
Indian financial institutions are still required to provision for restructured loans. However, they
are only required to set aside a provision of 10 percent of the amount outstanding of term loans
and interest payments to working capital facilities that were deferred until May 31 (see here).
These provisions will be phased in over the first two quarters of 2020.

Policy options for easing the impact of lifetime expected loss accounting
The implementation of new accounting standards is another source of increased loss
provisioning. These standards require lenders to conduct forward-looking assessments of
expected credit losses (ECLs) over the lifespan of each asset. The earlier “incurred loss” (IL)
models allowed banks to set aside provisions only when it was probable that an asset would fail;
they were “too little, too late” during the Global Financial Crisis (GFC). In contrast, the new
lifetime expected-loss standards require banks to provision more and earlier. This could
theoretically mitigate procyclicality by having banks build loss provisions for use during a
downturn.
Lifetime expected-loss models depend on each bank’s ability to accurately forecast and model
expected losses. However, by definition, expected-loss models cannot prepare banks for
unexpected events such as the COVID-19 crisis. For that reason, the potential capital effects of
COVID-19 may be more pronounced than they would have been under an incurred-loss model
(see here, pp. 5, 36-37). According to quarterly filings, provisions for credit losses for the six
largest U.S. banks increased $20 billion in the first quarter of 2020 due to the combined impact
of COVID-19 and their switch to expected-loss accounting.
Table 1: Expected credit loss provisions of major U.S. financial institutions
Institution Provision Provision Difference

(Q4 2019) (Q1 2020) (Q4 2019 and Q1 2020)
JPMorgan Chase $1.4 billion $8.3 billion $6.9 billion
Citigroup $2.2 billion $7.0 billion $4.8 billion
Bank of America $941 million $4.8 billion $3.9 billion
Wells Fargo $845 million $4.0 billion $3.2 billion
Goldman Sachs $336 million $937 million $600 million
Morgan Stanley $53 million $388 million $335 million
Total $5.8 billion $25.4 billion $19.7 billion
To mitigate the impact of expected-loss provisions on capital during this crisis, regulators have
pursued the following options:
• Flexibility in interpreting loss provisions.
• Temporary sterilization of the effect of new rules on regulatory capital.
• Allowing banks to temporarily suspend application of the new standard.
Background: CECL and IFRS 9

In the U.S., the Current Expected Credit Losses (CECL) standard was scheduled to come into
effect for large, publicly traded banks in 2020. CECL does not specify a given method for
measuring expected credit losses. It allows methods such as historical loan loss, roll-rate, and
discounted cash flow analysis. Banks are only required to forecast conditions under a timeframe
that is “reasonable and supportable.” Beyond that, they are allowed to use historical averages to
model long-run behavior (see here, pp. 10 and here, pp. 30 - 31).
The new IFRS-9 standard, now common outside the U.S., is also based on expected losses, but
works differently. It requires businesses to dynamically provision for expected losses based on
the credit risk of the assets. The standard classifies assets in three stages. Lower-risk (stage 1)
assets only require banks to provision for the next 12 months of expected losses (see here).
Restructuring, renegotiating, lack of payment, and other behaviors can cause assets to be labeled
as having a “significant increase in credit risk” (SICR), resulting in reclassification into high-risk
groups (stages 2 and 3).
The primary difference between the two standards is that CECL requires lifetime expected
provisions for all loans and IFRS-9 requires them only for loans that have had a SICR and
moved into Stage 2 or 3. IFRS-9 was implemented in 2018, which limits the tools that regulators
can use.
Table 2: Overview of IFRS-9 Expected Credit Loss (ECL) provisioning
ECL Classification Threshold Loss Provision Interest Calculation
Stage 1 (Performing) Immediately after origination. 12-month expected Calculated on the gross
credit losses carrying amount
Stage 2 If credit risk increases significantly and Lifetime expected Calculated on the gross
(Underperforming) is not considered low. credit losses carrying amount
Stage 3 If credit risk increases to the point that Lifetime expected Calculated based on the
(Nonperforming) it is credit-impaired credit losses amortized cost
Source: IFRS-9 information
Basel Committee recommendations during COVID-19

The sudden onset and uncertainty during the COVID-19 crisis amplifies the procyclicality of
capital and accounting standards. To mitigate this, the Basel Committee has issued several
recommendations on expected credit-loss accounting.
In its guidance, the Basel Committee first emphasized flexibility in determining whether a SICR
under IFRS-9 standards has actually occurred. If loans are affected by relief efforts, they should
not automatically be reclassified as Stage 2 or 3 on that basis alone.
Second, the Basel Committee expanded the use of transitional arrangements, which allow
lenders to phase in the effect that ECL accounting would have on their Tier 1 capital. The Basel
III capital agreement already includes transition arrangements that allow banks to phase in the
capital effects of expected-loss accounting over five years. Because of COVID-19, the Basel

Committee says that lenders now can either continue to use transition arrangements under the
existing framework or defer the capital impact of expected-loss accounting until 2022; after that,
banks can phase in the impact on a “straight line basis” over the following three years (see here,
pp. 2-3).
However, these transition arrangements have a limited effect (see here, pp. 6). The Financial
Stability Institute argues that combining these arrangements with increased flexibility could
provide more relief to lenders. However, they warn that doing so could widen the gap between
accounting and prudential measures of capital.
Many regulatory bodies -- such as the European Securities Markets Authority
(ESMA) and European Banking Authority (EBA) -- have followed the Basel recommendation
and stated that loans affected by economic recovery programs should not be considered as
having a SICR and moved into high-risk groups. They emphasized that the high degree of
uncertainty caused by COVID-19 could adversely affect estimated credit losses and damage the
reliability of short-term forecasts (see here, p. 4). To resolve this issue, the European Central
Bank (ECB) recommended that “banks give a greater weight to long-term macroeconomic
forecasts evidenced by historical information when estimating long-term expected credit losses
for the purposes of IFRS 9 provisioning policies” (see here).
In the U.S., the CARES Act states that U.S. banks would not have to adopt CECL until the end of
2020 or the end of the national emergency, whichever is earlier.
Also, U.S. financial regulators offered institutions that had already adopted CECL the option of
delaying its effect on their regulatory capital ratios for two years. After two years, banks have a
three-year transition period to phase in the capital impact (see here, pp. 4223). Banks that
already adopted CECL can continue to follow the three-year transition period or adopt the new
five-year plan instead. Regulators issued a policy statement on May 8 that provides flexibility for
management in forecasting and estimating credit losses under CECL.
The Bank of England (BOE) and Prudential Regulation Authority (PRA) first discussed IFRS-9
and echoed some of the same points as their Euro-area counterparts (see here). The PRA
discussed many of these points in greater detail in a letter on March 26, specifically emphasizing
the importance of using long-term trends when forecasting and not immediately classifying
borrowers into stages 2 and 3. The PRA reiterated that the economic shock from COVID-19
“should be temporary, although its duration is uncertain;” it said that the likelihood of an
increase in lifetime credit risk for most borrowers remained unchanged (see here, p. 6).
The Australian Prudential Regulation Authority recommended similar post-ECL forecasting
adjustments: “If the effects of covid-19 cannot be reflected in models, post-model overlays or
adjustments will need to be considered.”
Countries recommending flexibility in calculating expected credit losses include Germany, South
Korea, Brazil, New Zealand, Singapore, and Chile. Russia stated that loans affected by COVID-19
restructuring should not be classified as worse than stage II (underperforming).
Similarly, Malaysia stated that temporary COVID-19-related shocks can be interpreted as only
affecting 12-month expected credit losses, and not lifetime losses.
Some central banks have supplemented the Basel Committee’s guidance on transitional
arrangements by incorporating additional ways to stagger the capital impact that increased
provisioning will have. The Central Bank of the UAE required banks to apply a “prudential filter”

to IFRS-9 expected loss provisions. This filter allows banks to stagger any IFRS-9 provisions
over five years to mitigate the impact on bank capital levels. The Bangko Sentral ng
Pilipinas implemented a similar five-year filter.
Concerns
The fundamental tradeoff that regulators must consider when implementing these policies is
how to mitigate procyclicality while retaining credibility. Credibility is hard to gain and easy to
lose, especially in periods of economic stress. The more extensive the relief, the larger the
tradeoff.
Flexibility could erode comparability
One concern is that flexibility will erode the comparability of financial statements, the main
value of accounting standards. Temporary suspensions of already-implemented standards, such
as the CECL measures in the CARES Act, may also reduce the comparability of financial
statements across and within countries. Of the 17 countries and six international regulators that
YPFS identified as having implemented some form of accounting relief, the U.S.
and Romania are the only ones that suspended the adoption of new standards. See Table 3 for a
full breakdown of country-based relief. CECL forbearance could cause global financial statement
comparability issues if enough U.S. banks choose to maintain incurred-loss standards while the
rest of the world continues to use lifetime-loss models, as they have since 2018.
As it turned out, most major American financial institutions have not opted to use the CECL
relief provided by the CARES Act. But most large banks and many small banks did take
advantage of the regulatory guidance and delayed the regulatory capital effects of the transition
to CECL. The largest U.S. financial institutions have all adopted CECL, and all but three of them
-- Wells Fargo, State Street, and Bank of New York Mellon -- have elected to phase in the capital
impact over the longer, five-year plan that the regulators made available in the guidance.
The very nature of expected-loss provisioning, which requires managers to make subjective
judgments about the future course of the economy, can also erode comparability
(see here). Varying national guidance on the application of IFRS-9, as well as increased
flexibility in transitional arrangements, may alleviate market-based distress but could
compromise comparability. Reduced financial statement comparability and increased
heterogeneity across bank forecasts and estimations, on the other hand, can dampen
procyclicality as financial institutions increase their provisions at different rates.
Regulators may allow forbearance to last for too long
Prolonged forbearance had an adverse effect in both the Japanese banking crisis in the 1990s
and the U.S. savings and loan (S&L) crisis in the 1980s.
Japanese financial regulators liberalized their rules throughout the 1970s and ‘80s. Strong
regulation had previously substituted for bank risk management. As controls were relaxed, it
became apparent that financial institutions had not begun using modern risk management
techniques (see here, pp. 257-259).
The Japanese government responded with broad regulatory forbearance and flexibility, allowing
banks to understate the extent of their problems (see here, pp. 49). Ultimately, lax loan

classification and provisioning rules, continued dividend payments, competing regulatory
authorities, and other factors unique to the Japanese banking system harmed the health of
banks (see here, pp. 26-28). In the end, the banking system required aggressive government
intervention, consisting of tens of trillions of yen in bank rescues and additional assistance. (For
more, see the YPFS cases: Unnava 2020a, Unnava 2020b, and Unnava 2020c).
Prolonged forbearance also played an exacerbating role in the U.S. S&L crisis. S&Ls, or thrifts,
lent money mainly for long-term, fixed-rate mortgages and funded themselves primarily with
short-term deposits at interest rates that were capped by the government. As interest rates rose
in the late 1970s and early 80’s, thrifts experienced deposit outflows and faced catastrophic
losses because they could not raise their rates alongside commercial banks (see here).
In response, the U.S. government relaxed accounting and ownership standards and passed
legislation that relaxed regulations. Thrifts shifted from mortgages into riskier assets (see here,
pp. 180). Large numbers of new thrifts were chartered, and many “goodwill mergers” took place,
resulting in the overstatement of capital levels. Ultimately, the federal deposit insurer for the
industry went bankrupt amidst a deluge of failures (see here, table 8). Many considered the
regulatory forbearance to have been a core cause (see here, pp. 32). (For more, see the YPFS
case).
The origins of these crises are very different from COVID-19. In these cases, the extensive, and
in some cases exclusive, use of forbearance reflected “the hope that in time a changed economic
environment would take care of the problem” (see here, pp. 49). While this rationale still may be
a justification for forbearance in the COVID-19 crisis, these policies have complemented large-
scale monetary and fiscal policy initiatives supporting both financial and nonfinancial
organizations.

Table 3: Summary of International and National Reclassification and Accounting Relief
Policies
Measure Nation / Institution
Loan - Past-due day Philippines, Egypt, India, Sri Lanka

Reclassification exclusions
- Encouraging Australia, Russia (1) (2) (3) (4), Philippines, Nigeria, Ireland, ECB, United
reclassification States (1) (2), Kenya, Romania, ESMA, India (1) (2), Sri Lanka (1) (2), South
flexibility Africa, Ukraine, Korea, Estonia, EBA, European Commission, Malaysia
Accounting - Flexibility in Russia, ECB (1) (2), Kenya, Brazil, IASB, European Commission, South
Changes interpreting loss Africa, New Zealand, BCBS, ESMA, EBA, United
provisions Kingdom (1) (2), Korea, Singapore, Australia, Hong
Kong, Chile, Germany, Malaysia
- Sterilization of BCBS, Philippines, UAE, United States

capital effects
- Temporary IFRS (1) (2), Romania, United States

suspension of new
standards

COVID-19 and Insurance (1 of 3): Helping Individuals and Businesses
By Greg Feldberg and Alexander Nye
Original post here.

Insurance companies face unusual challenges during the COVID-19 crisis. This blog describes
efforts by companies and their supervisors to:
• Reduce financial burdens on insurance customers, for example, by allowing them to
defer premium payments.
• Resolve the controversy over whether existing insurance coverage extends to businesses
that have lost revenue during the crisis.
To date, crisis impacts on insurers have come mainly through financial markets rather than
through extraordinary claims. Two later blogs will describe measures providing operational
regulatory relief to insurers and measures encouraging insurers to conserve capital and avoid
procyclical behavior.
1. Reducing financial burdens on customers
The most visible COVID-19-related interventions in the insurance sector offer protection and
assistance to customers, whether individuals or organizations.
Some of these measures allow customers to defer paying their insurance premiums and give
them grace periods for renewing their policies. Some expand, modify, or clarify existing policies
to better protect policyholders from the brunt of COVID-19. Others seek to resolve the problems
of insurers who are overwhelmed by claims while customers demand a quick response. A few
countries have also encouraged insurance companies to allow deferred payments on loans they
hold as assets.
Perhaps the most important measures have been those directly providing customers with
financial relief.
Belgium has taken several measures. For unemployed workers, the National Bank of
Belgium postponed premium payments for death, disability, and hospitalization policies related
to employer-contracted insurance until September 30. Consumers in Belgium who
demonstrate that they have faced financial difficulties due to COVID-19 can also suspend paying
outstanding insurance premiums linked to mortgage loans until September 30. Businesses
interrupted by COVID-19-related lockdowns can obtain premium suspensions for certain types
of insurance.
Hong Kong’s government is directly paying the insurance premiums of bus companies and ferry
operators for six months.
India’s government allows consumers to forbear on their premium payments for the duration of
its lockdown; it offers a more generous forbearance policy for life insurance premiums (IRDAI
Circular 1, IRDAI Circular 2) than for health insurance or motor vehicle insurance. The
government has repeatedly extended this policy as it extended the lockdown. India and
the UK are also allowing consumers to pay life insurance premiums in installments. India froze

auto insurance premium rates at their 2019-20 levels, although, with the decrease in automotive
traffic, one would have expected motor vehicle insurance premiums to decrease.
Countries have also extended to insurance companies loan-forbearance programs that they had
originally created for banks. In Belgium, mortgage borrowers can now suspend principal and
interest payments to insurance companies through September 30. They can also postpone non-
mortgage loan repayments to insurance companies through September 30. India has a similar
mortgage forbearance policy.
Many insurance companies are expanding or offering more generous interpretations of their
policies for customers impacted by COVID-19. This is frequently at the urging of supervisors.
Insurance supervisors have given insurers breathing room to help consumers with more flexible
supervision policies and forbearance measures that incentivize insurers to provide relief to
customers.
Some countries have asked insurance companies to expand or modify the coverage consumers
have in their existing policies to fit the extenuating circumstances of COVID-19. They attempted
to do this while imposing little risk on the insurers, balancing the generosity of relief with the
cost to insurers or the government. For example, Ireland’s government negotiated a voluntary
agreement with insurance companies to maintain coverage for businesses’ buildings that have
been left unoccupied. The agreement also allows businesses to change which property is being
covered by a policy.
Thailand’s insurance regulator compelled insurers to cover risks relating to COVID-19, so long
as the relevant policies were sold before March 17 and the policyholder did not have the disease.
Some regulators have tried to make it easier for customers to acquire insurance. Thailand and
India called on insurers to create affordable microinsurance policies related to COVID-19. In
India, these plans act as a substitute for conventional insurance, as most of the country does not
have health insurance. Thailand is allowing non-life insurers to offer auto insurance policies
with less than one-year terms. Thailand’s measures have one side effect that may help insurers.
They might bolster insurer income from premiums in the small short-term auto-insurance
market.
In Canada, insurance regulators expanded the eligibility criteria for lenders to access portfolio
insurance for their mortgages. This provision also benefited lenders overall, because it made it
easier for them to access the government’s Insured Mortgage Purchase Program (IMPP).
Many countries have also loosened regulations surrounding policy underwriting and
distribution to allow consumers to purchase policies while remaining socially distant. This
involves cutting requirements for complete paper documentation or ensuring that consumers
will not have to pay their premiums in person.
As COVID-19 inundated insurers with questions and claims, regulators have tried to ensure that
consumers can access their insurance benefits easily and promptly. India issued regulations
telling insurers to establish systems that approve or reject claims within 24 hours and to have all
insurance claims related to COVID-19 reviewed by a claims review committee before they can be
rejected. Saudi Arabia moved the examination of insurance claims online, while Malaysia’s
central bank told insurers to facilitate and expedite claims related to COVID-19.

Some regulators have also sought to give insurers some breathing room to respond to the wave
of claims. Italy’s regulators gave insurers additional time to respond to complaints and customer
inquiries. While Peru extended the period of time that policyholders could submit claims to
insurers, it also told insurers to prioritize responding to managing and paying claims related to
health insurance or life insurance.
2. Resolving the controversy over business-interruption insurance
Business-interruption insurance is a common form of property and casualty insurance in the
U.S. and other developed countries. It covers a business’s loss of revenue due to a covered
incident, such as a natural disaster. However, business-interruption policies usually require a
policyholder to prove physical damage to the business premises, a condition that most
businesses affected by COVID-19 lockdowns have not experienced.
Although some policies don’t require physical damage to pay out, they may also exclude
pandemics or viruses from their coverage. Many are unclear about their coverage of pandemics
or of business closings that government authorities have broadly mandated. That lack of clarity
has led to conflicts between insurers and policyholders. (To some extent, this is because a large
number of insurance contracts rely on standardized forms that embody “boilerplate” wording.
These forms are then customized to the policyholders’ situation, but the amount of
customization and negotiation varies greatly and is often limited to larger customers. Because
many policies have common wording, they allow for common interpretations to
develop. However, because they are reused so often, one problem can quickly taint an entire
group of policies.)
Authorities have taken various approaches to resolve these conflicts. For example, the South
African regulator provided guidelines to insurers and consumers on May 12. Those guidelines
noted that the regulator had spoken to regulated insurers and found that most business-
interruption policies required physical damage; and even policies that covered contagious
diseases didn’t cover government lockdowns.
The Financial Conduct Authority in the UK announced on May 1 that it was seeking a court
declaration to help determine the basis on which insurance firms should decide whether to
accept business-interruption claims. On June 1, the authority said that it had reviewed more
than 500 relevant policies and selected a representative sample of 17 policy wordings to discuss
in court.
In the U.S., where states regulate insurance, 28 state insurance departments have issued
guidance to insurers and consumers on business-interruption coverage during the COVID-19
crisis. The NAIC had earlier asked insurers to provide data about their business-interruption
policies, saying that it hoped the data call would help state insurance regulators evaluate the
nature of business-interruption coverage, the size of the market, the extent of exclusions related
to COVID-19, and claims and losses related to COVID-19. It has not yet published an analysis of
the data it received.
Some governments have considered requiring insurers to retroactively cover COVID-19-related
losses that policies didn’t cover before the crisis. The state legislatures of Louisiana,
Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, and South Carolina
have introduced legislation along these lines, although none of these bills have passed.

The industry and its supervisors have warned against such initiatives, including the NAIC on
March 25, and the International Association of Insurance Supervisors (IAIS) on May 7. The IAIS
said such actions could “threaten policyholder protection and financial stability.” On April 1,
the European insurance supervisor, in guidance to insurers, said: “As a general principle,
imposing retroactive coverage of claims not envisaged within contracts could create material
solvency risks and ultimately threaten policyholder protection and market stability, aggravating
the financial and economic impacts of the current health crisis.”
As an alternative, some countries are considering using government resources to backstop
business-interruption insurance provided by the private sector. (See the YPFS blog). Proposals
vary, but they typically limit the losses a private insurer must cover before the government
backstop kicks in.

COVID-19 and Insurance (2 of 3): Operational Regulatory Relief
Original post here.

Many insurance supervisors have provided temporary relief to help companies manage during
the COVID-19 crisis.
Most of this relief comes in the form of extended deadlines for submitting various reports or
provisions that make remote compliance easier. Regulators have also suspended supervisory
activities and loosened accounting rules.
This blog discusses such measures. An earlier YPFS blog described similar regulatory relief
measures that bank supervisors have taken during this crisis.
1. Extending deadlines
At least 27 national and transnational insurance regulators extended insurers’ deadlines for
submitting their regular supervisory reports, according to an April brief from the Bank for
International Settlements (BIS). For example, India’s insurance regulator provided
extensions for submitting periodic compliance documents, providing a 30-day respite for filing
half-yearly and yearly returns, a cyber security audit, and a “Board approved Final Re-insurance
Programme.”
The EU insurance regulator advised its member countries to provide companies with extended
deadlines for 2019 annual reports, 2019 annual solvency and financial condition reports, and
2020 quarterly reports for Q1. It also called on insurers to publicize information on the effects of
COVID-19 on their businesses.
U.S. state insurance regulators have taken similar actions. For example, California’s
regulator issued a 90-day deadline extension for insurers to file their 2019 annual statements,
2019 supplemental filings, and 2020 first-quarter filings. Regulators in at least six states issued
similar policies. Several states also extended their deadlines for compliance with various
licensing requirements; for example, with respect to continuing education.
2. Limiting supervisory activities
COVID-19 has also made some relatively simple supervisory activities risky. Some
regulators (including in Botswana, Germany, Italy, Liechtenstein, North Macedonia, Poland,
Portugal, Russia, and Singapore) have postponed on-site inspections while others, like Malta’s
Financial Supervisory Authority, shifted to remote supervision. A number of U.S. states have
used other tools to reduce insurers’ administrative burden—including, for example, loosening
regulations around the provision of telemedicine.
Some regulators have suspended initiatives or exercises altogether. The UK’s insurance
regulator decided not to publish the results of its 2019 insurance stress test and postponed the
next insurance stress test to 2022. Australia’s insurance regulator postponed a number of
reforms to health insurance data collection. At least eight national and transnational regulators
have also delayed public consultations on new or revised regulatory rules.

Regulators have also provided regulatory relief to insurers who provide forbearance to
customers on premiums and to borrowers on mortgage payments. For example, as they have
done with bank loans, regulators have allowed insurers to treat loans as performing if borrowers
miss payments because of COVID-19.
For example, Canada’s insurance regulator has incentivized insurers to provide premium
forbearance to consumers impacted by COVID-19. It did this by changing the capital treatment
of the insurance for the duration of the forbearance, up to six months. South Africa also has
tried to provide these incentives by telling insurers that its Prudential Authority would exclude
the impact of the foregone premiums from its default risk calculation in situations in which
insurers make concessions that increase their outstanding premiums.
In the U.S., the National Association of Insurance Commissioners (NAIC), the organization of
state insurance regulators, issued an interpretation of its accounting principles in mid-April that
modified the rule categorizing “premiums and similar receivables as non-admitted assets if they
are uncollected for more than 90 days.” The interpretation allows insurers not to recognize
those assets as non-performing or non-admitted for their first and second quarter 2020
financial statements.

COVID-19 and Insurance (3 of 3): Capital Conservation and Countercyclical
Regulation
Original post here.

Insurance supervisors around the world outside the U.S. have urged companies they supervise
to conserve capital during the COVID-19 crisis by limiting payouts to shareholders and bonuses
to executives.
At the same time, many supervisors have sought to help insurers avoid procyclical behavior by
mitigating the impact of volatile market swings on the value of insurance company assets and, in
turn, on measures of their capital adequacy.
This blog describes such measures. Our online spreadsheet provides further details and links to
country-specific actions. An earlier YPFS blog described measures bank regulators have taken to
ease capital regulations during this crisis. YPFS blogs this week discussed measures to help
insurance customers and provide insurance companies with operational regulatory relief.
1. Measures to conserve capital

Insurers were generally well-capitalized going into the COVID-19 crisis. However, the lockdown
recession could generate an unprecedented shock to their balance sheets in the long run. For
that reason, supervisors in more than 19 countries have encouraged, but mostly not required,
insurers to conserve their capital by curtailing dividends, other capital distributions to
shareholders, and executive compensation, according to a BIS brief. (Many bank supervisors
have also done this, as we noted in an earlier blog).
For example, the UK’s Prudential Regulation Authority (PRA) sent a letter calling on insurers
thinking about distributing their profits to shareholders or executives to “pay close attention to
the need to protect policyholders and maintain safety and soundness.” Of course, some existing
contracts may make it difficult to withhold executive pay even if companies want to. Although
the only tool the PRA really deployed here was moral suasion, it apparently was enough to
convince some insurers to pause dividends.
The EU’s supervisor has urged insurers to “temporarily suspend all discretionary dividend
distributions and share buybacks.” In a statement, it asked any insurers that believe they are
legally required to pay dividends or provide significant variable pay for executives to explain
their reasoning for doing so to their national insurance regulator. However, insurers were not
convinced to modify or suspend their variable pay plans. The EU was not the only body looking
to adjust variable pay plans; a BIS brief states that at least eight national and transnational
insurance regulators asked insurers to modify their variable pay.
Italy’s insurance regulator sent a letter to the industry requesting that its companies “adopt, at
individual and group level, extreme prudence in the distribution of dividends and in the
payment” of variable pay. Austria offered the “urgent recommendation to insurance
undertakings to refrain from distributing dividends for the previous and current financial year
as well as from share buybacks.”

India was also assertive in its call for insurers to “refrain from dividend pay-outs from profits
pertaining to the financial year ending 31st March 2020.” Croatia’s insurance regulator took a
more aggressive approach; it banned insurance companies from distributing dividends until
April 30, 2021. However, it did not ask insurers to suspend share buybacks or modify variable
compensation for executives, unlike some other countries in Europe.
The U.S. has been an exception. The NAIC has been silent on this issue, and no state has asked
the companies it regulates to refrain from paying dividends, share buybacks, or paying executive
compensation.
2. Measures to avoid procyclical behavior
Supervisors have also used a handful of tools, both automatic and discretionary, to discourage
insurance companies from aggravating market stress during the COVID-19 crisis.
To be sure, insurance companies, as long-term investors, are less likely than banks or
investment funds to sell assets in market downturns (Timmer, 2016). They do not have to mark
the value of their portfolios to market prices as frequently and they are less likely to face funding
pressures that require them to raise liquidity in a pinch. As such, it is too early in the COVID-19
crisis to see significant market losses at insurance companies, and markets, for now, have
recovered from their recent lows. Early on, Thailand’s regulator concluded in a stress test that
its insurers were well-capitalized to handle potential COVID-19-related stresses.
Nonetheless, the international association of insurance supervisors has acknowledged that
insurers could be prone to procyclical behavior, for example, in response to actions by rating
agencies or supervisors (Insurance Core Principles, 2019, p. 245). In particular, an insurer
whose capital falls below a regulatory trigger may face restrictions that lead it to sell assets.
To address this procyclical bias in the rules, the Core Principles encourage supervisors to be
flexible in applying triggers during market stress.
Supervisors have exercised such flexibility during the COVID-19 crisis. For example, supervisors
in Canada, Europe, the Netherlands, and South Africa have said they will allow more time for
companies to restore capital levels that have fallen below supervisory triggers due to the crisis.
Thailand’s Office of the Insurance Commission (OIC) relaxed its capital adequacy ratio for
insurance companies in mid-March. Canada’s supervisor said it “considers the specific
circumstances of the insurer and recognizes that the restoration of Capital Resources levels may
take longer for some insurers when operating in a difficult environment.” The Dutch supervisor
said it “takes into account the expected temporary duration of this exceptional situation” when
evaluating health insurers’ capital.
Several countries have taken other ad hoc measures to discourage procyclical behavior during
the COVID-19 crisis. Canadian and Malaysian supervisors have eased capital requirements for
interest-rate risk. The Swiss supervisor said it would allow insurers to temporarily smooth yield
curves to dampen the impact of market volatility on regulatory capital. When Korean insurers
decided to help prop up domestic financial markets, Korea’s supervisor modified the risk
assessment application system it uses to determine insurers’ liquidity ratios.
The European Union (EU) supervisor also has automatic stabilizers, introduced after the global
financial crisis of 2007-09, that are intended to dampen the impact of volatile market prices on
insurers’ capital ratios. These include the matching adjustment, the volatility adjustment, and

the symmetric adjustment for equity holdings. They are part of the EU’s Solvency II framework
for insurance supervision.
The matching adjustment and volatility adjustment allow companies to reduce the net present
value of their liabilities in response to declines in the market values of their assets. When
market-wide spreads rise above predetermined thresholds, the mechanisms allow companies to
increase the discount rate they use to value their liabilities.
The two adjustments work differently. The matching adjustment is for insurers that offer long-
term guarantee products, such as annuities, and hold assets to match the maturity of those
liabilities. The volatility adjustment can be applied to an insurer’s business more broadly and is
intended to reduce the impact of large and sudden changes in market prices.
Solvency II also includes a symmetric adjustment for equity holdings. It requires companies to
hold slightly more capital against their equity holdings after markets have risen, and to hold
slightly less after markets have fallen.
These adjustments use market data provided by the European insurance supervisor. During the
COVID-19 crisis, the supervisor increased the frequency of its reporting of these data inputs
from monthly to weekly on April 30, but reduced the frequency to biweekly on May 19.
What issues still need more action?
On May 6, the European Systemic Risk Board (ESRB) met and discussed the macroprudential
aspects of their response to COVID-19. One of the key topics it addressed was the impact of
market illiquidity on insurers and the implications for financial stability. They argued that the
tools for avoiding the procyclical behavior discussed above may not be enough to head off a run
by holders of unit-linked insurance products, which are something like an insurance-investment
product hybrid, “if the macroeconomic outlook worsens by more than is currently anticipated.”
The ESRB noted that outflows from high-yield bond funds could put more pressure on the value
of less liquid assets, or assets that have become temporarily illiquid, which insurers tend to hold.
In such a situation, the ESRB said that the private sector and regulators will have to rely on
central banks to maintain financial stability. A recent article by KPMG’s Global Head of
Insurance stated that the “EU’s Solvency II regime is very sensitive to financial market volatility
and movements in bond yields and credit spreads.”

UK, EU Move to Ease Impact of Accounting Rules for Borrowers Affected by

COVID-19
By Greg Feldberg
Original post here.
On March 20, the Bank of England and European Central Bank (ECB) provided guidance to
banks on how to follow accounting rules in evaluating loans to borrowers affected by the
COVID-19 crisis.
The new IFRS 9 accounting standard, implemented in most of the world outside the U.S.,
requires banks to set aside loan loss allowances against all future expected losses for loans to
borrowers who are categorized in high-risk groups. For borrowers in the low-risk group, the
standard only requires banks to set aside allowances for 12 months of expected losses.
Most borrowers are now in the low-risk group. But IFRS 9 could require banks to downgrade
borrowers into a high-risk group if they miss payments because of the crisis. Such downgrades
would affect banks’ capital negatively, making it harder for them to keep lending or provide
forbearance to affected borrowers.
In different ways, UK and EU regulators gave guidance to banks to be flexible in such cases.
Specifically, they said that banks should take into account government relief measures in
evaluating borrowers and calculating expected losses on their loans. The guidance says that
those relief measures, such as payment holidays or loan guarantees, should not automatically
lead banks to move borrowers from 12 months of expected losses to lifetime expected losses.
The Bank of England said that, when firms calculate future losses, it expects they will “reflect
the temporary nature of the shock, and fully take into account the significant economic support
measures already announced by global fiscal and monetary authorities.”
The ECB said it would “exercise flexibility” regarding the classification of borrowers as unlikely
to pay when banks call on new COVID-related public guarantees and on borrowers covered by
legally imposed payment moratoria.
In the U.S., the Financial Accounting Standards Board (FASB) implemented the Current
Expected Credit Losses (CECL) standard for large banks at the beginning of this year. Like IFRS
9, CECL provides a forward-looking framework for banks’ calculation of expected losses.
Bankers and some U.S. regulators this week called on FASB to loosen or delay the standard.
FASB has said that is the regulators’ call.

Denmark Plans to Pay Fixed Costs for SMEs Hit by Coronavirus Lockdown
By Alexander Nye
Original post here.

On March 18, the Danish Minister of Finance introduced a plan to pay a significant portion of
the cost of small and medium businesses whose revenues fall by more than 25% during the
coronavirus pandemic. The plan, which the Parliament passed on March 19, would cost the
government roughly 40 billion Danish crowns ($5.8 billion or about 1.6% of GDP) for the first
three months (see details here in Danish).
The Minister also announced programs for self-employed people and for owner-operated
businesses with 10 or fewer full-time employees. These programs will complement Denmark’s
strong existing unemployment insurance program.
Denmark is the latest country to introduce a program to help small businesses struggling with
an unprecedented global revenue shock. These programs range from asking banks to voluntarily
delay payment dates to broader tax or debt holidays. In some cases, governments may ease the
cost for banks through regulatory forbearance. In other cases, governments provide direct
subsidies to prevent SMEs from missing payments (see India's vast farm loan waiver programs).
In normal times, such programs may be criticized for creating moral hazard and raising long-
term borrowing costs. During the coronavirus pandemic, though, such programs may not raise
moral hazard concerns if they will sunset when the virus has passed. Also, the Danish
government, by linking eligibility to dramatically falling revenues, can be relatively assured that
the funds will go to companies that need them (See Table 1).
Table 1
Decline in Expected Revenue (%) Government Compensation of Fixed Costs under

Program
100% (business ordered to close by the 100%

government)
80%-100% 80%-100%
50%-80% 60%-80%
25%-50% 40%-60%
In its SME compensation program, the Danish government noted six principles:
• Businesses in any sector should be eligible for compensation;
• Compensation will be targeted at companies with a large decrease in revenues earned
domestically;
• The compensation will cover at least 25% and as much as 100% of fixed costs;

• The compensation will cover up to three months of fixed costs and will be dispensed as
soon as possible;
• If revenue decreases less than expected, SMEs must repay the government; and
• Companies that are compelled to close due to a ban on staying open will receive
compensation for 100% of fixed costs.
The Danish program will seek to keep the administrative costs down by requiring outside
accountants to audit the reported fixed costs and the decline in revenues. To receive aid,
companies have to send audited statements of their fixed costs for the past three months and
hire accountants to confirm that business revenue has or is expected to fall. The government will
cover 80% of these auditing costs if a company joins the program. The government will also rely
on auditors to identify fraud. Supervisors will conduct random checks, and checks at the end of
three months, of auditors’ VAT reports. The government will use these VAT reports to adjust its
aid to reflect the actual revenue losses these firms eventually suffer.

US Eases Impact of Accounting Rules for Borrowers Affected by COVID-19
By Arwin G. Zeissler
Original post here.

On March 27, the US acted to delay the implementation of a new accounting rule to ease its
impact on banks whose borrowers have been affected by COVID-19.
The new accounting standard, known as “current expected credit losses” (CECL), had been set to
take effect this year for the largest US banks and over the next two years for other banks. It
requires banks to provision for all “expected” losses over the life of a loan. The previous
“incurred loss” standard, which is still in place as banks transition to the new standard, requires
them to recognize losses only when they become “probable.”
In an interim final rule, US bank regulators on March 27 gave banks the option to delay the
estimated effect of CECL on their regulatory capital, relative to the effect of the incurred-loss
method, by up to two years. As in an earlier 2019 rule, banks will be allowed a three-year
transition period, so the new rule gives them five years to fully implement CECL. Banks that
have already adopted CECL can continue with the three-year transition provided by the 2019
rule, or they can change to the longer five-year option announced on March 27.
Also, in the CARES Act, Congress on March 27 offered optional temporary relief from the CECL
standard. Banks, other insured depository institutions, and their affiliates will not have to
comply with CECL until the national emergency is over or until December 31, 2020, whichever
comes first.
US regulators clarified in a March 31 statement that banks may avail themselves of both the
short-term statutory relief provided by the CARES Act and the longer-term regulatory relief
contained in the interim final rule. However, the time period of these relief provisions will
overlap and not be additive, as the five-year transition option in regulators’ interim final rule
still begins January 1, 2020, for the largest US banks.
CECL is similar to the IFRS 9 international accounting standard, which regulators in most of the
world outside the US have implemented. IFRS 9 requires banks to set aside loan loss allowances
against all future expected losses for loans to borrowers who are categorized in high-risk groups.
Several countries have asked banks to be flexible in applying IFRS 9 in the current crisis. On
March 20, the Bank of England and the European Central Bank said banks should take into
account government relief measures in evaluating borrowers and calculating expected losses on
their loans.
Accounting standard-setters developed both CECL and IFRS 9 in response to the perceived
shortcomings in the incurred-loss method that they had required banks to use in the years
before the global financial crisis of 2007-09.
As banks and other financial institutions suffered steep credit losses during the global financial
crisis, these institutions as well as users of their financial statements expressed concern that the
incurred-loss standard limited a financial institution’s ability to record credit losses that were
expected, but not yet probable. (See the YPFS case study on the Irish experience with the
incurred-loss standard and its transition to the new expected-loss standard).

In the US, the Financial Accounting Standards Board introduced CECL in 2016 in Accounting
Standards Update 2016-13 (ASU 2016-13). Under the rule, an entity must estimate lifetime
expected credit losses for all of its loans, leases, debt securities, trade receivables, and other
financial assets that are measured at amortized cost (as opposed to fair value). Estimated losses
are based on past events, current conditions, and reasonable and supportable forecasts of future
collections. For public business entities that file with the US Securities and Exchange
Commission, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (that is,
in most cases, starting January 1, 2020).
US bank regulators incorporated ASU 2016-13 into US banking regulations in a 2019 joint rule.
Since banks only recognized probable losses under the old rules but are required to recognize
probable and expected losses under the new rules, regulators have noted that “various analyses
suggest that credit losses under CECL can be expected to be higher than under the incurred loss
methodology.” For this reason, the 2019 rule included a transition option allowing banks to
phase in the effects of CECL on regulatory capital ratios over three years.

Mortgage Relief
Mortgage and rent costs constitute a major component of many individuals’ cashflows. As fixed
cost commitments, measures taken to alleviate the payment burden can greatly improve the
likelihood of homeowners’ staying in homes. Policies targeted to aid these individuals must take
account of the duration of financial struggle, underlying financial circumstances of borrowers
and renters, and the impacts such policies can have on lenders.

Analysis
Residential Mortgage and Rent Relief During Crises

By Shavonda Brandon, Vaasavi Unnava, Rosalind Z. Wiggins, and Greg Feldberg
Original post here.

Cash flows around the world have dropped dramatically as more governments require non-
essential businesses to close and individuals to stay at home in order to fight the COVID-19
pandemic. In a fairly short time, such actions have led to massive layoffs and job losses. In the
United States, for example, the country has swung from historically low unemployment levels to
historically high numbers of claims for unemployment benefits; similar effects can be observed
in other countries. As a consequence, individuals are experiencing, and are expected to continue
to experience for some time, difficulty in paying their housing costs. Whether mortgage or rent,
housing is usually the largest fixed cost for households and many governments have responded
by announcing various packages to provide relief. This post begins by examining the
fundamental challenge presented by the need to provide residential expense relief on a grand
scale. It then details multiple programmatic interventions utilized in crises past and present.
Finally, this post provides some key takeaways to consider when implementing residential
expense relief policies.
Statement of the Challenge
National or state-wide residential mortgage and rent relief policies in response to broad
financial duress date back as early as the Great Depression. Such policies may provide
immediate relief to individuals through instruments like mortgage or rental forbearance or
eviction moratoria. Governments may also institute longer-term policies, such as mortgage
restructuring or repurchasing.
The need to provide respite to individuals during times of crisis places governments in a delicate
position in which they must implement policies that provide financial relief to
individuals experiencing difficulties making their mortgage or rental payments while
simultaneously maintaining the functional integrity of the mortgage lending and servicing
system. Difficulty may arise in balancing these two competing objectives as the individual
homeowner’s or tenant’s interest conflicts with that of the landlord, lender, or mortgage
servicer. Thus, to achieve a balance, governments that provide short-term or long-term
mortgage or rent relief often also provide flexibility or incentives for landlords, lenders, and
servicers administering or participating in such programs. Should a government employ one set
of relief without the other, or a method of relief that doesn’t fit the problem well, then the debt
burdens for homeowners (including landlords) may persist unaddressed, further exacerbating
the crisis.
To determine policies that optimally address such a problem regarding mortgage and rental
payment, governments must consider the following key questions:
• Type of Problem: What is the problem that creates the need for residential relief? When
is the problem expected to end?

• Type of Relief: What are the best tools to address the problem? Who are the various
stakeholders?
• Underlying Borrower/Renter Circumstances: What is known about the underlying
circumstances of the borrowers or renters?
• Lender Impact: Can lenders and their servicers execute the program efficiently? What
will the impact of the program be on them? What relief might they need?
• Existing Structural Issues: How might differing market incentives or structural
issues impede the success of the program?
Residential relief programs may address these considerations in different ways based on the
circumstances presented. We will discuss these questions further as we review different
intervention strategies below.
Types of Programs
• Mortgage Forbearance - allows homeowners to temporarily delay making payments
• Mortgage Restructuring - permanent modifications to existing at-risk mortgages
• Mortgage Purchasing - outright purchase of at-risk mortgages by a government or
agency
• Renter’s Aid - providing forbearance and rent subsidies to tenants
• Flexibility in Debt Restructuring - modifications to accounting and regulatory
frameworks to aid lenders in restructuring mortgages
Mortgage Forbearance
If decreased cash flows amongst individuals is the only economic problem they face, forbearance
may be a suitable relief strategy, since it grants mortgage holders a short period during which
they can defer payment and repay the unpaid balance months later. Because of the nature of the
current COVID-19 pandemic, where the cash flow issues are expected to be of limited duration—
reversing once the wide-spread government-imposed economic shutdowns are lifted—several
countries have used forbearance for short 3-6 month durations. In this instance, the period of
forbearance may also be extended as needed. Additionally, in connection with forbearance relief,
late payment penalties and foreclosures are usually stayed. Credit reporting may also be stayed
so that the individual does not experience a drop in creditworthiness after accepting
forbearance.
Governments may implement mortgage forbearance by passing legislation that provides direct
legal relief for nonpayment, as the United States has done in the current COVID-19 outbreak.
The CARES Act provides homeowners whose mortgages are federally backed (approximately
80% of those outstanding) the right to request a 180-day forbearance. (See a YPFS blog on the
US program here). Officials in the United Kingdom have instituted a three-month mortgage
holiday, during which borrowers do not have to make any payments. Ireland has implemented a
similar payment mortaria on mortgages, as well as on business and personal loans for
individuals. Some countries may institute government-mandated forbearance, but with more
limited coverage.

Other countries have implemented similar relief through the private sector. Hungary stopped
short of legislating such relief and instead urged banks to provide forbearance for household
payments. In Ireland, during the Global Financial Crisis (GFC), the government
emphasized forbearance by lenders but did not require such policies until 2013. In the Bahamas,
the government has arranged for lenders to provide a three-month mortgage forbearance to
borrowers who were in good standing prior to the pandemic. In this case, missed payments will
accrue interest throughout the forbearance period. Private-sector solutions can provide coverage
for substantial numbers of individuals if all major banks participate.
It should be noted, however, that forbearance is a delay, not forgiveness. Individuals are still
responsible for the deferred payments, and repayment plans must be negotiated with the
respective lender or landlord. As discussed below, governments often provide incentives for the
lenders to reach agreements that are manageable to the homeowner and keep them in their
homes. Depending on the structure of the country’s mortgage system, homeowners may have to
negotiate this restructuring with a mortgage servicer who represents the lender; either party
may have conflicting incentives that impact the ease of agreement.
Mortgage Restructuring
If the perceived problem is with the fundamental economics of the mortgage rather than a short-
term cash flow issue, then longer-term solutions provide opportunities for mortgage
restructuring in an effort to avoid delinquencies or foreclosures, and maintain people in their
homes. These solutions may also need to be employed if forbearance fails to address the
problem effectively, as occurred in Ireland during the GFC (discussed below).
Historically, the manner in which debt restructuring is implemented varies widely. Some
programs attempt to restructure loans to provide easier paths to pay off extant mortgages. Other
programs simply purchase homes outright from the lender, including any outstanding mortgage
balances, leaving original owners of dwellings as tenants who pay rent to the new homeowner.
The choice between the two programs may depend on whether or not the mortgages are
“underwater”— the case in which the outstanding principal payment is greater than the value of
the home. Mortgages that significantly exceed the value of the home may be strong candidates
for outright purchase rather than restructuring, as there is a lesser incentive for the homeowner
to continue payments. By contrast, restructurings or modification programs are aimed at
reworking the mortgage on the assumption that the homeowner will continue to occupy the
home and pay the mortgage. However, as discussed below, the methods and objectives
sometimes overlap.
The Home Affordable Mortgage Program (HAMP) instituted by the United States during the
GFC, when many mortgages exceeded home values due to a broad market correction,
encouraged privately negotiated modifications by incentivizing mortgage lenders and servicers
to participate in the program with cash payments and by providing a required modification
framework. The required framework expressly reduced all mortgage payments to 31% of an
individual's monthly income, relying first on a reduction of interest rate for five years, followed
by a reduction of principal payments to reach this target. The program thus established an
industry standard for modifications which sought to avoid foreclosures. The Homeowners
Support Mortgage Scheme (HSM) in the United Kingdom took a different approach to creating a
modification framework. That scheme allowed homeowners to defer up to 70% of their interest
payments for two years, with 80% of the deferred interest payments guaranteed by the
government for banks participating in the scheme.

Also during the GFC, Ireland utilized split mortgages, a novel restructuring option that split
mortgage debt into two pieces: one piece warehoused for later payment, and one piece that the
borrower makes payments on until their financial situation improves.
Some restructuring options do not rely on changing the terms of an existing mortgage. During
the Great Depression in the United States, a style of lending called “equity of redemption”
allowed debtors to re-attain their foreclosed properties if outstanding mortgage debt was paid
off within a certain time period after foreclosure. Many states extended the equity of redemption
period to provide relief for mortgage owners.
Mortgage Purchasing
In comparison to private-sector modification programs, government-funded mortgage
repurchase programs purchase loans and then offer favorable refinancing if the homeowner can
afford it. During the Great Depression, the Home Owners Loan Corporation in the United States
purchased mortgages directly from lenders and issued new mortgages to the borrowers,
refinancing many on much more favorable terms.
In some cases, if homeowners could not afford to refinance, they were permitted to stay in their
homes as tenants. During the GFC, Scotland created the Homeowner Support Fund, under
which a local council purchased distressed houses at 90 percent of their value and then rented
them to the former homeowners, allowing families to remain in their homes.
Also during the GFC, the United Kingdom implemented a two-part scheme, called the Mortgage
Rescue Scheme, designed to help vulnerable homeowners stay in their houses. Local councils
had the ability to purchase a home at market rate and offer a short-term tenancy to those
already living in the home at 80% of market rent. The scheme also allowed local councils to
make a “shared equity” loan to the household to help it maintain the mortgage by temporarily
paying a reduced amount. The scheme was ultimately criticized for miscalculating demand and
completing too many costly purchase rescues; a more balanced usage of the two schemes had
been forecasted.
Examples of restructuring or modification frameworks have yet to emerge in the
current COVID-19 crisis. However, if the crisis persists, the need for such relief may arise as the
prolonged effects of unemployment and economic downturn impair owners’ ability to maintain
their mortgages.
Renter’s Aid
Renters may also face reduced cash flows as unemployment rises during economic crises.
Similar to mortgage forbearance, governments may provide rent forbearance to renters, where
they are granted a short period during which they may defer payment and repay the unpaid
balance months later. Renters also may be protected from late-payment penalties and negative
marks on their credit report as a result of utilizing the forbearance benefit. The risks associated
with a tenant who takes a rental forbearance differ from those of a homeowner or mortgagor.
Rental contracts are short-term commitments and do not carry the possibility of equity. In
contrast, a mortgage creates an incentive for the borrower to remain in the home. There may be
a greater risk that tenants, especially tenants who have difficulty returning to work or other
basic financial difficulties, may not be able to repay the forbeared amount, creating a problem
for landlords and their own ability to pay related mortgages and expenses.

Governments may implement rent forbearance by passing legislation that provides direct legal
relief for nonpayment, as the United States has done in the current COVID-19 outbreak. The
CARES Act provides a rental moratorium and suspends evictions for the duration of mortgage
forbearance for properties that are financed by federally backed multi-family mortgages. (See a
YPFS blog on the program here.) Greece has provided relief using a different method;
businesses and individuals directly impacted by the pandemic will be permitted to pay only 60%
of their rent for the months of April and May. Both methods increase the flexible cash-flow for
renters who choose to take advantage of the benefit and illustrate the differing breadth that such
relief can take.
Governments may also implement rental subsidies, aimed at reducing rental costs rather than
deferring them. Government subsidies provide the additional benefit of guaranteeing payments
to landlords and lenders who may not receive payments if renters are unable to repay
outstanding rent after the forbearance period. Some rent subsidies are a direct government
payment to landlords. In British Columbia, government-funded rent relief of CAD$500 per
person per month for up to three months is intended to help tenants impacted by the COVID-19
pandemic continue to pay their rent. Related provisions prohibit evictions and rent increases
during this period; also, the government has asked banks to work with landlords who may
experience a drop in rents. Malta has also established a new Private Rent Housing Benefit
Scheme, through which individuals unemployed due to the COVID-19 outbreak will receive
governmental rent subsidies.
Governments may also reduce housing costs that are not typically included in rent. Bahrain will
cover electricity and water payments for three months; Ukraine has prevented the disconnection
of utilities for customers late on utility payments.
Flexibility in Providing Debt Restructuring
When economic shocks demand large-scale residential mortgage relief, lenders face barriers to
efficiently carrying out government mandates. These include liquidity issues due to slowed cash
flows; an increase in loans classified as “troubled debt,” due to restructurings that reduced
principal or interest payments; and other increased administrative costs associated with high
volumes of activity.
To provide flexibility for lenders who provide mortgage forbearance, governments may seek to
ease the application of accounting principles. For example, restructuring loans to reduce
principal or interest payments is typically classified as troubled debt. A government may specify
that restructurings in compliance with its mandate will be excluded from this classification. This
policy enables lenders to restructure more loans without taking massive losses on their balance
sheets.
In response to the COVID-19 outbreak, the United States provided that mortgages that benefit
from forbearance will not be categorized as troubled debt. Peru’s Superintendence of Banks
notified financial institutions that any modifications to loan terms due to the COVID-19 crisis
would not change the classification of the loans.
The government may also provide relief to lenders’ cash flows. In the United Kingdom, in
response to the GFC, the government guaranteed the interest-only payments of borrowers in
exchange for lender participation in the mortgage forbearance program. In response to COVID-

19, Canada has promised to purchase CAD$150 billion in loans from banks to free up their
capital.
In developing economies, it may be necessary to restructure loans denominated in foreign
currencies. For example, leading up to the GFC, it was common in many countries in central and
eastern Europe for mortgages to be denominated in Swiss francs. As the Swiss franc strongly
appreciated after the crisis, many of these loans became non-performing. In response, the
governments of Hungary and other countries allowed foreign-denominated mortgages to be
redenominated in local currency or even a third currency, providing relief to borrowers from the
pressure of increasing exchange rates on mortgage payments. In the COVID-19 crisis, Sri
Lanka has broadly allowed banks to recover loans in Rupees as a last resort, when recovery of
loans in a foreign currency appears remote.
Key Takeaways
Fit the solution to the problem.
When considering whether to provide aid to residents or tenants of a mortgaged property, the
nature and expected duration of the problem will be a key question. Mortgage and rent
forbearance programs provide short-term solutions to address cash-flow shortfalls for mortgage
owners or renters. They can provide quick relief to individuals having trouble paying their bills
because of unemployment or other cash-related issues until circumstances change.
However, forbearance may not adequately address problems with the fundamental economics of
a mortgage, as generally existed during the GFC. Then, longer-term solutions are needed to
provide opportunities for mortgage restructuring or purchasing in an effort to avoid
delinquencies or foreclosures, and keep people in their homes.
Forbearance relief may create secondary problems once the forbearance period ends.
Forbearance is not forgiveness, but this may be fundamentally misunderstood by some
individuals, or just disregarded when faced with a balloon payment or larger monthly payments
needed to make-up the forbearance amount. Others, just may be financially unable to make up
the payments. For homeowners, history has shown that there is no guarantee that restructured
loans will not default. But every crisis is different. If the COVID-19 crisis ends sooner and there
is no dislocation in the housing market, the effects should be much different than experienced in
the GFC under the HAMP program restructurings, when significant defaults on restructured
loans with underwater mortgages but also prolonged unemployment were cited as major
factors of the prolonged foreclosure crisis.
There is a similar risk that renters will fail to repay forbearance amounts. Some tenants may
have underlying financial difficulties not related to the immediate crisis. Governments should
consider that they may be confronted with a mass problem of unpaid forbearance rent and thus,
possibly increased evictions and or bankruptcies once the forbearance period ends.
In total, governments should consider the possibility of such secondary impacts and how they
might be addressed should they occur. Additional fiscal assistance may be needed.
Some residential relief programs may create moral hazard.
There is some evidence that forbearance policies create moral hazard. In other words,
homeowners may take advantage of the opportunity to not pay their mortgage even if they are

capable of doing so. In Greece, during the Sovereign Debt Crisis, many homeowners received the
benefit of a foreclosure moratorium. It is estimated that as many as 37% of the
homeowners utilizing the moratorium to delay payments did so strategically rather than because
of need.
Understand the underlying circumstances of homeowners and renters.
For both homeowners and renters who take advantage of forbearance benefits, factors that
contribute to the ability and willingness to repay center around issues of income,
unemployment, debt load, and credit worthiness. If the assistance provided does not take into
consideration the full financial profile of the borrower, then the mortgage assistance program
may not succeed in stabilizing the borrower’s situation.
Such was the case in Ireland in the aftermath of the GFC. The country’s initial response relied on
broad implementation of short-term mortgage forbearance, which did not account for the
broader underlying problem of excessive mortgage debt that had arisen during the GFC (by
2009, the ratio of mortgage debt to GDP was 92%). With a significant number of mortgages
underwater and increased unemployment, many homeowners participated in forbearance but
were ill-equipped to resume payments when their forbearance periods ended. The government
ultimately encouraged large-scale permanent mortgage restructuring to keep homeowners in
their homes, rather than temporarily restructuring for forbearance needs.
Similarly, in the United Kingdom, a miscalculation of the desirability of two options under
the Mortgage Rescue Scheme resulted in budgetary underallocation and undermined the
efficacy of the program. Although the shared equity option provided a cheaper alternative for
the government, it was far less popular than the mortgage purchase option. More homeowners
than expected chose to have their council purchase their mortgages and rent the home back to
them than the number of homeowners who chose to take a shared equity loan to help them
manage mortgage payments. The first option was significantly more expensive and therefore,
the number of homeowners assisted was less than planned, while the cost of assistance received
by each was significantly greater than expected. The scheme points out the pitfalls of providing
an open choice to the homeowner when trying to also serve as many people as possible. A
modification to the plan, such as limiting the budget allocated to each option, could have
maintained choice but also better positioned the government to achieve its service objectives.
In particular, the choice to reduce payments rather than the principal of a loan may not be
effective if a borrower’s equity is very negative. Some argue instead that programs should focus
on ameliorating the immediate consequences of job losses to help borrowers maintain liquidity
in the long term.
Lender experience and incentives may affect a program’s efficiency and participation rate.
Lenders may struggle with implementation due to a lack of experience in renegotiating loans. In
financial environments where a majority of lenders do not regularly restructure debts, the
implementation of various loan restructuring policies may take longer than expected. Such was
the case with the US Home Affordable Modification Program (HAMP) during the GFC. The
experience also highlighted the importance of the government understanding the way the
industry is structured and incentivized.
Attempts to correct currency mismatch in loans may not reduce lenders’ risks.

In some cases, restructuring foreign-denominated debts to local or third-country currencies can
provide the necessary leeway for lenders to properly implement government policies. However,
it’s unclear that changes to currency denomination reduce risk for lenders overall. They may
reduce currency mismatch in the original currency but create another in the new currency. Such
exchanges may also be difficult to administer.
Conflicting policies may hamper the success of residential relief programs.
As discussed above, because of the nature of housing, it is useful to combine forbearance policies
with restructuring incentives and foreclosure and eviction moratoria. However, when existing or
newly implemented rules do not properly allocate risk among housing market participants, they
can hamper efficient enforcement of housing policies aimed at providing residential mortgage
relief for both borrowers and tenants.
Protections that overshield borrowers from the risk of default (or renters from eviction) may
affect the ability to enforce residential mortgage relief policies. In the case of Ireland during the
GFC, homeowners slipped into default on mortgages for years, as a result of the country's strong
homeowner protections that created a one-sided mortgage forbearance regime. This was
facilitated by a repossession law that effectively made foreclosures impossible and left mortgage
lenders with little recourse. By December 2012, about 12% of Irish mortgages were late by more
than 90 days. In this case, homeowners were incentivized to stop paying mortgages when there
were few options to permanently restructure debts with mortgage servicers, exacerbating the
mortgage debt problem for both homeowners and lenders.
Structural issues may undermine utilization of residential relief programs.
The degree of separation between mortgage owner and homeowner can lead to difficulties in the
enforcement of mortgage aid programs. In the United States, before the GFC, the popularity of
securitization of mortgages meant that mortgages would often be sold and resold, creating
several degrees of separation between mortgage owners and homeowners. This distance
between lender and borrower, as well as the complexity of claims on a mortgage created by
securitization, often led to litigation negatively impacting the effectiveness of relief programs.
Additionally, due to the separation between mortgage servicer and mortgage owner, differing
compensation incentives hampered efficient mortgage restructuring. This incentive mismatch
manifested under HAMP, where 28% of modified loans defaulted again, including half of the
loans modified at the height of the financial crisis. While the program required restructuring of
loans in a way that supported homeowners—specifically through the introduction of mandatory
terms to reduce monthly payments to 31% of the individual’s monthly income—the program
permitted mortgage servicers to determine which borrowers could restructure. Because the
servicer was compensated by the unpaid principal balance of performing loans, servicers had the
incentive to reduce interest payments and instead opt for adding unpaid loan balances to the
outstanding principal of the loan, which was not effective in ensuring the long-term
performance of the loan. As a result, many servicers were incentivized to deny restructuring to
eligible borrowers, reducing participation in the program dramatically.
In the case of the HSM in the United Kingdom, also during the GFC, the additional onerous
requirements placed on lenders in terms of documentation and reporting lead to only 32
borrowers participating in the program. Additionally, few lenders provided forbearance through
the HSM program directly, instead opting to offer their own forms of forbearance. However, it

was concluded that through such intervention, the government was able to influence most
lenders’ forbearance policies, leading to indirect aid for even those not participating in the
program.
For more specific information about specific types of programs and their usage in the most
recent crisis, see Mortgage Forbearance and Eviction Moratoria in Response to the COVID-19
Outbreak and Expanding Debt Restructuring Options for Mortgage Lenders in Response to the
COVID-19 Outbreak.

Mortgage Forbearance and Housing Expense Relief in Response to the
COVID-19 Outbreak
By Shavonda Brandon, Vaasavi Unnava, and Rosalind Z. Wiggins
Original post here.

With US unemployment claims at record highs due to the nation’s directive to close many
businesses and shelter-in-place, many individuals are struggling to pay recurring fixed costs,
such as mortgages and rent. In response, the United States instituted the CARES Act, providing
opportunities for mortgage forbearance and moratoria on evictions for all holders of federally
backed loans. Other countries have instituted similar policies, but with varying time-frames and
coverage for homeowners and renters.
Mortgage and Rent Forbearance
More than 20 countries have instituted some form of mortgage forbearance in response to the
ongoing COVID-19 pandemic. The CARES Act endows borrowers with federally-backed
mortgages the right to request forbearance. It provides a general framework for mandatory
forbearance policies, while leaving the terms of agreement to the original lenders, with flexible
windows for forbearance as determined by borrower need. Canada strongly emphasized that
lenders should negotiate directly with mortgage borrowers to determine the terms of
forbearance on individual loans. Some countries provide forbearance for a fixed time period. For
example, the United Kingdom provides a fixed window of three months for forbearance.
Forbearance is not restricted to mortgage borrowers. Putting a moratorium on rent payments is
one approach to provide temporary relief for renters. British Columbia, in Canada, has promised
to pay CAD$500 a month, for three months, directly to renters’ landlords to provide a direct
subsidy of rental payments. Greece has restricted rent payment for those directly affected by the
outbreak to 60% of rent for the months of March and April.
To emphasize that forbearance is not forgiveness, lenders offer flexible repayment options. For
example, there is the paused payment option, in which borrowers pause payment and either
choose to make a balloon payment once their regular loan payment commences, or when the
mortgage reaches its term. Borrowers can also opt to reduce their payment by some fraction for
a set period. Any individual who seeks repayment accommodations due to the impact of COVID-
19 will remain current for purposes of credit reporting.
To fully account for housing-related fixed costs, some countries are paying utilities or providing
forbearance for citizens on utility payments. Argentina has extended forbearance clauses to
utility bills for households in arrears in addition to covering mortgages. Bahrain will pay
residents’ electrical and water utility bills for three months beginning in April, though it hasn’t
instituted any form of mortgage forbearance or rent. Ukraine has outlawed disconnecting
utilities for customers late on payments.
Typically lenders use caution when determining if a borrower is eligible for renegotiation of the
terms of a loan. Doing so may expose lenders to balance sheet losses and require them to
categorize the renegotiation as a troubled debt restructuring (TDR). TDRs require strict
reporting, tracking, and accounting requirements that are administratively costly. Since
forbearance is a form of term renegotiation, regulators have modified guidance around the

reporting of TDR to increase the expediency of the forbearance process in response to the
pandemic. To read more on the expansion of loan restructuring options that countries have
employed to provide flexibility to lenders, such as changing loan classification or accounting
requirements, click here.
Eviction Moratoria
To prevent evictions for individuals who are behind on payments, countries have instituted
moratoria on evictions and foreclosures. In some cases, this has not been codified into
law. Barbados has not passed legislation, but has “strongly encouraged” landlords to not evict
their tenants during this time; it plans to legally enforce the rule if not upheld without
legislation. Other countries have extended the timeline for foreclosures. In the United Kingdom,
landlords must now give renters three months’ notice before eviction, through September 2020.
Other governments have implemented stricter tenant protections. British Columbia, in Canada,
has placed a ban on evictions for three months. In addition to moratoria, Ireland has paired a
three-month moratorium on evictions with a ban on rent increases for the duration of the
COVID-19 emergency in the country. New York City has placed a moratorium on residential
evictions for 90 days; the United States Congress has prevented eviction for 120 days after
enactment of the CARES Act on March 27, and foreclosures for 60 days after March 18, for
federally guaranteed mortgages. In addition, US landlords receiving forbearance on their
mortgages are prohibited from bringing eviction proceedings against tenants, or charging
penalties during the forbearance period.
To read more about debt restructuring for mortgages, click here.

Expanding Debt Restructuring Options for Mortgage Lenders in Response to
the COVID-19 Outbreak
By Shavonda Brandon, Vaasavi Unnava, and Rosalind Z. Wiggins
Original post here.

With the outbreak of the COVID-19 virus, many countries have instituted some form of right to
mortgage forbearance and protection from foreclosure or eviction. Homeowners may request a
forbearance of payment for a negotiated or predetermined fixed period. At the end of the
forbearance period, lenders work directly with borrowers to recoup the payments missed, by
finding alternative payment schedules. Lenders may change the outstanding principal, interest
rates, or term of the loan to help the borrower.
Loan Classification
Governments providing forbearance support to borrowers have taken steps to protect lenders
who otherwise might experience a dramatic increase in their troubled debt. Typically, such
restructuring constitutes a troubled debt restructuring for the lender. When debts are
designated as troubled, they are categorized as a loss on balance sheets and a lender must
adhere to strict reporting, tracking, and accounting requirements that are administratively
costly. Several governments have changed accounting practices so that lenders may avoid
classifying restructured mortgages as troubled.
The United States provides such amnesty for mortgages modified pursuant to the CARES
Act. Peru has pursued a similar strategy, with the Superintendence of Banks notifying financial
institutions that any modifications to loan terms due to the COVID-19 pandemic would not
change the classification of the loans. Russia allows banks to restructure loans without
impacting their classification, so long as regulatory requirements continue to be satisfied.
Regulatory Requirements
Outside of loan classification, countries have modified regulatory requirements to provide
greater flexibility in lending.
Israel has increased the loan-to-value cap on residence-backed loans from 50% to 70%.
Residence borrowers are now eligible for the lowest rate of interest on a home loan at a 30%
down payment instead of the original 50% down. Separately, governments are modifying bank
capital requirements to improve liquidity conditions; Russia has specifically reduced risk
weighting of mortgages to alleviate the burden of mortgage debt restructuring.
Meanwhile, Norway has increased the amount of risk banks may take to provide greater
flexibility for loan restructuring. Now, 20% of mortgages may deviate from amortization
requirements, providing extra room for borrowers to suspend payment or reduce
payment. Sweden has followed a similar strategy, allowing some loans to be exempt from
amortization requirements under recognition of income loss for borrowers.
Freddie Mac, a government-sponsored entity (GSE) in the United States, has also provided more
flexible options for its lenders, by extending options for restructuring typically only available to
lenders during natural disasters.

Unified Loan Restructuring
Rather than provide individualized opportunities for loan restructuring, some governments
have elected to provide broad, prescriptive terms for loan restructuring. The US did this in the
GFC by encouraging restructure options. This may restructure loans quickly in an environment
with less experienced lenders, who have trouble restructuring loans in a timely manner.
In the Philippines, members of the Government Service Insurance System have been extended
the ability to settle debts through the government pension fund. Individuals may also
consolidate and restructure debts with the organization without penalty. The broad
restructuring does not leave space for individual negotiations, with all participants receiving the
same reduced interest rate of 7-8 percent from the original 12 percent interest rate.
The Philippines is not the only country setting unified terms of restructured loans at a national
level. In the United Kingdom, mortgage forbearance is mandated for three months, already
setting one of the terms for lenders for any relief that may be provided. Similarly, El
Salvador has extended a three-month payment exemption for mortgages and other critical
services whose repayment would be spread over two years with no risk of default or interest.
Other countries determined payment terms of the mortgage forbearance
restructuring. Palau requires interest-only payments, rather than forbearance outright. Bolivia,
similarly, is suspending only principal payments for mortgage forbearance. New Zealand is
suspending principal and interest payments for six months for all individuals affected by the
COVID-19 virus.
Aid to Lenders
By providing flexible options for debt restructuring that do not penalize the lender for borrower
non-payment, governments may be attempting to mitigate the sharp drop in capital flows that
will soon affect lenders due to the many mortgage forbearance and eviction moratoria that have
been instituted worldwide.
Extensive but temporary regulatory changes as well as broader guidances in debt restructuring
may help banks, but still leave room for difficulty amongst nonbank lenders. As a team of Fed
economists wrote in a recent paper, “Nonbank mortgage companies also need to finance the
costs associated with servicing defaulted loans for extended periods of time. Obtaining this
financing can be difficult in times of strain.”
It remains to be seen how this liquidity stress will be mitigated as forbearance extends into the
future. In the US, lenders have asked for the Federal Reserve to institute a mortgage liquidity
facility, though nothing has been created yet. The Federal Housing Finance Agency director has
expressed confidence that private banks will continue to extend credit to lenders for the short
term.
To read more about residential mortgage forbearance and eviction moratoria, click here.

FHFA Relaxes Standards for GSE Mortgage Servicers

By Vaasavi Unnava
Original post here.

On April 21, the Federal Housing Finance Agency (FHFA) announced that it was changing
standards for mortgage servicers in an effort to reduce burdens brought on by drastic increases
in mortgage nonpayment. Quickly following, on April 22, the FHFA announced that Fannie Mae
and Freddie Mac would purchase some mortgages in forbearance due to COVID-19.
New forbearance policies under the CARES Act are creating liquidity issues for mortgage
servicers. Typically, mortgage servicers collect payments of mortgage principal and interest from
borrowers whose mortgages are in mortgage-backed security (MBS) pools and use the funds to
make payments to investors who contractually own the rights to the cash flows from the
mortgages in the pool. Fannie Mae usually requires that the servicer advance payments of loan
principal and interest for up to 12 months, even if a borrower is in arrears. Freddie Mac only
requires that servicers advance interest-only payments for up to four months.
The new changes reduce the required advance period under Fannie Mae mortgages from 12
months to four months. This aligns the advance periods for all Fannie Mae and Freddie Mac
single-family mortgages. The new policies apply to all single-family mortgages backed by Fannie
Mae or Freddie Mac and to all servicers, regardless of type or size.
While Fannie and Freddie usually buy loans more than four months in arrears out of MBS pools
to replace them with performing loans, the FHFA has instructed the GSEs to treat loans in
COVID-19 forbearance as if they were subject to temporary natural disaster relief, which would
allow the loans to remain in the MBS pool for the period of forbearance. The change in
treatment reduces liquidity demands on the two government-sponsored enterprises (GSEs).
Also, as of April 22, FHFA announced that Fannie and Freddie would purchase mortgages that
have gone into forbearance almost immediately after closing. FHFA had previously treated such
loans as ineligible for purchase. Mortgages originated between February 1, 2020, and May 31,
2020, are eligible for purchase. Mortgages cannot be more than 30 days delinquent. The GSEs
will price these purchases to account for the increased risk of the mortgage in forbearance. By
relaxing mortgage purchasing standards, FHFA hopes to encourage mortgage origination in a
slow credit market, in which servicers are unwilling to originate mortgages for fear that GSEs
may not buy them.
Through the CARES Act, the government made forbearance available to all borrowers with
federally backed single-family or multi-family mortgages. The forbearance period for single-
family mortgages can extend as long as a year. As of April 19, the share of loans in forbearance
rose to 6.99%, up from 0.25% on March 6. Industry officials expect forbearance requests will
continue to rise with unemployment. As COVID-19 continues to depress demand and
employment, it remains unclear when homeowners in forbearance may be able to resume
mortgage payments. The Mortgage Bankers Association estimates that in a worst-case scenario,
servicers might need to fund as much as $75-100 billion in advances.

Though these changes in regulation provide a welcomed and needed reprieve for mortgage
servicers, servicers continue to push for a mortgage liquidity facility to ease strain on cash flows
during the forbearance period. Beginning in late March, many called for the Federal Reserve to
set up a mortgage liquidity facility to ease the liquidity pressures on mortgage servicers that
emerged as a result of the CARES Act. On April 8, a bipartisan group of senators explicitly
requested that the Federal Reserve set up a mortgage liquidity facility, something the central
bank has resisted doing. Mortgage experts believe that the Federal Reserve will create a funding
facility, but not until there is a meaningful increase in forbearance activity.

FHFA Allows Payment Deferral for Forbearance Payments While Extending
Foreclosure and Eviction Moratoria
By Vaasavi Unnava
Original post here.

On May 13, the Federal Housing Finance Agency (FHFA) announced that homeowners who take
advantage of COVID-19 mortgage forbearance will have the option to defer payment of the
missed amounts until the home is sold or refinanced, or the mortgage matures, once they return
to making their normal monthly mortgage payments. The next day, the FHFA announced an
extension of its foreclosure and eviction moratoria to June 30.
The CARES Act, passed in March, instituted an optional 180-day moratorium period, beginning
on March 15, for payments on any federally-backed mortgage in response to businesses’ rapid
and large furloughs of workers due to social distancing and isolation orders. The 180-day period
can be extended for an additional 180 days, for up to a year of forbearance.
The ability to miss mortgage payments provided much-needed relief to homeowners. However,
the prospect of widespread non-payment raised liquidity concerns for mortgage servicers who
service mortgage-backed securities (MBS) backed by Fannie Mae, one of the two government-
sponsored enterprises (GSEs) that support the secondary market for mortgages. Servicers of
Fannie Mae securities were responsible for covering 12 months of payments to MBS investors
when borrowers have missed mortgage payments.
To help servicers, the FHFA reduced the number of months of advances to MBS pools that
mortgage servicers with Fannie Mae loans were responsible for. Rather than the original 12
months’ payments for mortgages in arrears, the FHFA required servicers to pay four months’
payments, the same number of payments that servicers with Freddie Mac loans were
responsible for.
However, as social distancing guidelines are extended and few Americans return to work, many
homeowners may not be able to soon restart their mortgage payments or pay the deferred
amounts, which may continue to increase as forbearance continues.
In response, the FHFA announced an option for homeowners to defer repayment of amounts
not paid pursuant to the mortgage forbearance. Under this policy, borrowers who can return to
normal mortgage payments can pay off unpaid forbearance balances when the home is sold, the
mortgage is refinanced, or when the mortgage loan matures. Fannie Mae and Freddie Mac will
offer this option on their mortgages beginning July 1, 2020.
Referred to as “payment deferral” by the FHFA, this new alternative is part of a range of options
available to borrowers who take advantage of the forbearance. On April 27, the
FHFA announced it would not require lump-sum payments at the end of forbearance. Instead, it
proposed that borrowers could set up repayment plans for the forbearance amounts, modify the
loans so that the missed payments are added to the end of the mortgage, or modify the loans so
that they have a reduced monthly payment. Now, borrowers can pay the entire missed amount
at sale, refinancing, or maturity. However, the choice of payment plan will require agreement
between the servicer and borrower.

As mortgage servicers are no longer responsible for making more than four months of payments
into mortgage pools, Fannie Mae and Freddie Mac will have to fill the funding gap for the
remaining duration of forbearance. Freddie Mac wrote in its 10-Q statement, “we expect to
advance significant amounts to cover principal and interest payments to security holders for
loans in forbearance in the coming months. … We had a $1.2 billion provision for credit losses in
1Q 2020 due to our forecast of higher expected credit losses from our single-family credit
guarantee portfolio as a result of the pandemic, but these estimates are subject to significant
uncertainty and may increase substantially in the future depending on the depth and severity of
the economic downturn caused by the pandemic.” Fannie Mae and Freddie Mac currently
account for 62% percent of the market for first-lien mortgages, according to the Urban
Institute.
Other agencies are following similar strategies. In April, Ginnie Mae expanded its Pass-Through
Assistance Program (PTAP), advancing principal and interest payments for mortgage servicers
whose loans are in forbearance. Under the COVID-19 PTAP extension, issuers may request
PTAP assistance once per month to cover missed principal and interest payments to MBS
investors.
The Veterans Administration (VA) also allowed homeowners to make missed forbearance
payments at the end of the loan, rather than immediately at the end of forbearance. In that case,
the balloon payment will be non-interest bearing. Homeowners with VA-backed loans can also
make modifications to their loans or set up a repayment plan, as established under the CARES
Act.
The Federal Housing Administration (FHA) has also provided repayment options to
homeowners. Homeowners can defer paying forbearance balances until the mortgage is paid off.
In requesting forbearance, homeowners authorize mortgage servicers to advance funds on their
behalf, creating a partial claim: an interest-free subordinate mortgage on the property that
homeowners pay off once the original mortgage is paid off.
The Mortgage Bankers Association (MBA) welcomed the FHFA policy changes, saying that they
improved efficiency in the mortgage process. Though the current FHFA foreclosure and eviction
moratorium would have expired on May 17, on May 14, the FHFA announced an extension until
at least June 30. As of May 3, 2020, the share of loans in forbearance rose to 7.91%, up
from 0.25% on March 6th. The MBA estimates that in a worst-case scenario, servicers and GSEs
might need to fund as much as $75-100 billion in advances.
Though talks to privatize the two GSEs continued as late as February, on May 20, FHFA
Director Mark Calabria said that the two GSEs should hold $240 billion in capital before exiting
government conservatorship--a figure far larger than the current $23 billion in capital they
collectively hold. If forbearance continues for an extended period of time, it’s unclear whether
Fannie Mae and Freddie Mac will need to procure funding to continue making payments to MBS
pools for forborne mortgages. With the two agencies still under government conservatorship, it
is possible that additional funding would come from the Treasury since, pursuant to the Senior
Preferred Stock Purchase Agreements with the GSEs, Treasury in effect pledged to provide
funding as needed to maintain the agencies’ solvency. Under both agreements, Treasury cannot
commit more than $100 billion to each GSE.

SIGTARP Proposes Using Leftover TARP Funds for COVID Relief
By Vaasavi Unnava
Original post here.

On April 8, the Special Investigator General for the Troubled Asset Relief Program
(SIGTARP) recommended the Treasury use extra funds remaining from TARP’s Hardest Hit
Fund to provide mortgage relief for unemployed homeowners.
The Obama administration established the Hardest Hit Fund (HHF) in 2010, in an effort to
directly aid unemployed homeowners who were struggling with making payments on their
mortgages. The program offered opportunities for unemployed homeowners to receive mortgage
payment assistance, principal reductions, and transitions into more affordable homes. It also
included funds for blight elimination.
“Many people do not realize that TARP housing programs are still open,” Special Inspector
General Christy Goldsmith Romero said. “TARP’s Hardest Hit Fund program could be a strong
tool to help with the recent significant rise in unemployment, as there are already existing
infrastructures in 19 states that could be quickly employed.”
The Treasury originally targeted HHF to serve five states, but as the effects of the global
financial crisis spread, it expanded the program to serve 18 states and the District of Columbia
with $9.6 billion in funding. Treasury selected eligible states based on whether state
unemployment rates exceeded the national level or home prices in the states decreased by more
than 20 percent during the GFC; it’s unclear whether the states eligible to administer the
program would change during the present crisis. The program is administered on the state level.
Approximately $579 million of the funding is still available through 2022.
Potential COVID relief could also include unspent TARP funds from other housing programs,
such as the $4.3 billion in unspent funds for the Home Affordable Modification Program
(HAMP) and other mortgage programs. The Treasury has already moved $2 billion in funding
from HAMP to HHF, rather than simply deobligating the funding.
The targeted assistance intends to provide states with the flexibility to aid homeowners in the
ways they need on a local basis. However, some found a lack of take-up in such housing relief
programs. Barriers to entry included multiple requirements for applications from local agencies
and long distances to application centers from homes. Additionally, the program has faced
issues managing the spending of local offices. In 2017, a report found $3 million in wasted HHF
funding, which SIGTARP noted resulted from excessive spending on the state level and lack of
accountability on the federal level.
As the pandemic continues and few Americans return to full-time jobs, it’s unclear whether the
existing fiscal stimulus will be enough to help many individuals through a period of reduced
employment or unemployment while businesses struggle to keep afloat. Federal Reserve
Chairman Jay Powell has repeatedly called for additional fiscal spending, warning of a longer
period of weaker economic growth than originally expected. Utilizing existing TARP allocations
would enable the Treasury to provide more fiscal relief without waiting for an additional
stimulus package.

Most recently, the Federal Housing Finance Agency also responded to homeowners’ troubles
making mortgage payments, creating an opportunity for homeowners to defer forbearance
payments until the end of their mortgage, or at refinancing or sale.

Multinational Organizations
Multinational organizations comprise the IMF, the World Bank, the European Union, the G-20,
and other various regional multilateral development banks. These organizations provide
programs and financing facilities to assist governments and the private sector in responding to
the COVID-19 crisis. Actions of multinational organizations include loans, grants, guarantees,
forbearance, and technical assistance. Many of these actions tend to target vulnerable countries
and populations around the world.

Analysis
Multinational Organizations’ Efforts to Assist Countries through COVID-19

crisis
By Aidan Lawson, Manuel Leon Hoyos, and June Rhee
The International Monetary Fund (IMF), World Bank, and other multinational
organizations have announced plans to make hundreds of billions of dollars available to
emerging markets in response to the COVID-19 crisis. But their own experts have said these
funds will probably be insufficient, and they have collectively released only a small fraction of
that amount so far.
Since March, the IMF has doubled the access limit to its existing emergency loan programs,
whose demands could reach up to $100 billion, and launched a new liquidity line to help
countries meet balance-of-payments needs. The European Stability Mechanism has announced
plans to provide €240 billion to help its members with support in financing healthcare, cure and
prevention related to the COVID-19 crisis. Meanwhile, the World Bank and other multilateral
development banks have announced more than $250 billion in COVID-19-related programs.
While resources are being deployed through credit lines, expanded lending arrangements,
and support to developing countries, multinational organizations will require additional
resources through increased contributions or additional debt issuances to adequately respond to
the economic damage caused by the pandemic (see the YPFS reports here). Table 1 shows the
amounts available and deployed in response to the COVID-19 crisis under each organization. It
is not meant to be exhaustive and will continue to be updated.
This post discusses different efforts by multinational organizations set forth thus far in response
to the COVID-19 crisis and highlights the key elements in these efforts that ensure the support
adequately meets the needs of the most vulnerable member countries facing the global
pandemic.
1. Purpose: what is the mission and mandate of different multinational organizations?
2. Form of action: loan, grants or forbearance? Other forms of action?
3. Size: how do you determine the size of assistance ensuring a country’s needs are
covered?
4. Funding for programs: how do multinational organizations fund these assistances?
5. Speediness: how does assistance reach member countries in a timely manner?
6. Eligibility: who is eligible for support – i.e. governments or private entities?
7. Term: how long is the assistance for?
8. Limitations and other conditionalities: are there conditionalities and if there are, what
conditionalities accompany the assistance?

9. Coordination and cooperation: how are different multinational organizations
coordinating and assisting their efforts?
10. Post-crisis plan: do these actions consider means to rebuild the economy after the crisis
has ended?
Table 1: Multinational Organization Resources for COVID-19 and Deployment
Multinational Available Resources Deployment

Organization
(calculated based on YPFS
Resource Guide as of April 28,
2020 )
International Monetary $1 trillion (current total lending capacity of the IMF, $17.6 billion in emergency
Fund (IMF) including amounts already allocated. The IMF allows financing, grants and
augmentation and/or rephasing of existing arrangement augmentation of existing
to respond to COVID-19 crisis) arrangements
European Stability €240 billion N/A (expects to open June 1)

Mechanism (ESM)
Multilateral Development Banks
World Bank Group $160 billion will be made available in the next 15- $2,73 billion from fast-track
months
$2.3 billion from broader
($14 billion fast-track package) resources and redeploying
existing financing
European Investment €25 billion guarantee €16 million (€11 million to

Bank (EIB) outside EU)
€5.2 billion to EU response for outside EU (part of €20
billion Team Europe response to support partner
countries)
European Bank for €21 billion €162.5 million

Reconstruction and
Development (EBRD)
Asian Development Bank $20 billion $5.1 billion

(ADB)
Inter-American $12 billion $99 million

Development Bank (IDB)
Asian Infrastructure $10 billion $355 million

Investment Bank (AIIB)
African Development $10 billion $50 million

Bank (AfDB)
Source: Authors’ analysis

1. PURPOSE
The IMF's mandate is to ensure the stability of the international monetary system. This includes
the system of exchange rates and international payments that enables countries to transact with
each other, and was extended to include all macroeconomic issues relating to global financial
stability in 2012. Its main activities to fulfill this mandate consists of (i) economic surveillance,
(ii) lending, and (iii) capacity development. The main focus of the IMF’s COVID-19 response has
been lending, with a focus on solving balance of payment problems to help rebuild international
reserves, stabilize currencies, continue paying for imports, and restore conditions for strong
economic growth.
The ESM’s purpose is to financially assist euro area countries if it is necessary to protect
financial stability of the entire Euro area. Additionally, the European Investment Bank (EIB) is
the lending arm of the EU, promoting equality for EU citizens and helping the economy in
developing member states.
On the other hand, the World Bank Group and other multilateral development banks promote
long-term economic development and poverty reduction. The International Bank for
Reconstruction and Development (IBRD) and the International Development Association (IDA)
form the World Bank. The World Bank, together with three other organizations - the
International Finance Corporation, the Multilateral Investment Guarantee Agency and the
International Centre for Settlement of Investment Disputes - makes up the World Bank
Group. The IDA focuses on the world’s poorest countries, while the IBRD assists middle-income
and creditworthy poorer countries.
2. FORM OF ACTION
Actions of multinational organizations include loans, grants, guarantees, and forbearance. As
the IMF mainly focuses on solving balance of payment problems, it provides medium-term loans
and grants. For example, the IMF’s Rapid Credit Facility (RCF) and Rapid Financing Instrument
(RFI) disburse emergency loans to meet balance of payments needs and the Catastrophe
Containment and Relief Trust (CCRT) provides grants for debt relief so a country has enough
resources to meet exceptional balance of payments needs created by disasters rather than having
to assign those resources to debt service.
During the COVID-19 crisis, the IMF has also established a Short-term Liquidity Line (SLL),
which provides 12-month repurchase obligations to serve as a revolving international liquidity
backstop. The SLL builds on the framework of the Short-term Liquidity Swap (SLS)
discussed by the IMF Board in 2017. At the time in 2017, the SLS did not secure consensus
necessary for implementation.
The ESM provides a credit line designed to serve as an insurance for member countries. If a
member country applies for the credit line, funds do not necessarily have to be drawn.
The European Commission’s Coronavirus Response Investment Initiative (CRII) allows member
states to hold the unspent pre-financing by the European Structural and Investment Funds
(ESIFs) for 2019 and this provided the member states with an immediate liquidity buffer of €8
billion. Normally, the member states would have to reimburse the unused pre-financed ESIF
funds by the end of June 2020. Additional amounts are also available for member states.

Multilateral development banks, including the World Bank, generally have two major lending
windows. One is to provide assistance on market-based terms, in the form of loans, equity
investments, and loan guarantees. For example, the ADB provides loan guarantees to partner
financial institutions to support supply chains. The other is to provide concessional assistance at
below market-based terms, in the form of loans and grants.
Additionally, the IMF and the World Bank called for a standstill of debt service to official
bilateral creditors for the world’s poorest countries and the G-20 responded with a plan to allow
requests for forbearance to suspend repayment starting on May 1. The World Bank also called
on private creditors to participate in the initiative on comparable terms and asked the IMF to
review the debt challenges of middle-income countries and explore solutions to fiscal and debt
stress in those countries on a case-by-case basis. For further discussion on debt challenges of
emerging markets, see this YPFS blog post.
3. SIZE
The IMF has doubled the access limit to its two existing emergency facilities, the RCF and
RFI, in response to the COVID-19 crisis and it projects that the demand could be as high as
$100 billion. The IMF determines the size of individual assistance using quotas, which are
broadly based on a country’s relative position in the world economy. In response to urgent
COVID-19 related financing needs, the IMF increased the access limit for the RCF. Normally,
the facility is limited to 50% of a member’s quota per year and 100% of quota on a cumulative
basis, but the IMF temporarily increased the limit from 50% to 100% of quota per year and from
100% to 150% on a cumulative basis. The higher access limits are scheduled to apply until
October 5 and may be extended by the Board. Regardless of the increase, this assistance is still
based on quotas and not on the need of a country. This may mean countries in dire need of IMF
assistance may not be able to receive the necessary amount.
On the other hand, for the IMF’s FCL, there is no cap on access; support is based on the
member's actual or potential balance of payments needs. For more information on the size of
existing IMF measures, see Table 2 below.
The World Bank has vowed to make $160 billion available for the next 15 months, including $14
billion of fast-track financing. Support to an individual country under the IBRD’s Catastrophe
Deferred Drawdown Option is limited at $500 million or 0.25% of GDP.
The ESM grants 2% of the respective member states’ GDP as of end-2019 under its pandemic
credit line. If all 19 member states were to draw from the credit line, this would amount to a
combined volume of around €240 billion.
The ADB’s Supply Chain Finance Program determines the amount of funds partnering financial
institutions will receive based on their “risk appetite[s], presence in [Developing Member
Countries], and monitoring capabilities.” The EU Solidarity Fund (EUSF) provides assistance as
a percentage of total public expenditures on COVID-19-related measures, and successful
applicants can request up to 25% of this funding to be advanced immediately.

Table 2: IMF facilities currently used for COVID-19 crisis
Program Size Term
Rapid Financing Instrument • 100% of quota per year • 1 to 2 years

(RFI)
• 150% of quota on a cumulative basis
Short-term Liquidity Line • 145% of quota per year • 12 months

(SLL)
• Revolving access
Flexible Credit Line (FCL) • No outright limit • 1 to 2 years

• Determined case-by-case
Catastrophe Containment • Approximately $500 million available for • Up to 6 months to 2

and Relief Trust (CCRT) grants to pay debt service owed to the IMF years
Precautionary and Liquidity • 125% of quota (can be extended up to 250%) • 6 months (can be
Line (PLL) for 6 months; or extended once); or
• 250% of quota for the first year and a total of • 1 to 2 years
500% of quota for the entire arrangement
• 500% of quota on cumulative basis
Poverty Reduction and Growth Trust
Rapid Credit Facility (RCF) • 100% of quota per year • 10 years with 5 ½
year grace period
• 150% of quota on a cumulative basis
Extended Fund Facility (EFF) • 145% of quota per year • 4½–10 years
• 435% of quota on cumulative basis
(These limits can be exceeded in exceptional
circumstances)
4. FUNDING
Based on the projected needs of the emerging markets alone, it is clear that further fundraising
efforts may be necessary, despite current efforts to maximize available funding.
The IMF is composed of 189 member countries and member quotas are their main source of
funding. Additionally, the IMF can supplement its resources through the New Arrangements to
Borrow (NAB). Forty higher-capacity members stand ready to lend if member countries
representing 85% of committed funds agree to activate the NAB. The IMF last activated the NAB
during the 2007-09 global financial crisis (GFC). At that time, the US and G-20 led an initiative
to increase the NAB, and the IMF tripled its lending capacity to $750 billion. Under the CARES
Act passed in the US to cope with the COVID-19 crisis, the Treasury may expand the NAB it can
provide to the IMF through loans for up to $28.2 billion. The leaders of the US response to the
GFC have argued that the US plays a leadership role in ensuring international financial

institutions have enough resources to vigorously address emerging economic and financial
crises.
The third line of defense for the IMF are Bilateral Borrowing Agreements (BBA), providing
additional resources that will only be drawn “after resources from quotas and the New
Arrangements to Borrow are substantially used.” Currently, 40 members have agreed to
contribute to the BBA; activation requires the approval of creditor countries whose
contributions represent 85% of the total. The Board approved on March 31 a framework for a
new round of bilateral borrowing by the IMF from January 1, 2021, and this helped the IMF
maintain its lending capacity of $1 trillion.
Lastly, concessional lending and debt relief for low-income countries are financed through
separate contribution-based trust funds. For example, the IMF’s CCRT was able to extend its
capacity after the UK, Japan, Germany, Singapore, the Netherlands and China pledged
additional contributions. The IMF hopes to increase the commitment to $1.4 billion. Figure 1
provides an overview of the IMF’s lending capacity at the end of March.
Figure 1. IMF lending capacity ($ billions, end-of-March 2020)
Source: IMF & Authors’ analysis

While the IMF reports that total lending capacity sits just shy of $1 trillion, the amount readily
available for lending is lower. The IIF calculates that the IMF has $270 billion readily available
and can access an additional $508 billion if members agree to activate extraordinary
resources. Another calculation concludes that $787 billion is the maximum lending capacity as
of March 20 due to the possibility of borrowings by members whose quota is expected to be
available for lending and uncertainty around continued availability of funds from borrowed
sources.

The ESM’s current lending capacity is €410 billion and the pandemic credit line is expected to
take up less than €240 billion. It is also planning to issue social stability bonds to finance this
credit line. The ESM has paid-in capital of €80 billion from the 19 member countries but this
cannot be used to make loans. With this backing from member countries, the ESM raises
money from the financial markets to provide liquidity assistance to its member countries.
Multilateral development banks raise funding from international capital markets to make non-
concessional loans. They are backed by shareholder member governments and thus are able to
raise funding at very low market rates. For example, the World Bank’s IBRD, which lends mostly
to middle-income developing countries, raises most of its funds from issuing bonds in the
capital markets. Additionally, the ADB sold 2-year and 5-year global benchmark bonds in the US
dollar bond market to facilitate its capacity and enhance its liquidity in responding to the
COVID-19 crisis. The AfDB raised $3 billion by selling a Fight COVID-19 Social Bond, which was
the largest dollar denominated Social Bond ever launched in the international capital markets to
date. Moreover, they can increase non-concessional lending by increasing all members’ shares
through a general capital increase (GCI). Following the GFC all multilateral development
banks simultaneously increased their members’ capital allocations. For 2020, the US
Congress authorized the country to participate in a World Bank GCI.
On the other hand, concessional lending windows are generally funded by contributions of their
member countries. For example, the World Bank’s IDA, which lends mostly to low-income
countries, is financed by grants from donor nations that are replenished every 3-5 years. They
also transfer some of the net income from their non-concessional loans to help fund
concessional loans and grants. In 2018, however, the IDA started issuing bonds to finance its
concessional programs.
5. ELIGIBILITY
Generally, the assistance is provided to member countries of the multinational organizations.
Different facilities within the organization have different criteria of eligibility. For example, the
IMF’s CCRT is exclusively for the most vulnerable low-income countries, while the SLL is
available to members with very strong macroeconomic fundamentals and track records of strong
policy implementation. Similarly, members eligible for concessional and non-concessional loans
in multilateral development banks have different economic backgrounds.
To be eligible for EU Solidarity Fund (EUSF) assistance, EU member states must sustain
economic damage that exceeds the lesser of 0.3% of gross national income or €1.5 billion. On
the other hand, the ESM’s credit line is available to all EU member countries.
Some multilateral development banks have partnered with financial institutions to support
certain industries. The ADB’s Supply Chain Finance Program provides financing to suppliers in
developing member countries that have minimum 2-year relationships with any buyers they
associate with, and have “solid production and delivery track record[s].” The suppliers obtain
financing through partner financial institutions and the ADB either loans funds directly to these
institutions or provides assistance in the form of a guarantee.
6. SPEEDINESS
Multinational organizations are responding to the COVID-19 crisis by generally relying on
existing facilities and lending arrangements to deploy resources as fast as possible. The IMF is
disbursing its emergency funds mostly through its Rapid Credit Facility (RCF) and Rapid

Financing Instrument (RFI). Both are designed to deploy resources quickly by providing eligible
members with funds where there are urgent balance of payments needs, without the need or
capacity to have a full-fledged economic program.
On the other hand, the World Bank rolled out the Covid-19 Fast-Track Facility on April 2, with
the first group of projects assisting 25 countries amounting to $1.9 billion. The purpose of the
facility is to rapidly reach countries with no established funding line. The World Bank’s
existing Pandemic Emergency Financing Facility was only activated for COVID-19 response
on April 17, which raised criticism for not responding fast enough. This facility was launched in
2016 as an additional source of financing to the world’s poorest countries facing infectious
diseases. It had come under scrutiny when it failed to release funds for a year as the 2018 Ebola
outbreak in the Democratic Republic of Congo killed more than 2,000 people. A major reason
for the delay was that funds can only be released 12 weeks after the World Health Organization
(WHO) publishes its first situation report, and complex criteria including outbreak size, growth
rate, deadlines and death tolls have to be satisfied.
On the other hand, the ADB has revised its policies and business processes “to respond more
rapidly and flexibly to the crisis.” For example, it streamlined internal business
processes and widened the eligibility and scope of various support facilities.
7. CONDITIONALITIES AND LIMITATIONS ON THE USE OF FUNDING
The IMF’s facilities used for emergency disbursement of COVID-19 funding do not have
conditionalities. The Flexible Credit Line (FCL) and RFI provide resources without on-going
conditions and RCF support comes without ex-post program-based conditionality or reviews.
However, only two disbursements are allowed under the RCF in any 12-month period and
repeated use may trigger transition into the Extended Credit Facility, which is a medium-term
support for low-income countries with some conditionalities.
IMF conditionality in the past has raised concerns. A study in 2007 found that “a significant
number of structural conditions are very detailed, and often felt to be intrusive and to
undermine domestic ownership of programs.” Since then, the IMF has reformed its rules around
its lending to do away with “hard” conditionality. Hard conditionality for all IMF loans was
phased out by May of 2009.
The ESM’s Pandemic Support Credit Lines utilize the existing Enhanced Conditioned Credit
Lines (ECCL). The ECCL typically requires members accessing the credit lines to adopt specific
measures, but for the pandemic support, fewer conditions exist.
Most programs, however, prescribe and limit the usage of provided funds. For example, the
ESM only allows countries to use the Pandemic Support Credit Lines to support direct and
indirect healthcare, cure, and prevention costs due to the COVID-19 crisis. ESIFs generally have
distinct investment objectives that limit the uses of their funding, but the CRII eased
enforcement of these “thematic objectives” to facilitate a broader range of assistance.
8. TERM
Depending on the mandate of the organization and the purpose of the program, the term of the
loan varies. The World Bank and other multilateral development banks have mandates
that promote long-term economic development and poverty reduction. For example, the World

Bank provides long-term concessional loans with maturities between 30 and 40 years and
additional grace periods ranging between 5 and 10 years for low-income countries.
On the other hand, the IMF, with its mandate to ensure the stability of the international
monetary system, generally extends mid-term loans for eligible members. For more information
on the term of existing IMF measures, see Table 2. The IMF’s SLL, which aims to be an
international liquidity backstop, provides revolving funding through a 12-month repurchase
obligation and is only available for member countries with very strong macroeconomic
fundamentals and strong policy implementation records that are experiencing moderate capital
flow volatility.
The ESM loans under the pandemic credit line currently do not have a limit set on the term. In
a recent interview, its managing director stated that there is flexibility around the maturity for
these loans, more so than for IMF loans. The amended ESM treaty, the discussion of which was
halted by the COVID-19 crisis, had sought to impose a maximum average maturity of five years.
The EU’s macro-financial assistance program to 10 neighboring countries operates in tandem
with and to complement IMF disbursements to these countries. Therefore, this program will
only make two disbursements of loans with shorter terms than those extended by the IMF.
9. COORDINATION AND COOPERATION
Multinational organizations consult and coordinate their response to a crisis. The IMF and the
World Bank continue to issue joint statements. The G-20's debt relief was a response to their
joint request and they are now urged to cooperate further in providing mechanisms to
coordinate this standstill and ensure that the associated debt relief is directed towards pandemic
funding.
The EU’s macro-financial assistance program operates to complement IMF disbursements, as
seen above. Additionally, in formulating country-level responses, the ADB states that it
continues to prioritize close collaboration with the IMF, the World Bank, and other bilateral and
multilateral development partners. These partnerships include not only co-financing projects
but also setting overall strategies responding to the COVID-19 crisis. Furthermore, in its private
sector operations, the ADB collaborates with the International Finance Corporation,
the European Bank for Reconstruction and Development, and other development finance
institutions and reports that the frequency of communication has been stepped up during the
COVID-19 crisis.
Further collaboration and coordination also goes beyond organizations concerning economic
development and financial stability. Due to the nature of the pandemic, these institutions
are closely coordinating and exchanging information with the United Nations, including the
WHO, to ensure alignment in addressing the COVID-19 crisis.
10. POST-CRISIS RECOVERY PLAN
The IMF has yet to announce specifics but its managing director recently acknowledged the
importance of considering how to avoid a prolonged recession emerging from the pandemic. For
emerging economies, she said the IMF envisions that these measures will include regular
lending instruments, including those of a precautionary nature. She acknowledged that this may
require considerable resources and stands ready to deploy its full lending capacity and to

mobilize all layers of the global financial safety net. For the poorest members, the IMF considers
more concessional financing.
She said she was also aware that more lending may not always be the best solution for every
country; adding to high debt burdens may lead members down an unsustainable path.
Therefore, the IMF is contemplating innovative approaches in collaboration with other
multinational organizations and the private sector.

The Limits of the G20's Debt Service Suspension Initiative
By Alexander Nye and June Rhee
Original post here.
As of May 1, G20’s Debt Service Suspension Initiative (DSSI) for 76 International Development
Association (IDA) countries and least developed countries (LDCs) has become operational.
However, it remains unclear whether private-sector creditors will collaborate on such efforts for
those countries and the question on what to do about the much larger debts of low- and middle-
income countries is still open.
On April 15, the G20 announced the DSSI, which is an eight-month official bilateral sovereign
debt payment suspension if requested by International Development Association (IDA)
countries and least developed countries (LDCs) that are current on their International Monetary
Fund (IMF) and World Bank (WB) obligations. The DSSI allows 76 IDA countries and Angola to
suspend principal or interest payments on their debts to G20 members from May 1 through the
end of 2020.
Once the eight months elapse, the countries will have to pay the deferred principal and interest
over the three years following a one-year grace period. This deferral is net present value neutral,
and therefore, does not reduce the total payment debtors will make to participating creditors.
The Paris Club, the informal group of official creditors for negotiating sovereign debt
restructuring, has endorsed the DSSI and is trying to secure China’s participation.
The G20 also urged private-sector creditors to participate in this initiative on comparable terms.
The Institute of International Finance (IIF) is leading the discussion on voluntary participation
in the DSSI. The IIF is a global association for the financial industry that has historically served
the London Club, the once-powerful informal committee of commercial creditors that seeks to
build consensus for restructuring syndicated loans to sovereigns.
Some caution that these efforts may not be enough to address the true debt-relief needs of many
low and middle income countries struggling to deal with COVID-19 crisis. Many of these
countries simply do not have the fiscal capacity to weather the storm and have a mix of creditors
that make them especially vulnerable.
This post highlights the following additional actions that may help to enhance meaningful
assistance to the countries in need:
• Create incentives for a wider range of creditors to provide similar suspension as the G20
announced.
• Extend the G20 standstill to more middle-income countries (non-International
Development Association (IDA) countries).
• Address other problems associated with a prolonged standstill.
Overindebtedness in the developing world was one of the main concerns of 2019 IMF Spring
Meetings. As COVID-19 crisis unfolds, both low and middle-income emerging markets have to
grapple with increasing fiscal burdens as well as investors’ flight to safety.

What does G20 standstill amount to?
The DSSI is estimated to free up about $11 billion in funds ordinarily used for paying principal
and interest to bilateral official creditors, in addition to $7 billion from multilateral official
creditors. However, this is only a portion of the debt payments these 77 countries will be facing
through the end of 2020. The uncertain nature of the COVID-19 crisis means that it is difficult
to determine whether countries’ current sovereign debts are sustainable. A wave of sovereign
defaults could be catastrophic for those countries. Although the IMF has helped countries
through such temporary crises, it does not have enough resources to deal with the problem
alone.
Additional actions needed
Wider participation in standstill
The IIF estimates external debt service payments across the DSSI-eligible countries to be about
$35.3 billion this year, as seen in Figure 1 below. It says that private-sector creditor participation
would free up an additional $13 billion. The IIF currently is discussing collaboration with
private-sector creditors. But it acknowledges that negotiating private-sector participation will
likely be a lengthy process due to the DSSI’s abstract terms and the unique position of each
debtor country.
Figure 1
Source: IIF Weekly Insight: G20 Calls Time Out on Debt Service
Some propose that the G20, by creating a “Sovereign Debt Coordination Group consisting of
sovereign borrowers and representatives of the official and private creditor community,” could

make restructuring within the current system more workable. Some scholars suggest that
comprehensive suspension of debt obligations that compels private-sector creditors to accept
less than they would receive in a restructuring should be justified on the grounds of necessity.
They propose a mechanism by which the private-sector participation is mandatory and
immediate through a blanket restructuring of terms. This stands in contrast to the voluntary
participation pursued by the IIF, in which creditors would agree on suspension after lengthy
negotiations.
However, the contract-by-contract-approach the IIF supports means at least a minority of these
creditors may become holdouts. A portion of those holdouts may even litigate, further
complicating restructuring, as seen in the early days of the IMF’s Heavily Indebted Poor
Countries initiative. Enforcing a blanket standstill, on the other hand, could cause credit rating
downgrades, shutting these countries out of international capital markets and potentially
creating incentives for them to default on their obligations to private creditors.
Narrow DSSI-Eligibility
Middle-income countries have significantly more external debt (Figure 2) and are expected to
pay $422.9 billion in debt service in 2020. Only 22% of this is to official creditors (Figure 1).
These countries, like the DSSI-eligible countries, may also be quickly running out of fiscal
capacity to deal with the COVID-19 crisis. Capital outflows from emerging markets seem to
have stabilized, after foreign investors took around $100 billion out of emerging market stocks
and bonds in the first quarter. The IIF projects that emerging markets may find it hard to
borrow large sums internationally this year. It also expects emerging markets to run
unprecedented fiscal deficits this year.
Figure 2

Source: Bolton et al. 2020
Moreover, a wave of defaults by emerging market economies may pose a threat to the financial
stability of advanced economies. The last time a large portion of the sovereign debt market was
at risk of default was during the Latin American debt crisis of the 1980s. Large American bank
exposures to these debts triggered financial stability concerns in the US.
However, coordinating a DSSI-like action across all creditors will be even more complicated for
middle-income countries. As seen in Figure 1, these countries have a heavier reliance on private-
sector creditors, including bonds. This is especially the case for larger emerging market
economies. Bonds can have thousands of holders in a given issue and, in spite of collective
action clauses (CACs) becoming more common, it can be extremely difficult to negotiate
standstills on an individual basis. CACs are structured to help coordinate the actions of holders
of a specific bond issue and countries may have multiple bond issues, raising another
coordination problem. Investors have also been able to amass large enough positions in specific
bond issues to block restructurings. Investment funds holding emerging market bonds may
again contemplate holdout strategies.
Another complicating factor in expanding eligibility to middle-income countries is that the IIF’s
effort to convince private-sector creditors to restructure DSSI debt is based on assurances that
eligibility will not be extended beyond the current list of countries. In facilitating the discussion
among private-sector creditors to participate in the DSSI, the IIF said that “comments from IMF
and Paris Club officials noting that there is no intention to make the DSSI broader in scope have
also been helpful.”
Addressing other problems
The purpose of the standstill arrangements is to help debtor countries free up resources to
respond to the current pandemic. Creditor states are seeking to create a mechanism to ensure
the money freed up from suspension of debt payments will be used for that purpose.
One proposal is to create a central credit facility (CCF) at the World Bank. The CCF would allow
a country requesting temporary relief to deposit stayed interest payments to use for emergency
funding to fight the pandemic. Multilateral institutions would monitor it to ensure that
payments are used for emergency funding. The CCF would mix payments to the CCF with aid
money from international organizations. To reassure creditors, it would be considered senior to
other debt in any debt restructuring. The CCF has some academic support and has
received some positive press. Versions of the proposal have been published by the UN’s
ECOSOC and a number of academic institutions, but it is still not clear whether governments
will adopt the policy.
Currently, there is no mechanism like corporate or individual bankruptcy for sovereigns. There
were attempts in the past to have a sovereign resolution regime, such as the IMF’s Sovereign
Debt Restructuring Mechanism (SDRM) proposal in 2002. That proposal failed to obtain
necessary support due to differing views on various design features. The SDRM was proposed in
light of a development of a “diverse and diffuse creditor community posing coordination and
collective action problems” for sovereigns. Some scholars suggest that a broader reform of the
sovereign debt restructuring regime may also be necessary to deal with the problem of holdout
creditors.

In the 1930s, Herbert Hoover’s 1931 debt moratorium was followed by a wave of sovereign
defaults. Defaulting countries ultimately recovered from the Great Depression faster than those
that resisted default. Nonetheless, defaults contributed to a “hiatus in private foreign lending of
more than twenty years during which few countries had access to commercial financing outside
their own borders.” Private lending to sovereigns, as well as discourse on sovereign debt
restructuring, had only begun to return in the 1970s, and sovereign bonds only returned to
prominence after the 1989 Brady Plan. A wider international effort in responding to sovereign
debt may become necessary as the COVID-19 crisis unfolds globally.

Multilateral Development Banks in Latin America and the Caribbean
Original post here.

The Americas have become the new epicenter of the COVID-19 pandemic. The crisis has
exacerbated the fall in exports from Latin America. South America is one of the regions with
the largest losses in working hours.
Multilateral development banks in Latin America and the Caribbean led by the Inter-American
Development Bank (IDB) have made over $40 billion available to address the crisis. This adds to
funding facilities available through the International Monetary Fund (IMF) and the World Bank
(see YPFS blog post on overall efforts by multinational organizations).
The IDB's 2020 Macroeconomic Report, published in April, projects that the region of Latin
America and the Caribbean will experience a negative contraction of between 1.8% and 5.5% of
GDP in 2020. The World Bank expects a deeper contraction of 7.2%, a far deeper recession than
during the 2007-09 global financial crisis. A recent presentation from the IDB pointed out that
the region is in a notably weaker position than it was in 2008.
To respond to the crisis, governments are expected to run large fiscal deficits. In regards to
IDB’s resources, its President Luis Alberto Moreno recently stated that “it is going to be a drop
in the bucket compared to the immense needs the hemisphere has.”
Multilateral development banks usually aim to promote long-term economic development,
poverty reduction, and regional integration. In response to the COVID-19 crisis, the IDB focuses
on four main areas: the immediate public health emergency, safety nets for vulnerable
populations, economic productivity and employment, and fiscal policies.
Table 1 lists resources the multilateral development banks have made available in response to
the COVID-19 crisis and their usage as of June 9, 2020.
Table 1: Available resources for the COVID-19 crisis
Multilateral Development Resources Use as of June 9, 2020

Bank
Inter-American Committed $21 billion for Over $14 billion in loans, of which over $2 billion has
Development Bank (IDB) new lending: $12 billion for been allocated to six governments
governments and $7 billion (Argentina, Colombia, Panama, Ecuador, El Salvador,
for the private sector and Belize) and over $12 billion for the private sector.
through IDB Invest—the
private arm of the IDB— Mexico announced $12 billion in loans a year to
SMEs provided by IDB Invest in collaboration with the
focusing on MSMEs.
Mexican Business Council.
Also, up to $1.35 billion
from existing projects can Over $100 million from existing projects was redirected
be redirected by to health initiatives in five countries
governments. (Ecuador, Bolivia, Honduras, Panama and Belize).

For COVID-19, countries
can request up to $90
million or 0.6% of GDP
(whichever is less) through
the recently expanded
Contingent Credit Facility
for Natural Disaster
Emergencies (CCF).
Development Bank for Emergency regional credit Eight countries—Argentina, Bolivia, Colombia,
Latin America (CAF) line of $50 million per Ecuador, Panama, Uruguay, Paraguay, and Trinidad and
country for health Tobago—have accessed the Emergency Credit Line
emergency investments
$2.5 billion Emergency
Credit Line to support and
complement government
fiscal measures
Non-reimbursable
technical cooperation for
up to $400,000 per
country
Central American Bank for $1.96 billion Emergency Over $835 million to three countries
Economic Integration Support and Preparedness (Honduras, Guatemala, Costa Rica)
(CABEI) Program for COVID-19:
Also, $8 million in non-reimbursable funds—$1 million
• $8 million provided for each country of the Central American Integration
in non- System: Guatemala, El Salvador, Honduras, Nicaragua,
reimbursable funds Costa Rica, Panama, Belize and the Dominican Republic.
• Up to $2.1 million
purchase and
supply of medicines
and medical
equipment
• $600 million in
emergency
sovereign loans to
member countries
• $1 billion to support
central banks’
liquidity
• $350 million
Financial Sector

Support Facility for
MSMEs
FONPLATA Development In 2019, total lending Over $100 million disbursed

Bank capacity was over $3 (Argentina, Brazil and Uruguay).
billion, with $883 million
available for lending. Provided $1.1 million in non-reimbursable funds to
purchase medical equipment ($300,00 to Brazil and
$200,000 each
to Argentina, Bolivia, Paraguay, Uruguay).
Caribbean Development Utilizing $347 Over $200 million disbursed ($140 million to borrowing
Bank (CDB) million available for member countries and $67 million to seven Caribbean
funding approved in 2019: countries).
$297 million in loans and
$50 million in grants.
$3 million for medical
equipment in response to
COVID-19.
These resources are generally made available through a combination of existing facilities. Table
2 below provides a summary of facilities that each institution has available to respond to the
COVID-19 crisis.
Source of Funding
Multilateral development banks’ loans and grants to member countries are funded from
member countries’ subscriptions and contributions, borrowings from capital markets, equity,
and co-financing ventures.
Multilateral development banks also raise funding on international capital markets. On April 21,
the IDB, which is rated AAA, launched a $4.25 billion sustainable development bond, its largest
ever, with a 3-year term.
Other recent bond issues include:
• On April 13, the IDB launched the IDB Indonesian Rupiah Sustainable Development
Bond at a 3-year fixed rate, valued at 55 billion Indonesian rupiah ($3.4 million).
• On May 27, the IDB launched an Australian Dollar Sustainable Development Bond with
a 10-year fixed rate, valued at 350 million Australian dollars ($226 million).
• On April 24, IDB Invest launched its largest US dollar benchmark bond of $1 billion to
strengthen support for the COVID-19 response.
• On May 7, CAF issued $800 million in 3-year bonds and on May 27, €700 billion in
social bonds.

Table 2: Facilities and programs used for COVID-19 response
Multilateral Development Bank Facilities
Inter-American Development Public sector support: Ordinary Capital (OC), the Fund for Special
Bank (IDB) Operations (FSO), the Intermediary Financing Facility (IFF), trust funds,
the IDB Grant Facility (GRF), and the recently expanded Contingent Credit
Facility for Natural Disaster Emergencies (CCF).
Private sector support: loans, guarantees or capital market products, or in
conjunction with local institutional investors.
Development Bank for Latin Loans: commercial loans (pre-shipment and post-shipment) and working capital
America (CAF) loans and limited guarantee loans.
Central American Bank for Loans: co-financed loans, structured loans, syndicated loans and A/B Loans,
Economic Integration (CABEI) loans for investment projects, and refinancing.
Credit lines: the Global Credit Line (GCL) to commercial banks and other
financial institutions, the Line to Support the Liquidity Management of the
Central Banks to central banks of CABEI’s founding countries to support
liquidity, and the Credit Line for Decentralized Public Entities and Central
American Integration Institutions to meet working capital needs.
CABEI also offers guarantees and letters of credit.
FONPLATA Development Bank Loans and credit lines.
Caribbean Development Bank Loans and credit lines.

(CDB)
• On April 29, CABEI, with an “AA” rating, executed its largest issuance for a total of $750
million in 5-year bonds. On June 5, it issued $156 million in the Swiss market at a 5-year
term, and $375 million at a 5-year term in the Formosa Asian market with dual listing in
Taipei and Luxembourg exchanges.
In some instances, multilateral development banks are able to attract resources from non-
regional members. For example, in 2019 CABEI welcomed Korea as its seventh non-regional
member with an $450 million investment for a 7.2% stake. Since the COVID-19 crisis, some of
CABEI’s regional borrowing members have received financing from the Korea Development Co-
Financing for Central America. On May 27, the IDB and Sweden established a risk transfer
mechanism in which Sweden will provide a $100 million guarantee to enable the IDB to lend up
to $300 million to Bolivia, Colombia, and Guatemala.
Conditionalities and Limitations
In addition to the IDB’s COVID-19 goals, IDB Invest also prioritizes its lending based on sound
credit fundamentals; environmental, social and financial sustainability; their contribution to the
UN Sustainable Development Goals; and their ability to have a demonstration effect in local
economies.

IDB President Moreno has said that private sector institutions that receive IDB Invest
financing will not be able to distribute dividends.
Selected Country Highlights
Argentina, the third-largest Latin American economy, struggles with a debt crisis. This May, the
country missed a $503 million payment in interest on $65 billion in sovereign debt. It remains
in debt restructuring negotiations with its creditors, with technical support provided by the IMF.
In response to COVID-19, the country has received around $6 billion in financing through
multilateral development banks, including the World Bank, IDB, CAF and FONPLATA.
Ecuador has been hit hard with the fall of commodity prices—particularly crude oil. In April, the
country was able to delay, until August, interest payments of $811 million on part of its
sovereign debt. Carmen Reinhart, recently appointed World Bank chief economist, said the
probability that Ecuador will default on its debt is very high. Ecuador has received financing for
over $1 billion from the IMF, World Bank, IDB, and CAF. On June 4, Ecuador's Deputy Finance
Minister Esteban Ferro said the country still faces a $3.5 billion financing gap.
Venezuela, similarly, has been hit hard by the fall in crude oil prices. On March 15, the
country requested $5 billion from the IMF, but was rejected. In late May, the central bank of
Venezuela sued the Bank of England to release $1 billion in gold reserves after the Bank of
England refused to release its gold reserves.
The largest two Latin American economies, Brazil and Mexico, have seen their currency
depreciate by over 20%. Both central banks have provided extensive measures to support
liquidity (see YPFS blog post on the Bank of Mexico’s actions).

Asian Development Bank Increases Funds for Producers of Critical Medical

Supplies
By Aidan Lawson
Original post here.

On March 12, the Asian Development Bank (ADB) said it would make $200 million available to
companies that make and distribute medicines and medical supplies to fight the coronavirus.
The ADB will disburse this aid through its Supply Chain Finance Program, which was originally
developed in 2012 to “unlock financial resources caught in the supply chain.” Suppliers were
sometimes waiting for up to six months to receive payment from buyers, and the SCFP provides
short-term funding so they don’t have to wait (see here, pp. 3).
The primary objective of the SCFP is to ensure that, as demand increases for medical equipment
and other critical products to fight the coronavirus, suppliers will be able to expand their
production without encountering any supply-chain related disruptions.
The SCPF provides financing to suppliers in developing countries that are experiencing cash-
flow difficulties and unable to access financing elsewhere. Traditionally, these businesses, which
are normally small and medium-sized enterprises (SMEs), faced two obstacles in obtaining
financing: weak financials and lack of collateral (see here, pp. 5). The financing is obtained
through partner financial institutions (PFIs), who receive predetermined amounts of money
from the ADB and then lend it to suppliers.
The program requires PFIs to contribute funding equal to or greater than the amount that the
ADB provides to the supplier (see here, pp. 3). After receiving the commitment to pay for the
goods from buyer, the supplier asks the PFI for the money they would have received from the
buyer, and the PFI finances the transaction so the supplier experiences no disruption. At the
invoice date, the buyer would pay the PFI, who then remits the ADB’s part of the financing (and
fees) back to them. In the event of default, the ADB shares the losses with the PFI servicing the
loan, up to a maximum exposure of 50%, but never exceeding the PFI’s amount. The ADB can
either loan funds directly to PFIs or provide assistance in the form of a guarantee; the term of
either can be up to 180 days. Thus, the facility could provide upwards of $400 million in
financing in one year. With full loss-sharing from PFIs, this amount could be as high as $800
million annually (see here).
Steven Beck, the ADB’s head of Trade and Supply Chain Finance, stated that they were working
to map out “the entire supply chain for these types of goods, including the companies that are
involved at each and every component phase” so that investors would be able to support
companies at all steps of the supply chain (see here). Additionally, he stated that there would be
a substantial increase in the capacity of the ADB’s Trade Finance Program in the near future.

The SCFP takes a buyer-centric approach, assisting suppliers that are often considered
“unbankable” by examining the credit ratings and financial strength of their regular
counterparties, which are often large, corporate buyers. Suppliers can now receive much
cheaper financing since the SCFP’s risk evaluation methods emphasize the strength and
longevity of supply chain relationships between businesses. (see here; here, pp. 5).
Suppliers must be from developing member countries, have minimum 2-year relationships with
any buyers they associate with, and have a “solid production and delivery track record.” Buyers
can be located domestically or internationally and are required to be at least BB rated (or
equivalent). PFIs are required to have a global credit rating of at least A- and a supply chain
finance portfolio rating of at least BB, conduct sound risk management practices, have a default
rate of less than two percent on their supply chain portfolio, and report at least quarterly to the
ADB about their SCFP activities. PFIs would receive varying amounts of funds from the SCFP
based on their “risk appetite[s], presence in [Developing Member Countries], and monitoring
capabilities.” However, the ADB stated that it would “seek to include as many PFIs as
practicable” (see here, pp. 5).
The SCFP is similar in structure to the Automotive Supplier Support Program (ASSP) created by
the U.S. during the Global Financial Crisis. Suppliers of automotive goods found it more difficult
to obtain credit due to the precarious financial positions of and uncertainty surrounding GM
and Chrysler. The ASSP used bankruptcy-remote Special Purpose Vehicles (SPVs)—funded
jointly by the U.S. Treasury, GM, and Chrysler—to purchase receivables from suppliers so they
would experience no supply-chain disruptions. In this case, the SPVs served essentially the same
function as PFIs do for the SCFP, though the SPVs had to take any losses first, whereas PFIs
jointly share any losses (up to a 50%) with the ADB. For further discussion on the ASSP, see
the YPFS case.

The IMF makes funds available in response to the COVID-19 crisis
Original post here.

On March 27, IMF’s Managing Director Kristalina Georgieva revealed that over 80
countries had requested emergency financing from the IMF. The IMF expects the financial
needs of emerging markets will be at least $2.5 trillion, and many of these countries already face
significant burdens of debt.
About 50 of the requests came from low-income countries and over 30 from middle-income
countries. Emerging markets have seen an $83 billion capital outflow, shortages in foreign
exchange liquidity, and declines in commodity prices. The IMF aims to expand its emergency
financing capacity under its existing facilities and is considering the launch of a new short-term
liquidity swap line.
On March 26, Ms. Georgieva asked the G-20 to double the IMF’s emergency financing capacity.
Under the recently passed CARES Act, the U.S. Treasury may expand the New Arrangements to
Borrow (NAB) it can provide to the IMF through loans for up to $28.2 billion. During the 2007-
2009 Global Financial Crisis, through strong efforts by the G-20, the International Monetary
Fund (IMF) tripled its lending capacity to $750 billion. Since then, the IMF has expanded its
mandate to play a more active role in preventing and fighting crises and preserving financial
stability. Currently, the IMF forecasts a global recession in 2020 and a rebound in 2021.
During the current Covid-19 crisis, the IMF is increasing its role. Since March 26, the IMF has
provided emergency financing and disbursed amounts to over ten member countries. In the
IMF’s first press release for COVID-19 emergency financing, in relation to the Kyrgyz Republic,
the IMF stated that it aims to provide a backstop, increase buffers, and shore up confidence. It
also attempts to preserve fiscal space for essential COVID-19-related health expenditures.
The IMF is composed of 189 member countries and its current lending capacity is $1 trillion. A
quota is assigned to each IMF member based on its relative position in the global economy.
Member quotas are the main source for IMF’s members financing. Additionally, through the
New Arrangements to Borrow (NAB), a number of members lend to the IMF and supplement
IMF financing in order to cope with shocks to the global monetary system.
On March 27, the IMF announced an enhancement of the Catastrophe Containment and Relief
Trust (CCRT), which was established in 2015 during the Ebola crisis. The changes expanded the
qualification criteria for the facility, which is available to low-income countries and allows the
IMF to deliver grants for debt relief during catastrophic natural disasters and major public
health emergencies. The IMF asked the stronger members to help replenish the CCRT, which
had only $200 million at disposal. The UK, Japan, and China have already made commitments
to contribute.
The IMF discussed on a conference call on April 1 its available resources to help countries
combat COVID-19. Existing IMF lending facilities include the Flexible Credit Line (FCL), which
is uncapped in principle and provides large-scale financing without policy conditions for
members with sustained track records of strong policy implementation. The Rapid Credit
Facility (RCF) provides financial assistance with limited conditionality to low-income countries

facing an urgent need for balance of payments. And the Rapid Financing Instrument (RFI) is
available to all members facing an urgent need for balance of payments. Under the RCF and
RFI, members are allowed to borrow up to 50% of their quota. The RCF lends at very low
interest rates and provides a longer repayment period. The IMF has said that to be eligible for
emergency financing, members need to commit to target health policies to combat the COVID-
19 pandemic and to remain on a sustainable debt path.
The IMF is considering the launch of a new facility, the Short-term Liquidity Swap (SLS), which
was initially discussed in 2016. This facility would operate similarly to existing central bank
swap lines. The SLS could be launched upon approval of the IMF Board and would be available
for members eligible for the FCL for up to 145% of their quota. This facility would serve
members with short-term capital account volatility to obtain resources on a short-term and
revolving basis.

World Bank Support to Developing Countries
Original post here.

The World Bank (“The Bank”) has deployed a number of programs to support developing
countries during the ongoing COVID-19 crisis. Since March, over 65 countries have received
financial support in amounts ranging from USD 2 million to USD 1 billion. The programs aim to
assist governments experiencing severe fiscal constraints and support healthcare infrastructure
during the pandemic. Overall, the Bank committed to provide up to USD 160 billion in long
term loans and grants to be deployed globally over the next 15 months. This post describes the
channels, size of support, lending conditions and the way governments use funds for different
World Bank programs.
Channel
There are two channels through which the Bank has provided support: through preexisting
programs and through newly established programs. Preexisting programs include
the Catastrophe Deferred Drawdown Option (“Cat DDO”). Cat DDO is a contingent financing
line that allows approved countries to access liquidity “to address shocks related to natural
disasters and/or health-related events.” The program has been used as a channel for immediate
support in Romania, Morocco, Colombia, the Dominican Republic and Samoa. Other programs
were used in countries where public health projects had been previously established. Examples
include the Disease Prevention and Control Project in Armenia, Health Resilience Project in
Lebanon and the Health System Resiliency Strengthening Project in the West Bank and Gaza.
By April 2, the Bank had provided USD 1.7 billion in additional funds to preexisting projects.
The use of established programs as funding channels allowed for immediate support to
participating countries.
To guarantee rapid support to countries with which the Bank had no established funding line,
the Bank rolled out the dedicated Covid-19 Fast-Track Facility (“FTF”) that is expected to deploy
USD 14 billion. The program allows a rapid allocation of funds to countries affected by the
pandemic. The first round of projects, announced on April 2, provided support to 25 countries
for a total of USD 1.9 billion.
Conditions
Countries have received support on different terms through the Bank’s two lending arms: the
International Bank for Reconstruction and Development (“IBRD”) and the International
Development Association (“IDA”). The IBRD provides loans to middle-income or creditworthy
low-income countries based on market rates under its programs, including the Cat DDO
implemented in the current crisis. IDA programs focus on concessional, low to zero interest
loans and direct grants to low-income governments. IDA extends long-term credit with
maturities between 30 and 40 years and additional grace periods ranging between 5 and 10
years. Both the IDA and IBRD have used the newly established FTF to guarantee rapid support
to the governments that need it.
Size

The total amount of funds allocated to a specific country largely depends on the size of its
economy. The programs implemented at the time of writing provide loans and grants for up to
0.5 percent of GDP. Some programs impose an upper bound on the funds that can be allocated
to a specific country. For instance, funding provided through the Cat DDO is limited to the lower
of USD 500 million or 0.25 percent of GDP.
The Bank’s largest program at the time of writing is the IBRD’s USD 1bn loan to the government
of India through the country’s Emergency Response and Health Systems Preparedness Project,
the largest health sector support to India in the Bank’s history. The largest grant has been
provided to the government of Afghanistan with a USD 100.4 million commitment from the
IDA, USD 19.4 million were provided immediately through the FTF.
Use
The Bank emphasizes that under current conditions the support programs are focused on one
objective – saving lives. Many of the recipient countries are in the early stages of the
pandemic; funds are to be used to strengthen healthcare infrastructure and provide emergency
equipment. Funding will cover such measures as: provision of laboratory equipment, personal
protective equipment and portable ventilators, expanding intensive care units, and building
systems to prevent and limit local transmission.
In response to the COVID-19 pandemic, other international institutions are implementing and
extending policies to provide support to member countries. For an overview of different types of
programs, see “International Support for Governments in Response to COVID-19.”

The IMF Expands and Expedites Lending in Response to the COVID-19 crisis
Original post here.

Since March, the International Monetary Fund (IMF) has expanded existing lending programs
and introduced new ones to help countries bear the costs of the COVID-19 crisis. As of April 21,
it had approved a total of $8.7 billion in emergency financing for over 40 member countries, of
the more than 100 countries that have requested assistance. (See the updated list here).
But those outlays represent a small fraction of what the IMF expects countries will need.
Emerging markets will need at least $2.5 trillion in financing needs. The IMF has committed to
utilize its current lending capacity of $1 trillion to support their member countries.
Prior to the crisis, the IMF had various lending facilities to help countries facing temporary
shortfalls in their balance of payments. On April 15, the IMF announced a new revolving credit
line, the Short-term Liquidity Line (SLL), to help eligible countries with moderate short-term
balance of payments needs. It also revamped its Catastrophe Containment and Relief Trust
(CCRT), which helps low-income countries bear the costs of natural disasters and public health
emergencies.
About 50 of the initial emergency requests came from low-income countries; 31 from middle-
income countries. Starting in early 2020, emerging markets have seen large capital outflows,
shortages in foreign exchange liquidity, and declines in commodity prices. In its April 2020
World Economic Outlook, the IMF forecasts a global recession in 2020 of a 3% decline and a
rebound in 2021 of 5.8% economic growth.
Existing IMF lending facilities include:
• The Flexible Credit Line (FCL), which is uncapped in principle and provides large-scale
financing without policy conditions for members with sustained track records of strong
policy implementation.
• The Rapid Credit Facility (RCF), which provides financial assistance with limited
conditionality to low-income countries facing an urgent need for balance of payments.
• The Rapid Financing Instrument (RFI), which is available to all members facing an
urgent need for balance of payments.
Under the RCF and RFI, members are allowed to borrow up to 50% of their quota. The RCF
lends at very low interest rates and provides a longer repayment period. The IMF has said that
to be eligible for emergency financing, members need to commit to target health policies to
combat the COVID-19 pandemic and to remain on a sustainable debt path.
Funds disbursed through April 21 include:
• $2.5 billion for 14 countries under the RCF. The largest recipient is Ghana with $1
billion.
• $5.8 billion for 15 countries under the RFI. The largest recipient is Pakistan with $1.4
billion.

• $240 million for 24 countries under the CCRT. The largest recipient is Guinea with $24.1
million.
April 15 announcements
On April 15, the IMF’s Executive Board approved immediate debt service relief to 25
members under its revamped Catastrophe Containment and Relief Trust (CCRT), which was
established in 2015 during the Ebola crisis. The revamp expanded the qualification criteria for
the facility, which is available to low-income countries and allows the IMF to deliver grants for
debt relief during catastrophic natural disasters and major public health emergencies. The IMF
had asked the stronger members to help replenish the CCRT, which had only $200 million at
disposal. The UK, Japan, and China have already made commitments to contribute.
Also on April 15, the IMF established the Short-term Liquidity Line (SLL). The new facility will
operate on a revolving basis as a renewable backstop for eligible member countries. The design
of the new SLL aims to address potential, moderate, and short-term balance of payments needs.
It provides a reliable and renewable credit line, without ex post conditionality and has a
qualification criteria in-line with the FCL to ensure that the facility is mainly used by members
with very strong macroeconomic fundamentals and track record of strong policy
implementation. The SLL can provide financing for up to 145% of each member’s quota.
Managing Director Kristalina Georgieva said that “the SLL will strengthen further a country’s
liquidity buffers and thus help in managing liquidity pressures. Complementing other
instruments during the current crisis, the facility will fill a critical gap in the Fund’s toolkit and
help to facilitate a more efficient allocation of resources.”
The SLL builds on the framework of the Short-term Liquidity Swap (SLS) discussed by the IMF
Board in 2017. At the time in 2017, the SLS did not secure consensus necessary for
implementation. Although most Directors considered the SLS to be broadly reasonable, a
number of Directors had reservations about some key features that, in their view, “depart
significantly from current Fund principles and policies, and hence warrant further reflection.”
The SLL aims to further support the Global Financial Safety Net (GFSN). The GFSN comprises
international reserves, central bank bilateral swap arrangements, regional financing
arrangements, IMF resources, and market-based instruments. It aims to provide insurance
against crises, supply financing when crises hit, and incentivize sound macroeconomic policies
The SLL has a 12-month repurchase obligation and a fee structure to support its revolving
nature (e.g. 8 basis points to set up). The IMF estimates that overall SLL demand could reach up
to $50 billion.
The IMF is composed of 189 member countries. A quota is assigned to each IMF member based
on its relative position in the global economy. Member quotas are the main source for IMF’s
members financing. Additionally, through the New Arrangements to Borrow (NAB), a number
of members lend to the IMF and supplement IMF financing in order to cope with shocks to the
global monetary system. Under the recently passed CARES Act, the U.S. Treasury may expand
the New Arrangements to Borrow (NAB) it can provide to the IMF through loans for up to $28.2
billion. During the 2007-09 Global Financial Crisis, through strong efforts by the G-20, the IMF
tripled its lending capacity to $750 billion. Since then, it has expanded its mandate to play a
more active role in preventing and fighting crises and preserving financial stability.

IFC Provides $8 Billion in Fast-Track Financing to Private Sector
By Mallory Dreyer
Original post here.

The International Finance Corporation (IFC) will be providing fast-track financing of $8 billion
to support companies impacted by the COVID-19 pandemic. On March 3, the World Bank Group
approved $6 billion in fast-track financing through the IFC. It approved an additional $2 billion
on March 17.
The IFC is the private-sector arm of the World Bank Group. It is the largest private-sector-
focused global development institution for developing countries. It provides loans, equity
investments, and advisory services to over 2,000 clients around the world. The fast-track
financing, which is the first phase of the IFC’s COVID-19 response, allows it to provide
immediate and direct support to existing clients.
Of the $8 billion pandemic response, $2 billion is for the Real Sector Crisis Response Facility,
which the IFC will use to support existing clients with loans or equity investments. The support
will go to companies in the infrastructure, manufacturing, agriculture, healthcare, and services
industries. It will help companies increase working capital, reschedule existing debt, or cover the
cost of delays in project implementation. Instruments under the facility include medium to long-
term senior and subordinated loans and equity, though equity is capped at $400 million. The
IFC can provide no more than 20% of the funding to a single country and no more than 10% to a
single borrower.
The IFC will channel the remaining $6 billion through four different programs that leverage
bank lending. Through the Financial Institutions Response Envelope (FIGE), the IFC will
provide support to financial institutions in order to maintain trade flows and lending to micro,
small, and medium-sized enterprises (MSMEs). It will allocate $2 billion of the FIGE for
the Global Trade Finance Program, which covers payment risks of financial institutions in
emerging markets so they can provide trade financing to importers and exporters. It will direct
another $2 billion through the Working Capital Solutions Program, which provides funding to
banks in emerging markets for the provisioning of working capital loans. Working Capital
Solutions Program loans can be in US dollars or the local currency, and the financial institution
can use the funding to provide new working capital loans or refinance existing loans. The
remaining $2 billion will flow through the Global Trade Liquidity Program and the Critical
Commodities Finance Program. These programs offer risk-sharing support to financial
institutions for continued financing of companies involved in the trade of commodities or
essential trade in emerging markets.
The approval process will be made under delegated authority from the Board, except for Real
Sector Crisis Response projects exceeding $100 million or those with a potential significant
adverse environmental or social impact. The IFC plans to closely monitor projects and will
develop a new section for reporting on the COVID-19 initiatives in the quarterly Investment
Operations Report.
The $8 billion IFC phase one response is part of a $14 billion fast-track financing from the
World Bank. The broader World Bank response could provide up to $160 billion over 15
months. (See here for YPFS post on broader efforts of the World Bank).

The IFC committed more than $40 billion in funding in response to the Global Financial Crisis
of 2007-2009. Similar to the COVID-19 response, the IFC increased funding for the Global
Trade Finance Program and the Global Trade Liquidity Program. It also established facilities for
infrastructure projects, microfinance lending, and bank recapitalization. The IFC also
launched the Distressed Asset Recovery Program (DARP), which focuses on the resolution of
distressed assets and restructuring and refinancing of viable entities. During the Ebola outbreak
in 2014, the IFC provided support to West African countries through Working Capital Solutions
Program loans.

EU Programs Supporting non-EU Countries
By Priya Sankar
Original post here.

On April 22, the European Commission approved a €3 billion macro-financial assistance (MFA)
program to ten neighboring countries outside the European Union for a period of one year to
help them cover their immediate financing needs. Like the €20 billion Team Europe strategy
announced earlier, this helps demonstrate the EU’s solidarity with other countries in tackling
the COVID-19 pandemic.
The MFA program still requires the approval of the European Parliament and the EU Council.
The first installment of the MFA aid will happen shortly after approval, whereas the second
installment could happen in Q4 2020 or the first half of 2021, if recipients fulfill conditions to
maintain macroeconomic stability.
If adopted, the MFA will issue 12-month loans on favourable terms. EU MFA programs typically
are for 2.5 years and disbursed in multiple tranches. Allocations to individual countries
correspond to estimates of their external financing needs, accounting for their capacity to
finance themselves internally and externally, for example from the International Monetary Fund
(IMF). The MFA program may be available to other countries on a case-by-case basis.
The MFA is intended as an exceptional crisis response instrument for countries experiencing
balance-of-payments problems. Countries must meet certain requirements to be eligible. These
include democratic principles in their political systems; support for human rights and rule of
law; and participation in an IMF financial assistance program. The EU usually disburses MFA
funds on a case-by-case basis. The EU used the program to support multiple countries in the
wake of the Global Financial Crisis. An MFA program must be proposed by the EC and approved
by both the EU Council and Parliament. However, in 2003 it became clear that this case-by-case
and lengthy decision-making process was inefficient, and a new framework for expediting it was
implemented in the Lisbon Treaty.
The MFA is a complement to IMF financing and aims to restore sustainable external financial
situations, while encouraging economic adjustments and structural reforms. It takes the form of
loans or grants paid directly to recipients’ central banks and can be used as they see fit. Most
MFA funding is in the form of loans, though grants did become popular in the early 2000s, due
in part to funding for the Balkans. Per capita income, repayment capability, and other financial
factors help the EC decide whether to use loan funding, grant funding or a blend of the two.
The assistance is financed through a European Commission borrowing operation, and the
budgetary impact of this assistance will be 9% of the amount disbursed in the Guarantee
Fund for External Actions of the EU, to be provisioned in two years--in other words, loans
disbursed in 2020 will be in the 2022 budget.
EU MFA operations are subject to an ex-post evaluation two years after the end of the
availability period. So far, the EU has found MFA operations to benefit the recipient countries’
external sustainability, macroeconomic and fiscal stability, structural reforms, and balance of
payments. An important and unique benefit of the EU MFA is its generous terms, which help
contribute to sustainable public debt. Coordination with the IMF and the World Bank programs

ensures the MFA is implemented efficiently and delivers good results. Some have criticized the
MFA program for lack of transparency and a long negotiation processes.
TEAM EUROPE
Team Europe is a broader EU effort totaling €20 billion, of which the EU itself is directly
contributing €15.6 billion. It seeks to support the most vulnerable countries, such as in Africa
and the Balkans, and at-risk populations, particularly women and minorities. It promotes
coordinated multilateral responses alongside the United Nations, international financial
institutions, and the G7 and G20. The EU will ensure the flow of goods and prevent supply chain
disruptions; promote and uphold democratic governance principles; and commit itself to
transparency, communication, and fighting disinformation.
The majority of funds (€15.6 billion) will be allocated to several regions including neighboring
countries, Africa, Asia and the Pacific, Latin America and the Caribbeans. Of the €15.6 billion,
€507 million will go to immediate needs, €2.8 billion will go to research and health aid and
€12.2 billion will go to mitigating the economic and social impacts of the crisis. A list of specific
actions to support these goals can be found here.
The funding for Team Europe comes primarily from reorienting existing funds and programs to
address the COVID-19 crisis, and includes €5.2 billion of accelerated European Investment
Bank (EIB) loans. To complete the Team Europe package, these funds also mobilize private
resources through budgetary guarantees, and will be supplemented with resources from
member states, the EIB, and the European Bank for Reconstruction and Development.
This complements the European Commission’s existing €25 million allocation from the
European Development Fund to support the World Health Organization’s response to African,
Carribean, and Pacific countries as well as €30 million from ECHO (European Civil Protection
and Humanitarian Aid Operations) budget reserves. Private involvement will be encouraged
through the use of €500 million of the EU External Investment Plan (EIP)’s €1.55 billion
guarantee. This will prioritize financing for SMEs, local currency financing, and healthcare
pandemic responses.
A significant portion of EU crisis assistance will be channeled through the UN, to which the EU
and its member states provide 30% of total funding. The EU has already committed to provide
€114 million to the UN Strategic Preparedness and Response Plan led by the WHO, and
committed €1.3 billion to global health initiatives.

Country receiving MFA assistance Amount (EUR)
Republic of Albania €180 million
Bosnia and Herzegovina €250 million
Georgia €150 million
Hashemite Kingdom of Jordan €200 million
Kosovo €100 million
Republic of Moldova €100 million
Montenegro €60 million
Republic of North Macedonia €160 million
Republic of Tunisia €600 million
Ukraine €1.2 billion

EU Programs in Support of Member Countries
By Aidan Lawson
Original post here.

The European Commission (EC) is still working out the details of a €37 billion plan and further
extension of this initiative to support member states using existing funds to provide emergency
support for distressed member states. EU leadership has also agreed in principle to a much
larger recovery fund that would provide approximately €1 trillion.
The €37 billion emergency support was mobilized through the Coronavirus Response
Investment Initiative (CRII). The CRII became operational on April 1 and consists of three main
elements:
1. Up to €37 billion in funding for distressed member states
2. Increased flexibility for Coronavirus-related expenditures
3. Up to €800 million from the EU Solidarity Fund
Coronavirus Response Investment Initiative Plus that came into effect mid-April further extends
the CRII. The operational details of these initiatives, which are designed to free up funds
available from other programs to provide medium and longer-run relief to member states that
are most affected by the virus, are currently being discussed by the EC.
Coronavirus Response Investment Initiative

Up to €37 billion for distressed member states
€8 billion of this funding comes from unspent pre-financing given to member states for
programs approved in 2019 under agreements with European Structural and Investment Funds
(ESI-Funds). ESI-Funds, which are a conduit for over half of the funding in the EU, “invest in
job creation and a sustainable and healthy European economy and environment” (see here). The
ESI-Funds are managed jointly by the EC and member states and are financed through the EU
budget. Every funding period, which lasts six years, member states prepare general partnership
agreements with each of the funds to determine how their allocations will be spent. The current
funding period lasts from 2014 to 2020.
Unused pre-financing payments normally scheduled to be remitted by June 2020 can now be
retained by each member state for COVID-19 relief. The EC states that reimbursement of €8
billion would not be required “provided the funds are fully spent in accordance with the relevant
rules” (see here).
As this immediate liquidity of €8 billion is depleted, the member states will have an
additional €29 billion financed from the EU budget available, maintaining and increasing
member states’ capacity to respond to the COVID-19 crisis.
Figure 1 (below) breaks down amounts available to member states from the immediate liquidity,
EU co-financing, and unallocated ESI-Fund measures. The stacked column represents both the
€8 billion in repurposed pre-financing payments, as well as additional €29 billion in potential

EU co-financing as discussed above. Poland and Hungary, despite having relatively low levels (a
combined total of about 18,000) of cases, have the largest allocations (€13 billion) under CRII
(see here). In contrast, Italy and Spain, which have had a combined case total of about 437,000,
are allocated about 6.5 billion. This discrepancy has prompted criticism about the design of the
program. Hungary’s allocation has been especially controversial due to increasingly autocratic
behavior on the part of prime minister Viktor Orban in response to the pandemic (see here).
Figure 1. EU budget and ESI-Fund Amounts available, by country (€ millions)
Increased flexibility for Coronavirus-related expenditures

Each of the five ESI-Funds have distinct investment objectives, ranging from providing general
support for small and medium-sized enterprises (SMEs) to providing more targeted funding for
developing specific sectors such as agriculture and fishing. The extent of the damage caused by
COVID-19 crisis prompted the EC to allow expenditures made in response to the pandemic to be
eligible for ESI-Fund assistance. A total of €28 billion in unallocated funds for any investment
programs from ESI-Funds can now be used for various forms of new COVID-19 programs. After
submitting aid plans to the EC, member states are awarded an envelope of aid. They are
expected to come up with investment programs to use this money by the end of the funding
period (2014 – 2020).
These unallocated funds under the European Regional Development Fund (ERDF) and
European Social Fund (ESF) can be used to purchase personal protective equipment, medical
devices and expand health care access, among others. ERDF and ESF money can be used to
provide short-term relief to SMEs experiencing cash flow issues and support national short-time
work schemes, respectively (see here). Funding through the European Maritime and Fisheries

Fund (EMFF) can be used to support mutual funds and stock insurance for fisherman and
aquaculture farmers (see here, pp. 4, 10 - 11).
Access to the EU Solidarity Fund
Finally, the EC expanded the scope of the EU Solidarity Fund (EUSF) to include major financial
aid of up to €800 million for public health emergencies created by COVID-19. Originally created
in 2002 to respond to severe floods across Central Europe, the EUSF has provided a total of €5.5
billion in disaster support since then (see here).
Since its inception in 2002, the EUSF has provided assistance to 24 countries for 87 disasters
(see here). Italy has used about half (€2.52 billion) of this amount. Coincidentally, Italy is the
only country that has applied for EUSF aid for COVID-19. Each year the EC grants the EUSF a
set amount of funding and it retains any leftover funding from the previous year in the current
year. From 2002 to 2016, yearly disbursements by the EUSF were about 38% of total resources
(see here, pp. 49). According to an official ex-post report, the EUSF has been successful in
providing emergency financial assistance to distressed institutions after natural disasters and
national emergencies, although its capacity is limited.
The EC will collect all coronavirus related applications until June 24 and then assess them all
together, ensuring that the available resources are being distributed in a fair and equitable
manner. The EC will then propose a total amount of aid to the Parliament and Council of the EU
and, if approved, it will award the aid fully to each member state that is accepted.
Countries wishing to apply for COVID-19 aid under the fund must have sustained economic
damage that exceeds a certain threshold, which is calculated either as a percentage of national
income or as a general amount (see here). The application requires member states to estimate
their total expenditures for emergency operations related to the COVID-19 crisis during the four
months following the date when they first took official action. The EC will disperse funding as a
percentage of the total amount of (projected or actual) public spending over the four months.
Funding can be applied to programs that are still in development, or to re-finance expenditures
already made.
Member states must disclose any funds they received from other institutions or public programs
Member states can request advance funding of up to 25% of the expected total EUSF
contribution, and all funding must be used within 18 months of disbursement (see here, pp. 29).
Coronavirus Response Investment Initiative Plus
A day after the implementation of CRII, the EC proposed a second set of support measures,
called the Coronavirus Response Investment Initiative Plus (CRII+), which became operational
on April 24. CRII+ expands on the initial steps taken by the original package by enhancing
flexibility across ESI-Funds, simplifying administrative requirements, and providing additional
assistance to some of the most vulnerable groups.
This proposal includes the ability to transfer funds between the European Regional
Development Fund (ERDF), European Social Fund (ESF), and Cohesion Fund (CF) as well as
across categories of regions (see here, pp. 29). This allows funds to flow more freely across
institutions and regions to the areas where assistance is needed most. The EC also exempts
countries from having to mobilize resources under ESI-Fund agreements in accordance with the
investment objectives. CRII+ also provides regulatory relief by deferring and simplifying various

reporting and auditing requirements. CRII+ grants member states the ability to request 100%
EU co-financing for existing COVID-19 programs.
As part of CRII+, the EMFF provides relief to the fishing industry by compensating out-of-work
fishers and aquaculture farmers and increasing its budgetary flexibility to address new shocks.
The EAFRD will begin offering loans or guarantees of up to €200,000 to “farmers and other
rural development beneficiaries” and allow its funds to be used for healthcare centers and
infrastructure in rural areas.
Finally, the CRII+ aims to help the most impacted by increasing the flexibility of the Fund for
European Aid to the Most Deprived (FEAD), which normally provides food, clothing, and other
essential goods and services to vulnerable European populations (see here). About €3.8 billion
were set aside for FEAD operations for the current funding period.
Recovery Fund Under Consideration
EU leaders recently agreed to the creation of an approximately €1 trillion recovery fund that
would be used to offset the damage caused by the crisis. Member states are still debating the
exact operational details of the program, including the exact amount, financing, and through
what means aid will be disbursed (see here). On May 13, President of the EC proposed to the
European Parliament that recovery fund will be financed both by EU budget resources as well as
state-guaranteed borrowing arrangements in the capital markets. The money would be
channeled across three pillars:
1. A new recovery and resilience tool for public investment in the hardest-hit member
states.
2. A new solvency instrument that will revive private investment and “match the
recapitalization needs of healthy companies who have been put at risk as a result of the
lockdown”
3. A new dedicated health program, as well as strengthening existing programs
It is still unclear what the total amount for these measures will end up being, but President
reiterated that the funding may be front-loaded short-term loans and grants to member states
that need the most.

Small and Medium Enterprises (SMEs)
The majority of workers in many economies are employed by SMEs, and these firms account for
more than 90% of total businesses worldwide. Due to the COVID-19 pandemic, many SMEs
were forced to shut-down. Government programs in response to the COVID-19 pandemic vary
with some focused on providing access to finance, supporting employee wages, providing grants
to cover various expenses, among others. In many cases, especially in emerging markets,
governments are also providing support to informal economy workers and firms.

Analysis
Credit Guarantee Programs for Small and Medium-Sized Enterprises

By Christian McNamara with Research Support from Mallory Dreyer and Kaleb Nygaard
Original post here.

With the economic fallout from the coronavirus pandemic likely to have a particularly
significant impact on small and medium-sized enterprises (SMEs), countries around the world
have adopted or are considering measures intended to support such businesses. One common
tool for doing so, even in non-crisis times, is an SME credit guarantee, a program pursuant to
which governments encourage banks to lend to SMEs by at least partially guaranteeing those
loans. While evaluations of these programs are somewhat limited and the evidence mixed, when
an event like the Asian Financial Crisis or the Global Financial Crisis occurs, countries often
expand existing SME credit guarantee programs to make them more responsive to crisis
conditions and/or develop new programs specifically targeted to the crisis.
When designing an SME credit guarantee program, the following four categories of design
decisions are of particular importance to policymakers:
1. Underwriting - who will be responsible for approving the guaranteed loans?
2. Risk sharing - how much of the loans will be guaranteed?
3. Fees - how much will borrowers have to pay in guarantee fees?
4. Eligibility - what borrowers will be eligible to participate and what type of loans will they
be able to receive?
Below is a summary of how policymakers have approached these questions in the past.
Underwriting
Typically, the decision to extend particular loans has been made by the banks themselves, often
with the rationale that they are better positioned to engage in credit analysis than the
government. This decision is closely tied to how risk sharing is structured. If the banks are
determining which borrowers get loans, fully guaranteed loans could give rise to a moral hazard
problem because the banks won’t suffer any losses from non-performing loans.
Less frequently, governments have decided which loans to extend. Japan’s Special Credit
Guarantee Program (SCGP), adopted in 1998 during its banking crisis, involved the government
making underwriting decisions (while also providing a full guarantee). In its screening process
for borrowers, it relied on a short list of negative characteristics such as tax delinquencies and
previous bank loan defaults. The SCGP typically accepted any borrower not possessing one of
the listed characteristics, with the result that the approval rate was very high. However, this
limited credit analysis has been criticized as having contributed to misuse by
borrowers. Government involvement in underwriting may also result in high program
administrative costs, as appears to have been the case with South Korea’s Credit Guarantee
Fund.

Risk Sharing
As noted above, the question of how much of a loan should be guaranteed introduces the issue of
moral hazard. For that reason, SME credit guarantee programs have typically provided partial
guarantees (often in the range of 70%-80%). This leaves banks with some of the loss associated
with a non-performing loan and therefore offers better incentives to conduct effective credit
analysis. The portion guaranteed is not always fixed. In the Czech Republic, the Czech-
Moravian Guarantee and Development Bank provides a gradual guarantee whose percentage
increases over the duration of the loan up to a cap of 80%.
Some countries have sought to preserve these incentives while still fully guaranteeing loans,
particularly in times of crisis. In Thailand, the Thai Credit Guarantee Corporation established
during the Global Financial Crisis provided a full guarantee, but only if a participating bank’s
portfolio of guaranteed loans did not have non-performing loans that exceeded 16% of the total.
Chile’s FOGAPE takes a unique approach to risk sharing, determining the percentage of a loan
to be guaranteed pursuant to an auction in which banks bid for the right to provide a certain
amount of guaranteed loans. Bids with the lowest guarantee percentages are selected first until
the total amount of guarantee rights has been allocated. Such an approach may be consistent
with research by Yoshino and Taghizadeh-Hesary (2016) arguing that guarantee percentages
should vary by bank based on soundness (and based on macroeconomic conditions).
Fees
In determining the guarantee fees to be charged in connection with an SME credit guarantee
program, countries typically seek to balance the desire to fund the programs with the need to
avoid pricing out participants. Flat fees of approximately 1% to 2% of loan amounts seem
common. A reduction in such fees is often a way that existing programs are adapted in the face
of crisis.
Eligibility
SME credit guarantee programs can either be broadly available or, less commonly, limited to
borrowers meeting specific criteria. In the UK, the Enterprise Finance Guarantee adopted
during the Global Financial Crisis required borrowers to demonstrate that they had first been
denied a loan outside of the program. Programs in the US, Brazil, and Turkey had similar
features. The Greek Credit Guarantee Fund of Small and Very Small Enterprises (TEMPME
SA) limited participation to firms that had been profitable over the previous three
years. In Italy and Chile, rather than acting directly, programs have provided guarantees to
mutual guarantee associations that in turn provide guarantees to their SME members.
What types of loans will be eligible is also an important consideration. To ensure that
guaranteed loans are not used to refinance existing non-guaranteed loans, many programs
contain a prohibition on this practice. Programs often specifically include shorter-term working
capital loans. In Canada, a Global Financial Crisis-era initiative called the Canada Small
Business Financing Program excluded working capital loans despite a subsequent survey that
showed over half of all SMEs intended to use debt financing for that purpose. This exclusion
was seen as limiting the program’s effectiveness.

Loan Guarantee Programs May Include Nonbanks
By Mallory Dreyer
Original post here.

Loan guarantee programs that involve nonbank lenders may be more effective than bank-only
programs at getting credit quickly to small businesses that need it during the coronavirus crisis.
Small and medium-sized enterprises (SMEs) play a major role in the world
economy, representing roughly 90% of businesses and 50% of employment worldwide. Many
countries operate credit guarantee programs to encourage lending to SMEs. These programs are
typically limited to bank loans. For example, the UK launched a Coronavirus Business
Interruption Loan Scheme this week, taking advantage of existing programs, but the program is
limited to forty previously accredited bank lenders.
This may limit its value. Since the Global Financial Crisis, other types of financing beyond
traditional bank lending--such as online sources of alternative lending and short-term loans
from non-financial corporations--have become increasingly important for SMEs. Expanding the
scope of eligible lenders for guarantee programs could be a valuable tool for credit guarantee
programs developed or expanded during times of crisis.
Some guarantee programs involve nonbanks already. The Netherlands expanded the BMKB
program in 2012 and GO facility in 2013 to include other types of financial institutions, such as
credit unions, SME funds, and crowdfunding as eligible lenders. The Growth Facility offers
banks or private equity firms a 50% guarantee on newly issued equity or mezzanine loans.
Mezzanine loans are a hybrid instrument, which gives the right to convert debt to equity if the
loan is not paid back.

Making SME Credit Guarantee Programs Affordable: Subsidized Interest
Payments for an Initial Period
By Mallory Dreyer
Original post here.

The coronavirus pandemic has severely affected small businesses across the world and forced
many to close temporarily. Several countries have provided relief to help them cover their fixed
costs until social conditions return to normal. Government-guaranteed loans can help, but a
small business may hesitate to take on new debt that only adds to its monthly fixed costs.
For that reason, the U.K. government’s new temporary Coronavirus Business Interruption Loan
Scheme, announced on March 17, 2020, includes a full government subsidy of the first 6 months
of interest payments on guaranteed loans. This feature appears designed to address the issue of
providing liquidity to small and medium-sized enterprises, while removing the immediate
burden of interest payments, allowing for viable SMEs to survive until macroeconomic
conditions improve.
In our March 19, 2020 post, Credit Guarantee Programs for Small and Medium-Sized
Enterprises, we highlighted key considerations in the design of SME credit guarantee programs,
especially how these programs have been modified in response to crises. Literature suggests that
crisis-focused guarantee programs can help solve immediate liquidity problems, although their
effectiveness ultimately relies on improving macroeconomic conditions.
A prior example of interest payment relief can be found in the Greek response to the Global
Financial Crisis, during which it established the Credit Guarantee Fund of Small and Very Small
Enterprises (TEMPME S.A.). The interest costs on guaranteed loans under the first phase of the
program, between December 2008 and April 2009, were fully covered by the government. In the
second phase of the program, the interest rate for guaranteed loans was set at a fixed privileged
rate, based on negotiations between TEMPME S.A. and the banking sector, which was lower
than the going market rate.
In 2008-2009, some programs also temporarily decreased or suspended guarantee fees,
including programs such as those in Hungary, Finland, and other EU countries, as well as
the US Small Business Administration (SBA). Other programs, such as Malaysia’s SME
Assistance Guarantee Scheme, did not charge a guarantee fee at all. Decreasing or eliminating
the cost of the guarantee can also relieve the immediate financial burden on SMEs.

Large-Scale Assistance Programs for Small Businesses
By Mallory Dreyer, Christian McNamara, Alexander Nye, Kaleb Nygaard, and Priya Sankar
Original post here.

With the economic effects of the coronavirus pandemic likely to be particularly devastating for
small and medium-sized enterprises (SMEs), countries around the globe are faced with the task
of determining how best to support such businesses. A number of potential intervention types
exist and are already being deployed, many of which have also been used in response to earlier
financial crises. This post begins by describing the fundamental challenge: to provide SME
assistance quickly and on a large scale. It next examines each of the primary tools governments
can use to extend assistance to SMEs on such a scale. In so doing, it provides examples of the
use of these tools drawn from the current situation and previous crises. The post then presents a
detailed analysis of the framework for SME assistance established in the United States by the
recently adopted CARES Act as one example of how interventions can be combined to support
SMEs. It concludes by offering some takeaways about why certain SME assistance interventions
may be preferable to others in given contexts.
Confronted with a crisis that threatens to result in widespread failure of SMEs, governments
have an interest in keeping such businesses afloat, even if their activities are temporarily
suspended. While failed companies can restart post-crisis, costs can arise from the need to
rehire employees and reestablish business relationships. Some of these costs could be avoided if
companies can remain in business in a suspended state. Government assistance to SMEs may
be justified to avoid these costs.
Governments may have the funds available to provide assistance. The fundamental challenge is
to get those funds into the hands of SMEs quickly and on a large scale. But there is a tradeoff
between speed of distribution and the amount of due diligence that can be done on potential
recipients. Governments generally lack the capacity to engage in due diligence at scale. For that
reason, they often turn to private financial institutions to perform this role, given such
institutions’ expertise and existing relationships with SMEs.
Thus, key questions that must be answered in designing an approach to SME assistance include:
What is the right balance between speed of distribution and due diligence on potential
recipients?
To what extent should private financial institutions be utilized to help achieve the right
balance?
If private financial institutions are to be utilized, how should the SME assistance be structured
so as to provide them with adequate incentives to actually perform their intended role?
Types of Large-Scale SME Assistance
1. Grants - government payments to or on behalf of SMEs
2. Forgivable Loans - loans extended to SMEs that they do not have to repay under certain
circumstances

3. Direct Lending - government loans to SMEs
4. Credit Guarantees - government guarantees to induce private firms to lend to SMEs
5. Funding for Lending - funding for private lenders to induce them to lend to SMEs
6. Payment Forbearance - delays on amounts SMEs owe to creditors
7. Tax Policy Changes - waivers of/revisions to the tax code to reduce or delay taxes owed
Grants
Arguably the most direct way to assist SMEs is by providing them with funds they do not have to
repay. Other tools such as loans and payment delays are provided in the expectation that SMEs’
ability to service loans and meet other obligations will improve over the duration of the
intervention. If this does not occur, SMEs will be saddled with loans that they cannot repay and
payments they cannot make. Given the severity of the pandemic’s effect on SMEs and its
uncertain duration, it is perhaps not surprising that grants play a key role in many countries’
approach to SME assistance, despite their cost.
In Denmark, for example, the government established a program that pays a portion of the fixed
costs of eligible businesses for up to three months. Businesses that expect to lose at least 25% of
their revenues will see the government pay at least 40% (and up to 100% for businesses that lose
all revenue) of fixed costs, including payroll and rent. The program’s initial three months are
expected to cost 40 billion Danish crowns ($5.8 billion or about 1.6% of GDP). In Australia, the
government is providing grants of up to AUD $100,000 ($59,960) based on a business’s
employment tax withholdings. It is distributing these grants via the system businesses use to
make their withholdings.
Other grant-based programs have focused on providing fixed, relatively small amounts of money
to SMEs quickly while more substantial support is pending. The United States has appropriated
$10 billion so that applicants for coronavirus economic disaster loans can receive advances of up
to $10,000 per potential borrower while loan applications are pending. Recipients do not have
to repay the advances, even if a loan application is ultimately rejected. In Austria, the
government established a €1 billion hardship fund to provide immediate payments of up to
€1,000, with the possibility of monthly payments of up to €2,000 for three months following an
application process. A German program provides €50 billion in grants to support SMEs and
self-employed individuals in all sectors. SMEs with the equivalent of up to five full-time
employees will receive €9,000 over the course of three months, while SMEs with the equivalent
of up to 10 full-time employees will receive €15,000 over three months.
Many governments are using grants to subsidize wages. For example, businesses and nonprofits
that have lost 30% or more in revenue due to COVID-19 are eligible for the Canada Emergency
Wage Subsidy. It supports 75% of the first CAD $58,700 of each employee’s salary for three
months. Similarly, Australia’s wage subsidy provides SMEs that have lost 30% of revenue
relative to 2019 a fixed grant of AUD $1,500 per employee every two weeks for up to six
months. Large businesses are also eligible for this grant, administered through the JobKeeper
program, which is expected to cost the government AUD $130 billion (approximately 7% of
GDP). Singapore’s Job Support Scheme (JSS) co-funds different amounts of employee salaries
in different industries for a period of nine months: 25% of the first SGD $4,600 ($3,200) of
monthly wages for all employees, 50% for food service workers, and 75% for aviation and

tourism workers. A notable feature of the Singapore program is that employers do not need to
apply; the government will calculate the subsidy based on their tax withholdings and dispense it
in three installments that are estimated to cost SGD $15.1 billion total (approximately 3% of
GDP) .
In some programs, only furloughed or laid-off employees qualify. For example, the United
Kingdom’s Coronavirus Job Retention Scheme explicitly prohibits employees receiving the
subsidy from undertaking work for their employers. Programs with these types of restrictions
operate more like a form of unemployment insurance than direct assistance to the businesses
themselves. The primary benefit to SMEs appears to be continued ties to an idled workforce
that can be quickly reactivated once conditions improve. Germany’s existing kurzarbeit policy
allows employers to furlough workers in periods of economic hardship; during that time, the
government pays 60% of their pre-crisis salary or 67% of their pre-crisis salary if they have
children. Germany recently expanded eligibility for this program to companies with at least 10%
(previously 30%) of their workers under furlough. Estonia and Belgium, among others, also
have similar temporary unemployment programs.
Forgivable Loans
Other types of support can function like a grant. The cornerstone of the United States’
assistance for SMEs is a $349 billion program that guarantees loans that can be forgiven in an
amount equal to eight weeks of the borrowers’ key expenses, including payroll, mortgage
interest, rent, and utilities. Following forgiveness, borrowers will have received a grant covering
these expenses similar to that provided by Denmark’s program. Austria has developed a
program with a similar structure -- a €15 billion ($16.2 billion) “corona crisis fund” that
provides loans, of which the portion used for a borrower’s operating costs, such as energy costs,
insurance or rent, can be 75%-forgiven. Under the Canada Emergency Business Account
program established in response to the pandemic, SMEs can borrow up to CAD $40,000
($28,000), of which CAD $10,000 will be forgiven, conditioned upon timely repayment of the
remaining balance.
Direct Lending
Some countries lend directly to SMEs through public institutions such as state or development
banks. An example of direct lending to SMEs is the Business Development Bank of
Canada (BDC). The BDC serves a counter-cyclical role, as its lending activities increase during
periods of economic instability. During the Global Financial Crisis, BDC lending was a key
component of the Canadian government’s approach to providing assistance to SMEs, as the
government provided additional funding for new or existing programs. Through the Business
Credit Availability Program (BCAP), the government allocated additional funds to the BDC for
working capital loans, term lending, and loan guarantees. In 2010, the BDC expanded its
offerings with the Emergency Recovery Loans Program, which provided 3,700 businesses with
pre-approved financing for working capital needs up to CAD $100,000.
Ireland is using an existing institution to lend directly to a specific subgroup of SMEs. The Irish
government established MicroFinance Ireland in 2012 to provide liquidity support to
microenterprises that do not meet the lending criteria of private banks. This year, MicroFinance
Ireland launched an emergency lending program for microenterprises negatively impacted by
the pandemic. In order to be eligible for the program, applicants must demonstrate through
financial projections that the pandemic is expected to decrease turnover by 15%. The loans are

interest-free with a payment moratorium for the first six months, which eases the initial debt
burden on microenterprises during the period of economic uncertainty.
Countries such as Spain (Instituto de Crédito Oficial), France (OSEO), and Japan (Japan
Finance Corporation) also have institutions that lend directly to SMEs. But direct lending
programs for SMEs are rare in comparison to other interventions, likely because direct lending
programs require the government to utilize an existing vehicle or create a new vehicle from
scratch during a crisis.
Credit Guarantees
Rather than providing loans to SMEs directly, governments can encourage private lenders to do
so by at least partially guaranteeing those loans. Some governments use credit guarantee
programs to promote SMEs’ access to credit even during non-crisis times. But they often expand
these programs or develop new ones during crises. That has happened in the current pandemic
and also during earlier events such as the Global Financial Crisis and the Asian Financial Crisis.
Typically such programs involve the government guaranteeing loans approved by private
lenders, often with the rationale that such lenders are better positioned to engage in credit
analysis than the government. Less commonly, governments themselves have been responsible
for the loan underwriting process. In Japan’s Special Credit Guarantee Program, adopted in
1998 during its banking crisis, the government made underwriting decisions based on a short
list of negative characteristics such as tax delinquencies and previous bank loan default. But the
program has been criticized as having contributed to misuse by borrowers. Government
involvement in underwriting may also result in high program administrative costs, as appears to
have been the case with South Korea’s Credit Guarantee Fund.
SME credit guarantee programs have typically provided partial guarantees, often in the range of
70%-80%, to leave banks with some of the loss associated with a non-performing loan to
incentivise effective credit analysis. Some countries have sought to preserve these incentives
while still fully guaranteeing loans, particularly in times of crisis. In Thailand, the Thai Credit
Guarantee Corporation, established during the Global Financial Crisis, provided a full
guarantee, but only if a participating bank’s portfolio of guaranteed loans did not have non-
performing loans that exceeded 16% of the total. Chile’s FOGAPE takes a unique approach to
risk-sharing, determining the percentage of a loan to be guaranteed pursuant to an auction in
which banks bid for the right to provide a certain amount of guaranteed loans and bids with the
lowest guarantee percentages are selected first, until the total amount of guarantee rights has
been allocated.
Borrowers typically pay a fee for the guarantee. Flat fees of 1% to 2% of loan amounts are
common. A reduction in such fees is often a way that existing programs are adapted in a crisis.
SME credit guarantee programs can either be broadly available or, less commonly, limited to
borrowers meeting specific criteria, such as those who can demonstrate that they have been
denied a loan outside of the program or those with a history of profitability. What types of loans
will be eligible is also an important consideration. Programs often specifically include shorter-
term working capital loans. In Canada, a Global Financial Crisis-era initiative called the Canada
Small Business Financing Program excluded working capital loans, an omission that was seen as
limiting its effectiveness.

For more information about Credit Guarantee Programs for SMEs, please see YPFS’s analysis of
this topic.
Funding for Lending
An additional means for encouraging lending by private banks to SMEs involves providing
banks with the funding to do so. Under such funding-for-lending programs, the government,
frequently via the central bank, provides low-interest-rate funds to the banking system, while
requiring or incentivizing banks to use the money to support SMEs. In response to the COVID-
19 pandemic, the Bank of England (BoE) and the Reserve Bank of Australia (RBA) are each
conducting funding-for-lending programs. To incentivise banks to lend to SMEs, both central
banks offer two tranches of money to eligible banks. All eligible banks have access to the first
tranche, but banks can only access the second tranche if they use the first tranche to increase
their loans to SMEs. The BoE ran a similar program in 2012, and although the multi-tranche
structure was not included in the initial phase, it was added when the program was extended in
2013.
The BoE set no upper limit on the overall size of either the 2012 or the current program. Banks
borrowed £42 billion (roughly $67 billion, 2.5% of the UK GDP in 2012) through the original
program between June 2012 and April 2013. Other central banks have announced a maximum
size for their funding-for-lending programs. The RBA set its program at AUD $90 billion ($52
billion, or 4.8% of GDP); Hungary’s 2013 program, HUF 750 billion ($3 billion, or 2.2% of
GDP); Saudi Arabia, SAR 13.2 billion ($3.5 billion, or 2.5% of GDP); and Taiwan, NT 200 billion
($6.6 billion, or 1.1% of GDP). Still, the amount of funds available to each bank depends on the
size of its loan portfolio.
Typically, only companies with prior access to a central bank’s discount window are eligible to
participate in funding-for-lending programs due at least in part to the pre-existing technical and
operational capacity of institutions already in the central bank system. Central banks are
finding ways to expand eligibility, however. For example, the RBA said in announcing its
program that it had developed a complementary program for nonbank lenders.
To encourage banks to begin lending to SMEs as soon as possible, funding-for-lending programs
can reward banks for the lending they had extended to SMEs even before the central bank had
made the funding available. This is accomplished by using a date before the crisis began as the
date by which the central bank will begin counting new lending. For example, in the current
crisis, the BoE used December 31, 2019 and RBA used January 31, 2020. This ensures that
banks can benefit appropriately if they were already lending to SMEs before the central bank
announced its program but after the crisis began.
Funding-for-lending programs are not exclusively conducted by central banks. For
example, South Korea, Saudi Arabia, Ireland, and the EU (via the European Investment Fund)
have each established funding-for-lending programs where the fiscal authority provides the
funds to banks and sets similar stipulations and/or incentives for banks to lend to SMEs at
favorable rates.
For more information about Funding for Lending for SMEs, please see YPFS’s analysis of this
topic.
Payment Forbearance

Assistance to SMEs focused on increasing the funds coming into a business can be
complemented by programs aimed at delaying or reducing outflows. Payment forbearance
allows businesses to simply delay paying amounts owed. Creditors sometimes implement these
programs during normal times, especially when the institution in question thinks a business is
suffering but is viable as a going concern. During economic downturns, governments are more
likely to step into the picture and create their own programs by incentivizing or outright
requiring forbearance.
Which creditors should offer forbearance and for which types of obligations is a critical
question. SMEs can have payment obligations to entities in the public sector, financial private
sector, and nonfinancial sector. Public-sector payment obligations can include government-
owned utilities and other services, government-sponsored entities, and, of course, taxes
(discussed in more detail below). It may be relatively easy for a government to waive such
payments for a short period. On March 18, for example, Dubai and Abu Dhabi reduced 15
different customs fees, taxes, and other costs for businesses.
In the financial sector, banks typically have procedures for working with borrowers who are
experiencing temporary financial stress. In the current crisis, some of the largest
banks voluntarily created forbearance programs. A broad, government-initiated moratorium on
loan payments to banks and other financial institutions could offer relief to small businesses
during a crisis. On March 17, Italy adopted such a plan as part of the “Cura Italia
Decree”. Under this plan, amounts owed by Italian SMEs with no non-performing exposures on
financings to banks, financial intermediaries, and other entities authorized to carry out lending
activity in Italy are suspended until September 30.
SMEs also may have obligations to creditors in the nonfinancial private sector, such as landlords
and suppliers. A French program adopted in response to the current crisis allows SMEs to
apply to defer rent and utility payments.
Which businesses will receive forbearance must also be considered. On March 19, Korea’s
Financial Services Commission (FSC) announced a forbearance program that appears to offer
blanket eligibility. Under the program, SMEs can access a six-month minimum extension on
existing loans and guarantees from both banks and nonbanks. Blanket eligibility may be the
most efficient policy in a pervasive crisis such as the current one, in which the sheer number of
affected SMEs is so large as to challenge systematic efforts to distinguish the truly
needy. However, blanket eligibility, as seen in some of India’s farm loan waiver programs, can
also be susceptible to abuse due to moral hazard. Recent small-business programs in Europe
have tended to limit eligibility to borrowers that meet certain criteria related to the impact of the
coronavirus on their businesses.
Governments can negotiate forbearance programs with creditor associations for institutions like
banks and non-banks, then bind them to the program. The Central Bank of Ireland
announced one such agreement in response to the COVID-19 pandemic. Authorities can also
outright require forbearance. In some cases, governments pass laws that require creditors to
restructure SMEs loans. The Japanese government passed such a law during the Global
Financial Crisis.
Typically, payment forbearance programs operate for a short and specified time period tied to
the nature of the crisis. In cases of natural disasters, these programs can last for just a few
months, as affected regions return to normalcy. Financial crises can be different. Governments

that introduce temporary programs can end up extending them under political pressure or
simply because the economic stress has continued longer than expected. During the Global
Financial Crisis, for example, the Italian government, in collaboration with a creditor
association, imposed a loan forbearance program for SMEs in August 2009 that Italy continued
to extend and modify through at least 2014.
A challenge associated with forbearance programs is that they have the potential to negatively
affect the creditors who were to have received the payments that are now being delayed. For this
reason, forbearance programs are sometimes paired with measures intended to support affected
creditors. Under the Italian debt moratorium discussed above, lenders are entitled to a
government guarantee equal to 33% of suspended payments if 18 months after the end of the
moratorium a debtor remains unable to pay. In Saudi Arabia, a program delaying SME
payments to banks and financing companies for six months also includes financing from the
Saudia Arabrian Monetary Authority for such banks and financing companies.
For more information about Payment Forbearance for SMEs, please see YPFS’s analysis of this
topic.
Tax Policy Changes
Some governments choose to lessen SMEs’ tax burdens as a way to provide them with relief
during a crisis. Unlike some of the other tools for assisting SMEs, governments may change tax
policies to benefit SMEs just as frequently during normal times as during crises. These
programs have a tremendous range, but all tend to alter the corporate tax code. They can
encompass everything from delays on employers’ social contributions to tax cuts and changes in
how tax deductions work.
One of the most common tax policy tools, regardless of whether times are good or bad, is
altering tax deductions for SMEs. Governments usually deploy these kinds of tax policies to
encourage or discourage different kinds of investment by SMEs. In 2005, while the United
States economy was still in expansion, the government passed the Gulf Opportunity Zone Act of
2005. This law contained a provision that increased the size of the deduction small businesses
could take on property expenditures, which encouraged businesses to improve their properties.
One Australian response to the COVID-19 pandemic operates on a similar logic. Australia’s
Backing Business Investment (BBI) program allows businesses with turnover of less than AUD
$500 million to deduct 50% of the cost of a business’s investment in a new asset. Programs like
this provide cash flow relief and incentivize increased capital expenditures during the COVID-19
crisis.
Another common tool, especially during a recession, is cutting or delaying taxes for SMEs. The
most common variant of this tool, which in some ways is similar to payment suspension, is the
VAT (value-added tax) or sales tax deferral, in which payment of the VAT is merely delayed for a
specified period of time. One can find a recent example of this policy in the Republic of Korea,
which suspended the VAT for companies earning 60 million won or less per
annum. Vietnam announced a five-month VAT deferral, during which businesses would not be
punished for late payments.
Given the circumstances in which tax policy changes are being introduced, it is important that
they be on taxes that are “profit insensitive” (i.e. taxes that are paid regardless of whether the

SME is profitable). A break on a tax that a business pays only when it is making a profit is
unlikely to be of much use during a crisis.
CARES Act
On March 27, 2020, the United States passed the Coronavirus Aid, Relief, and Economic
Security (CARES) Act, which establishes a number of measures to combat the economic impact
of the COVID-19 pandemic, including aid to SMEs.
Forgivable Loans and Grants
Section 1102 of the CARES Act allocates $349 billion to the Paycheck Protection Program, which
guarantees Small Business Administration (SBA) sponsored loans made by financial institutions
of up to 250% of an employer’s pre-pandemic average monthly payroll (up to a maximum loan
value of $10 million each) to businesses with up to 500 employees. The CARES Act also
expands eligibility to sole proprietors, independent contractors, eligible self-employed
individuals, certain nonprofits, and certain tribal business organizations. Borrowers can use the
proceeds of the guaranteed loans to fund payroll costs, employee benefits, mortgage interest
payments, rent, utilities, and interest on existing debt, in addition to other allowable SBA
uses. SBA fees typically associated with such loans are waived, and the interest rate lenders can
charge is capped at 4% with a minimum payment deferment of six months. The Treasury has set
this rate at 1%. The CARES Act also waives requirements borrowers must typically meet to
receive an SBA loan, including providing a personal guarantee and/or collateral and
demonstrating an inability to obtain credit elsewhere. Any loan not entirely forgiven as
described below can have a maximum maturity of 10 years from the forgiveness application
date.
Under Section 1106, guaranteed loans provided pursuant to Section 1102 will be forgiven in an
amount equal to the borrower’s spending on payroll (including salaries, wages, and benefits),
mortgage interest, rent, and utilities in the eight weeks after the origination of the loan. This
forgiveness amount is subject to reduction (a) in proportion to the reduction in the number of
employees during this eight week period as compared with pre-pandemic periods and (b) based
on the amount salaries and wages are reduced beyond 25% during this eight week period as
compared with pre-pandemic periods. Rehire provisions incentivize businesses to bring back
staff and restore salaries and wages by enabling borrowers to avoid loan forgiveness reductions
if certain previously adopted job or pay cuts are reversed.
The CARES Act also expands other loan opportunities for SMEs. Section 1102 increases the
maximum amount of the SBA’s Express Loans to $1 million from $350,000. Section 1110
expands eligibility and loosens requirements for the SBA’s Economic Injury Disaster Loans
(EIDL) program and establishes emergency grants in amounts up to $10,000 per potential
borrower to be paid while loan applications are pending, with no repayment required even if a
loan application is ultimately rejected. Section 1112 provides for six months of payment
subsidies on existing SBA loans.
Funding for Lending
SMEs may also benefit from the $500 billion in loans, loan guarantees, and other investments
the CARES Act makes available to assist businesses, states, and municipalities under Section
4003. Section 4003 requires the Treasury Secretary to “endeavor to seek” to establish a
program providing financing to lenders who make loans to eligible businesses with between 500

and 10,000 employees on favorable terms including a maximum annual interest rate of 2% and
at least six months of deferred payments. Section 4003 also allows for the creation of a “Main
Street Lending Program” aimed at small and mid-sized businesses that are too big for SBA
lending but not big enough for capital markets. On March 23, 2020, the Federal Reserve
announced that it would soon establish a Main Street Business Lending Program, which would
provide support to SMEs and complement SBA lending. Further information about this
potential program is not yet available.
On April 6, the Federal Reserve announced that it would establish a new lending facility to offer
term financing backed by loans in the Paycheck Protection Program. Further information about
this program is not yet available.
Tax Policy Changes
SMEs may also benefit from a number of the tax provisions contained in the CARES
Act. Section 2301 establishes an employee retention tax credit for businesses fully or partially
suspended as a result of a government order stemming from the coronavirus or that otherwise
suffer a more than 50% decline in revenue. Eligible businesses will receive a refundable credit
against employment taxes equal to 50% of qualified employee wages (up to $10,000 in wages
per employee). For businesses with more than 100 employees, only wages paid to employees not
performing services due to coronavirus suspensions are included. Section 2302, meanwhile,
allows businesses (although not those who have received the loan forgiveness provided by
Section 1106 described above) to delay payment of 2020 employment taxes until December 31,
2021 (50% due) and December 31, 2022 (the remaining 50% due). There are also provisions for
relaxing restrictions on net operating losses, providing corporate alternative minimum tax
credits, and business interest expense deductibility.
Key Takeaways
Evaluations of SME assistance interventions are limited and/or mixed. Nonetheless, it is
possible to identify several key takeaways associated with their use.
In order for assistance to be effective, SMEs must receive it in time
Speed is often essential when seeking to support SMEs during a crisis because of SMEs’ limited
reserves and reduced access to other forms of financing. Which intervention type or types will
enable a country to respond most quickly can depend on what resources, programs,
infrastructure, etc. it had in place heading into the crisis. Many countries expand existing SME
support programs in response to crisis conditions. An intervention like direct lending seems
difficult to introduce during a crisis absent such a pre-existing program given the resources and
infrastructure it requires, but where institutions like state banks exist, they may be able to
provide lending on favorable terms more readily than the private banking system.
Grants, while costly, can be relatively easy to implement, particularly where there is an existing
mechanism like the withholding system that can be used for their distribution. Even relatively
small grants given quickly may afford countries adequate time to adopt interventions that are
more difficult to implement.
Funding for lending can potentially be implemented under existing central bank authority,
meaning that no legislative or executive action would be required. Tax policy changes and
payment suspensions involving government-controlled creditors, meanwhile, can be

accomplished without the involvement of third parties such as private banks and private
creditors.
In the developing world, credit guarantee programs may be the intervention type most easily
adopted because they leverage the expertise of private banks in a context of limited government
capabilities. Guarantee programs have the added benefit of not requiring a large upfront
expenditure, as costs are incurred only after loan defaults.
Due diligence on potential recipients is also an important consideration
While speed of distribution would be improved by conducting no due diligence on potential
recipients of SME assistance, such an approach runs the risk of widespread waste, fraud, and
losses to the government. Governments generally lack the capacity to engage in this sort of
diligence. The experience and existing relationships theoretically possessed by private financial
institutions may make them well-suited for this role. However, the extent of the diligence must
still be balanced with the desire for speed, and the incentives of private financial institutions to
perform the role must be addressed.
Assistance to financial institutions does not automatically result in greater
lending to SMEs absent the right incentives
The experience of past crises suggests that merely providing assistance to the banking sector
doesn’t ensure that such assistance will be used to increase lending to SMEs. During the Global
Financial Crisis, capital injections for banks did not necessarily improve SMEs’ access to bank
credit. Even guarantees on SME lending may not result in such lending where banks are
reluctant to take them up. The Paycheck Protection Program under the CARES Act in the US is
an example. It may be similar to a grant for borrowers whose loans are forgiven, but the role of
banks as intermediaries means that the government can’t control how much lending actually
occurs. Elected officials followed the announcement of the program with strong language urging
banks to participate. Additional tools such as credit mediators, timely reporting of SME lending,
and SME lending codes of conduct may be necessary.
Actual sources of SME credit must be considered
SMEs are increasingly obtaining financing from outside the traditional banking
sector. Programs that operate solely through this sector (e.g., a guarantee program available
only on bank lending or a funding-for-lending program targeted at just those institutions with
discount window access) may be insufficiently broad. Some programs are being tailored with
this new reality in mind by including non-bank lenders alongside traditional banks.
Interventions may have effects on other parts of the system that must be
considered
Payment forbearance programs can be attractive as they provide immediate relief to SMEs
without any government outlay. However, the suspension of payments to creditors may have a
negative impact on those creditors who themselves in turn may require government
intervention.
Ultimately macroeconomic conditions will need to improve relatively quickly for
most intervention types to be successful

Programs that provide SMEs with loans or that delay payments otherwise owed can meet the
short-run liquidity needs of businesses. However, absent an improvement in macroeconomic
conditions they may only postpone insolvency.

Lessons Learned in Designing and Implementing Support for Small
Businesses
By Mallory Dreyer and Kaleb Nygaard
Original post here.

One month into the biggest global bailout of small businesses in history, countries have started
to adjust their initial programs to make them more effective. Small and medium sized
enterprises (SMEs) account for 90 percent of businesses and a majority of employment
opportunities across the world. Even during non-crisis times, many SMEs face constraints in
accessing financing. Governments are working to provide exceptional support during the
COVID-19 pandemic in order to prevent bankruptcies, unemployment, and a deeper recession.
All countries face the same challenge: how to quickly get funds to the businesses that need
them. In response to the challenge, governments have adopted a variety of interventions (see the
YPFS blog here). In this post, we evaluate interventions designed to support SMEs and present
nine lessons learned.
Lessons Learned
1. Demand has far exceeded most programs’ initial budgets
2. Aligning incentives can encourage more private-sector lender participation
3. Leveraging existing agencies can get money to SMEs faster
4. Including both bank and nonbank lenders can account for multiple sources of SME
financing
5. Targeting assistance too narrowly can slow down the provision of support
6. Streamlining the application process can speed up distribution of funds
7. Small businesses may face challenges meeting fixed costs that programs don’t cover
8. Some programs inherently require, or benefit from, additional programs
9. Businesses will likely need further government support
1. Demand has far exceeded most programs’ initial budgets
In many countries, demand from SMEs for assistance has outstripped the amount governments
initially made available. In response, governments have increased the overall allocation of funds
to these support programs. In some instances they have also increased the amount available to
individual SMEs.
Overall allocation
Italy, a country that suffered particularly early and deeply from COVID-19 has dramatically
increased the amount of funds available for loan guarantees. On March 17, the Italian
government announced a EUR 100 billion ($109 billion) loan guarantee program. On April 14,
the EC approved a four fold increase (up to EUR 500 billion) of the original program and

announced a new program for the self employed and smaller companies with an unspecified
allocation.
In less than two weeks, on April 16, the United States expended the full $349 billion Paycheck
Protection Program (PPP). On April 22, congressional leaders reached a deal with the
administration to infuse the PPP with an additional $310 billion.
Switzerland doubled its initial loan guarantee program allocation from CHF 20 billion ($21
billion) to CHF 40 billion. Spain increased its original EUR 100 billion SME support program by
EUR 20 billion.
Participation limit
Many countries have increased not only the amount of total funding available in a support
program, but also the individual business participation limit. For example, the government
of Singapore increased the maximum loan amount available under its Temporary Bridging Loan
Program from SGD 1 million ($700,000) to SGD 5 million. When Italy added a new program
specifically targeting smaller companies and the self-employed it increased the size of loans
eligible for a 100% state guarantee from EUR 25,000 under the previous program to EUR
800,000 in the new one.
2. Aligning incentives can encourage more private-sector lender participation
When the government channels funds through the financial system, it has to ensure that the
lenders are properly incentivized to lend the funds to the SMEs.
Guarantee Percentage
Many countries have had to increase the government guarantee rate on the loans they are asking
the banks to offer to SMEs. When Germany expanded its loan guarantee program, it increased
the guarantee rate from between 80% and 90% up to 100% after banks were reluctant to take on
new risks in the current economic environment. Singapore increased guarantee rates on a
variety of its programs from 80% to 90%. Colombia increased its guarantee rates from 60% to
90%.
Interest Rate Ceiling
Many governments set interest rate ceilings on the loans that banks offer to SMEs under credit
guarantee programs. However, setting this rate ceiling too low can make banks unwilling to
participate. The US’s PPP initially set the interest rate at 0.5% but later had to increase the rate
to 1.0%.
Waiver for Individual Bank Participation
Wells Fargo had been lending under the PPP, but it was constrained by an outstanding
restriction on balance sheet growth due to previous misconduct. The Federal Reserve
temporarily waived the growth restriction on Wells Fargo to allow Wells to issue more loans
under the PPP. Because Wells Fargo is an important lending channel for small businesses, this
waiver incentivizes it to continue to participate, which will help its small business customers
that need funding receive it.
3. Leveraging existing agencies can get money to SMEs faster

Some governments avoid the challenge of structuring programs to appropriately incentivize
private sector banks by leveraging pre-existing government agencies that provide loans directly
to small businesses without needing to use the banking system as an intermediary. This can lead
to quicker delivery of emergency funds.
In response to the COVID-19 crisis some of these countries have increased funding to these
agencies to allow them to provide substantially more loans directly to small businesses. For
example the Business Development Bank of Canada announced a CAD 10 billion program that
will provide up to CAD 2 million working capital loans with flexible repayment terms to small
businesses. MicroFinance Ireland initiated a new program that provides loans to businesses
with less than 10 employees if they have been rejected for financing by a bank. The European
Investment Bank, the lending arm of the European Union, has announced a EUR 25 billion
credit guarantee program, part of which will be distributed by European countries’ development
banks.
The US tasked its Small Business Administration (SBA) agency with the administration of much
of its support programs. This includes the PPP as well as direct grants and loans under the SBA’s
Economic Injury Disaster Loan program. The SBA deployed more than $350 billion in support
to SMEs in two weeks and is expected to deploy a similar amount in the coming days.
4. Including both bank and nonbank lenders can account for multiple sources of
SME financing
Because many SMEs do not have existing loans, credit lines, or relationships with traditional
banks, some programs include lenders beyond traditional commercial banks or target lenders
with expertise to lend to small businesses.
For example, many SMEs in Switzerland do not have bank loans and only bank
with PostFinance, the financial services subsidiary of the national postal service, which does not
traditionally lend. The Swiss government is temporarily allowing PostFinance to issue loans
under its credit guarantee program.
In the PPP, the Small Business Administration (SBA) provides the guarantees, but the financial
system issues the loans. Eligible lenders of SBA loans now include non-bank-entities like PayPal,
Square, and Intuit. In the proposed emergency legislation, which appropriates an additional
$310 billion for the PPP, $60 billion is earmarked for small, midsize, and community lenders, as
these lenders typically reach more of the smaller businesses compared to the large national
lenders.
On April 17, the British Business Bank (BBB), which administers the United Kingdom’s
Coronavirus Business Interruption Loan Scheme (CBILS), announced that a new lender was
accredited to lend under the scheme. The new lender, Funding Circle, is the first newly
accredited marketplace lending platform in CBILS and is the largest online small business loan
provider in the UK. The BBB has accredited additional lenders since the launch of CBILS and
will continue to accept applications from new lenders in order to expand the funding options for
SMEs.
5. Targeting assistance too narrowly can slow down the provision of support
Policymakers face a trade off between specificity and efficiency in providing support to SMEs.

In general, programs that target specific types of firms require more administrative processes.
For example in the United Kingdom, the CBILS was initially limited to borrowers who had failed
to secure standard commercial financing. This not only limited the scope of the support but also
added administrative burden for lenders and prolonged the process. Some firms complained
that banks were offering standard financing with high interest rates instead of loans under the
scheme. In the first two weeks of the program, 130,000 inquiries were received but only 983
loans were approved. The amendment to CBILS eliminated the requirement, thus expanding the
eligibility criteria. The UK also announced a credit guarantee scheme for larger companies when
the CBILS program was amended, in order to fill the financing gap for companies that could not
participate in CBILS or access the Covid Corporate Financing Facility (CCFF).
Many countries limit programs to firms up to a certain size or maximum turnover. For example,
the Paycheck Protection Program in the US restricts usage to employers with 500 or fewer
employees. However, the SBA released additional guidance regarding eligibility to clarify that
firms that meet the statutory and regulatory definition of a “small business concern” with more
than 500 employees are eligible. The US program has faced backlash after some larger
companies were reported to have received loans under the program, and Financial Times
analysis shows that eighty publicly-traded companies, with ability to raise capital elsewhere,
received aid.
6. Streamlining the application process can speed up distribution of funds
By eliminating complexity from the application process, programs can distribute funds to small
businesses quickly.
In the United States, small businesses apply directly to their lender. These institutions are
responsible for the application process and can utilize their existing interface and online systems
though the SBA provides a template application. Thus, borrowers approach the lender, and
lenders then submit information to the SBA. However, speed will depend on existing bank
infrastructure, system, and staff. In the US where the PPP operates on a “first-come-first-serve”
basis, the speed at which an individual lender can process applications influences which small
businesses receive aid.
In Switzerland, the government provides a standardized application online which applicants fill
out and then take to the lender. The government anticipates that the application should take
approximately 10 minutes to complete. In some cases, applicants have reported receiving funds
less than an hour after completing the application. Because credit risk assessments are waived,
the Swiss government announced actions to prevent fraud on April 3. The Swiss guarantee
organizations confirm that the loan agreements comply with the requirements and cancel loans
that are duplicates or wrongly applied. The loans are also checked systematically by linking VAT
and other data to the information provided by companies.
In contrast to the 10 minute application in Switzerland, some countries require more detailed
documentation in applications and feature more complex processes. Applications vary across
lenders, but in programs with less than a 100% guarantee, lenders bear a portion of the risk.
Because of this, credit and risk assessments are often required, but these processes are more
time consuming. In Italy, this is cited as a reason why funds are not flowing quickly. Thus, the
application process can be a bottleneck to distributing funds

7. Small businesses may face challenges meeting fixed costs that programs don’t
cover
Some countries establish criteria and restrictions on how funds can be used, which can leave
some small businesses with the challenge of finding financing to cover the gap. In the United
States, the Treasury requires that at least 75% of the value of a forgivable loan issued under the
PPP will be used for payroll expenses. Some firms worry that this support does not go far
enough, especially for firms with high rent costs. Employee compensation is capped at an
annualized $100,000 per employee under the PPP. Other countries developed or expanded
wage subsidy programs which are specifically designed to cover payroll costs.
In Denmark, the government announced a program to cover a certain percentage of fixed costs
of companies that have been impacted by the COVID-19 pandemic. The government will cover
between 25 to 100% of fixed costs. Denmark also announced a wage subsidy program for firms
forced to decrease work hours of employees or temporarily lay them off. By providing support
for fixed costs in addition to payroll expenses, Denmark addresses a gap faced by other
programs.
8. Some programs inherently require, or benefit from, additional programs
Providing support to one type of business or one sector of the economy sometimes
disadvantages a different business or sector. Governments have had to introduce a number of
complementary programs in tandem or introduce new programs in response to outcomes from
previously announced programs.
Funding for Lending and Guarantees
A number of countries have paired credit guarantee programs with funding for lending
programs. These programs are designed to increase the incentives to lenders to issue the
guaranteed loans. In general these programs work by accepting loans to small businesses (often
the very ones issued under the credit guarantee programs) as collateral for funds from the
central bank or ministry of finance.
In the US, the Federal Reserve has two sets of programs that serve this purpose: the Paycheck
Protection Program Lending Facility and the Main Street Lending Program. The Bank of
England introduced the Term Funding Scheme. The Australian government introduced two
such programs, one administered by the Reserve Bank of Australia for depository institutions
and another administered by the Office of Financial Management for non-bank lenders.
Debt Moratoriums and Guarantees
By introducing debt moratoriums, the government effectively shifts the risk from the SME to the
lender, who in turn often requires assistance. In Italy, the government paired its six month debt
moratorium with a government guarantee equal to 33% of suspended payments if 18 months
after the end of the moratorium a debtor remains unable to pay.
9. Businesses will likely need additional government support
To a larger degree than seen in past crises, many countries are providing direct grants for
businesses in response to the COVID-19 crisis. Recent research from the Federal Reserve Bank
of New York shows that fewer than 1 in 5 small businesses in the US can continue normal
operations with their cash reserves if they experience a two-month revenue loss. Credit

guarantee programs and additional lending can assist businesses with immediate cash flow
needs, but the programs will only be effective if underlying macroeconomic conditions improve
quickly; otherwise, they only delay insolvency. Beyond increased adoption of grants, credit
guarantee programs are more generous, with the EU allowing 100% credit guarantees and
multiple countries waiving risk assessments. Generous loan guarantee programs have similar
characteristics to grants in terms of limited diligence but still increase the overall debt burden
for firms, which some firms may not be inclined to accept given the uncertainty of long-term
economic conditions and future revenues.

Countries Provide Support to Workers in the Informal Economy
By Kaleb Nygaard and Mallory Dreyer
Original post here.

In response to the COVID-19 crisis, countries have begun to help informal sector workers
through safety-net programs, cash transfers, and public-works programs.
Workers in the informal economy are especially vulnerable to negative impacts from the
COVID-19 pandemic. Informal workers are those in jobs without social insurance in sectors of
the economy that are neither taxed nor regulated. The International Labor Organization (ILO)
estimates that 1.6 billion of the approximately 2 billion informal economy workers globally will
be significantly impacted by the COVID-19 pandemic, with workers experiencing an average
earnings decline of 60%. Without an alternative income source, the ILO estimates that the
proportion of informal economy workers in low-income countries living in relative poverty will
increase from 18% to 74%. Informal workers are already twice as likely as formal workers to
belong to poor households.
In general, informal economy workers have higher exposure to occupational health and safety
risks. COVID-19 increases risks for workers, and many who become infected do not have a
source of income security or healthcare coverage. Policies targeting informal economy workers
are thus an important component of the government policy response to COVID-19, but
policymakers face additional challenges in designing policies. Informal workers are not officially
registered, making them harder to reach, and the informal economy varies widely across
countries and regions.
In response to the COVID-19 pandemic, countries have implemented support programs for
informal sector workers using the following:
• Existing unemployment insurance or social safety net programs
• New direct cash or in-kind transfers
• Public works programs
• Support to micro, small and medium-sized enterprises (including informal businesses)
Existing unemployment insurance or social safety net programs
Many countries have existing social safety net programs, such as cash and in-kind transfer,
social pension, and school meal programs. In response to the COVID-19 pandemic, these
programs can be expanded or enhanced to include more vulnerable and high-risk individuals.
By utilizing existing programs, policymakers can quickly respond to the urgent needs of
informal workers.
In the United States, the Pandemic Unemployment Assistance (PUA) provision of the CARES
Act expands unemployment insurance eligibility to include self-employed individuals or those
who may otherwise be excluded. Though low-income countries have higher proportions of the
workforce in informal jobs, industrialized countries, including the US, also have an informal
labor force. The share of workers in informal jobs in the US has steadily increased in the past
decade, and the ILO estimated that informal employment accounted for 30 million jobs in 2018,

or 19% of the total labor force. States are permitted to provide unemployment benefits to self-
employed, gig economy, or other informal workers through PUA for 39 weeks. The benefits
include what the state provides and $600 through the Federal Pandemic Unemployment
Compensation (FPUC) program under the CARES Act.
North Macedonia expanded its existing unemployment insurance system to include informal
sector workers, with an additional 20,000 households expected to benefit. These informal
workers can receive 7,000 denars (USD 125) in April and May. Lesotho, Kazakhstan,
and Vietnam have also expanded social protection programs to include informal sector workers.
New direct transfers or grants
Other countries have introduced new cash transfers for informal workers in response to the
COVID-19 pandemic. Identifying eligible individuals can be a challenge, as many informal
workers are not registered, and policymakers also face the challenge of providing access to
benefits quickly.
On March 25, Thailand introduced a cash transfer of 5,000 baht (USD 153) per month for three
months for informal workers. The government initially committed to support 3 million workers,
but demand far exceeded the commitment size. The Thai government has since announced
that 14.5 million individuals are eligible to receive support. Individuals are required to submit
applications online to claim the benefits. The website to submit applications opened on March
28, and despite a system crash, 8.5 million individuals were able to submit applications on the
first day. However, not all individuals are approved automatically, and some applicants are
asked to provide additional information, such as a picture of their workplace, and others have
been rejected.
In Egypt, workers in the informal sector are eligible to receive a one-time payment of LE 500
(USD 32) to recoup some lost income due to the COVID-19 shutdowns. This one-time payment
was initially expected to go to 400,000 individuals. Like Thailand, the actual demand exceeded
the announced size, as 1.2 million people applied for the grant in the first week. These benefits
will be provided to individuals who are registered in government workforce databases and
distributed through post offices.
Identifying informal workers can be a major challenge, as these workers may not have formal
employment contracts or be officially registered. In Guatemala, the government determines
eligibility based on electricity consumption to provide the emergency cash grant of GTQ 1,000
(USD 130) to informal and self-employed workers. Individuals receive emergency grant
payments electronically, either through smartphones or ATM withdrawals. Similarly, in El
Salvador, the government’s new cash transfer program targeted households using electricity.
Households with usage between 0-250 kilowatts/hour received the transfers. In Ecuador,
informal workers who earn less than USD 400 per month are required to register to receive the
emergency cash benefit. After registering for the benefit, individuals receive a text message with
information regarding nearby payment locations where the USD 60 benefit can be collected.
In Brazil, informal workers, including domestic workers, can receive an emergency cash transfer
of USD 115 per month for three months. The government identifies beneficiaries through the
social registry, but individuals who are not registered can apply online.
In addition to cash transfers for vulnerable individuals, some countries have launched programs
that provide training support to informal workers. Indonesia’s Kartu Pra-Kerja (pre-

employment card) program provides vouchers for training and re-skilling to unemployed
workers in addition to unemployment benefits. The program is estimated to benefit 5.6 million
informal workers impacted by COVID-19, and eligible recipients receive benefits through bank
transfers or through e-wallet platforms.
Public-works programs
Many governments have announced programs that provide financial aid to unemployed
workers, some of whom come from the informal economy, in exchange for participation in a
public-works program. Government-sponsored public-works programs have traditionally
consisted of infrastructure projects. The US’s Public Works Administration is often cited as an
important part of the government’s response to the Great Depression in the 1930s. To varying
degrees, many countries are also hiring people to do COVID-19 testing or sanitation.
Many countries have increased funding to existing public-works programs. In Nepal, the Prime
Minister’s Employment Program was originally introduced in early 2019 and guaranteed 100
days of work per year to work on infrastructure projects. In April the government extended the
program; it also announced that informal sector workers who had lost their jobs due to the crisis
would receive 25% of a local daily wage if they chose not to participate in the public-works
projects. The Philippines added an additional sub-program to its broader TUPAD public-works
program that provides between 10 and 30 days of work to displaced, underemployed, or
seasonal workers. In Kenya, the government introduced a new program, Kazi Mtaani, focusing
on unemployed workers in informal settlements in poor countries.
Other countries have provided public-works projects in health and hygiene. For example, South
Africa’s program provides work in essential services and waste collection but also includes a new
initiative to hire 20,000 people to support the distribution of sanitizers and hygiene education
as well as to work in disinfection and sanitization. Kenya’s program includes street cleaning,
garbage collection, bush clearance and drainage unclogging services, as well as fumigation and
disinfection. The emergency expansion of the existing Philippines program provided 10 days of
employment in sanitation and disinfection activities to eligible workers.
Beyond infrastructure and sanitation, governments have looked to hire many contact tracers.
These contact tracers “work with patients to help them recall everyone with whom they have had
close contact during the time-frame while they may have been infectious, then contact the
individuals to let them know of their potential exposure.” In the US, according to one survey,
state governments plan to hire at least 36,000 people to work in contact tracing. Similarly,
the UK will hire 18,000 contact tracers. Though some countries have leveraged existing
surveillance technologies or mobile apps, there is likely going to be a high demand in other
countries for contact tracers, which a government could fill using a public works program.
Support to micro SMEs and informal businesses
The ILO predicts that the informal economy will grow as workers are pushed out of small
businesses that close, in some cases permanently, due to economic shut-down measures taken
by governments to help prevent the spread of the disease. Some countries have introduced
measures to support these micro SMEs and informal businesses.
The government in Burkina Faso has suspended fees charged on informal sector operators for
rent, security, and parking. In Gabon, the government has a lending mechanism with
approximately USD 375 million in funding to facilitate access to commercial bank financing for

both formal and informal companies. In Malaysia, the government introduced a special, one-
time MYR 3,000 (USD 690) grant program for micro SMEs with less than 5 employees
(excluding the owner) and less than MYR 300,000 in turnover. Support to micro SMEs and
informal businesses will be important as governments begin to lift stay-at-home orders and
restrictions.

Governments Provide SMEs with Relief for Non-Wage Fixed Costs
Original post here.

As countries adopt measures to respond to the ongoing COVID-19 crisis, many are providing
support to businesses for fixed costs. Fixed costs are those that do not change with the amount
of product or services a firm provides. Though a small business may be able to decrease variable
costs in response to diminished demand or a government-mandated suspension of operations,
small and medium-sized enterprises (SMEs) still face the ongoing burden of fixed costs.
Instruments vary across countries, with some countries providing waivers, grants, deferrals,
moratoriums, loans, or even negotiation tools and eviction protection. Most fall in one of the
following categories:
1. Multiple fixed costs
2. Rent
3. Property taxes
4. Utilities
We have covered programs that support wages, salaries, and other personnel costs earlier. See
our posts on the Paycheck Protection Program, small business support in the United States,
and short-time work schemes.
Programs Covering Multiple Fixed Costs
The Netherlands, Austria, and Denmark have all announced fixed-cost subsidy programs to
cover a specified amount of fixed costs for companies. Unlike programs that cover specific fixed
costs, these programs cover multiple fixed costs.
In the Netherlands, the government announced a EUR 1.4 billion (USD 1.6 billion) support
package for fixed costs of SMEs on May 20. On May 28, the government expanded the
maximum amount of support and extended the time frame. The program will provide up to EUR
50,000 per company for reimbursement of fixed costs for four months. The size of the grant
depends on the size of the company, level of fixed costs, and amount of the revenue loss. Eligible
companies are those with at least a 30% decrease in revenue. Wage costs are not eligible under
the program, but rent, insurance premiums, lease, and maintenance costs are.
The Austrian government has allocated EUR 8 billion in funding for its fixed-cost subsidy
program, which reimburses up to 75% of a company’s fixed costs for up to three months. Eligible
costs include rent, insurance premiums, financing costs for leases, utility costs, spoiled goods
that have lost at least 50% of their value due to the crisis, and interest expenses; including
interest expenses as eligible for reimbursement appears to be unique to the Austrian program.
Support is provided in the form of direct grants to companies that experience at least a 40%
decline in turnover compared to the same quarter in 2019.

Rent
One significant fixed expense many SMEs face is rent payments. In response to COVID-19,
governments at all levels have provided direct support to SMEs in the form of rent waivers,
deferrals, and subsidies, as well as eviction protection.
Government as landlord
For some SMEs, their landlord is the government. In these cases, governments have been able to
provide rent payment relief quickly and efficiently. St. Lucia, for example, waived rental
payments for six months for all small entities renting properties from the
government. Bahrain and Burkina Faso instituted similar waivers. Other countries have waived
rent payments owed to the government from certain sectors, like tourism-related businesses
in Bhutan. In Malaysia, the government’s rent waiver extends to government-linked companies
such as the state-owned oil and gas company (Petronas), highway construction company (Plus),
and urban-development company (UDA), among others.
The Russian government introduced a support program that waives three months of rent owed
to the federal government for SMEs in affected sectors. The measure also defers all rent
payments to all levels of government in the country through the rest of 2020.
Private landlord
Governments also provide support for SMEs whose landlord is not the government. These
programs are more challenging to implement and often shift the burden from small businesses
to landlords; however, many more SMEs rent from private landlords and therefore the impacts
of these programs can be significant. These support programs come in two broad categories: (1)
moratoriums and payment deferrals and (2) government subsidies of all or part of payments.
Government-mandated payment moratoriums have ranged in duration from a few months
(e.g. Albania, Oman, and Slovak Republic) to six months (e.g. Qatar) to even a full year
(e.g. Vietnam).
The government of Singapore passed a SGD 2 billion program (USD 1.4 billion) offering grants
to SMEs to use for rent payments. For SME tenants of commercial properties, the program will
cover two months of rent, and for SME tenants of industrial and office properties, the program
will cover one month of rent.
Other programs seek to distribute the costs between the landlord, tenant, and government. The
governments of Lithuania and the Czech Republic have each introduced programs whereby
landlords of properties with small-business tenants will waive 30% of the rent, the tenant will
pay 20%, and the government will pay the landlord the remaining 50%.
Lease negotiation and eviction protection
Many governments have passed laws restricting the actions of property owners in dealing with
small business tenants who do not pay rent. In Russia, SMEs may simply terminate their lease
without penalty. Spain introduced a mechanism whereby small businesses can renegotiate
leases. In the Netherlands and the Democratic Republic of the Congo (DRC), the governments
have prohibited eviction during the COVID-19 pandemic (the DRC explicitly defined this period
as March through June).

Support through property owners
Rather than provide support directly to SMEs for rent expenses, some governments channel
support indirectly through landlords and property owners.
The Canada Emergency Commercial Rent Assistance (CECRA) program provides support to
property owners. The support comes in the form of unsecured, forgivable loans. The loans to
eligible property owners are forgivable if they reduce rent for small business tenants by at least
75% for the months of April, May, and June. Small businesses eligible for the reduction include
those who pay less than CAD 50,000 (USD 37,000) gross rent per location, generate no more
than CAD 20 million in gross revenue, and have experienced at least a 70% decline in pre-
COVID-19 revenue.
Many governments offer tax breaks to incentivize property owners to reduce rent expenses. For
example, Mongolia and Malaysia offer tax rebates or reductions equal to the amount by which
rent was reduced. In Russia, the government offers tax deferrals to property owners that defer
rent payments.
Property Taxes
Some governments provide property-tax relief to SMEs and other companies through deferrals,
penalty waivers, and discounts.
In the Czech Republic, the government is waiving penalties for companies that do not file and
pay property taxes on time. This provides an extended window for repayment, but it does not
impact the total amount owed. Similarly, Chile provided a property-tax deferral of the first
quarter payment to companies with less than UF 350,000 (USD 12 million) in sales. The
government is not charging interest on the deferred amount and requires the amount to be
repaid with the remaining quarterly payments.
Some countries are targeting specific sectors and industries through property-tax
relief. Georgia is providing a property-tax holiday for hotels through November 1. Egypt is
providing companies in the industrial and tourism sectors with a three-month extension on tax
payments.
Israel has allocated NIS 2.8 billion (USD 806 million) for property-tax discounts for businesses.
Businesses will be eligible for a 25% discount on the property-tax bill. Because local government
authorities are impacted by a decline in property taxes, the federal government is transferring
funds to local governments to make up for the lost revenues. In other countries, local
governments have deferred the payment of property taxes, but not always with a federal
backstop.
Japan has also reduced property taxes for SMEs. The measure impacts the property-tax bill for
2021, unlike measures in other countries which typically decrease or defer the 2020 amount.
SMEs can benefit from a 50% decrease in the tax due if their gross income falls between 30%
and 50% for a three-month period between February and October, 2020; SMEs whose gross
income declines more than 50% will be exempt from paying property taxes during that period.
Utilities
Some countries are also providing relief for utility payments to SMEs. Relief varies across
countries and can take different forms.

In Romania, some SMEs are eligible for utility-payment extensions, which include electricity,
gas, water, phone, and internet services. Guinea, Brunei, and Israel provide temporary deferrals
for companies that are most impacted by the COVID-19 crisis.
In some countries, state and local governments provide direct support to SMEs for utility
payments. For example, San Francisco suspended shutoffs of water and power for 60 days for
residential and business tenants and waived interest and fees on late payments. South Carolina,
Kentucky, and Massachusetts have also temporarily stopped shut-offs for small businesses
during the crisis.

Governments Encourage SMEs to Adopt New Technology
Original post here.

In response to the COVID-19 pandemic, governments around the world are adopting measures to
encourage small and medium-sized enterprises (SMEs) to implement new technology.
Mandatory stay-at-home orders significantly impact foot traffic and revenue for many small
businesses. Governments are encouraging firms to use new technologies to promote objectives
such as establishing e-commerce sales channels, enabling employees to work remotely, increasing
internet access, and moving to cashless payment systems.
Instruments to encourage digitalization vary across countries but include the following:
1. Grants
2. Loans
3. Free online platforms
4. Consulting and advisory services
Grants
Some governments are providing direct financial support in the form of grants or subsidies to
small businesses to encourage the adoption of technologies to enable remote working, online
sales, or cashless payments. The design of such grant programs vary, with some programs
targeting firms of specific sizes or stipulating specific usage while other programs have a broader
range of eligible uses.
In Ireland, eligible SMEs can receive grants of up to EUR 2,500 (USD 2,827) to develop an e-
commerce platform or online trading platform. The Trading Online Voucher is available to SMEs
with up to 10 employees and annual revenue of less than EUR 2 million. Firms are required to
cofund 10% of the cost of the new technology. A firm could be eligible for a second voucher of up
to EUR 2,500 if upgrades are required.
Japan is offering multiple subsidies to firms as a part of the SME Productivity Revolution
Promotion Project. These include a sustainability subsidy, a manufacturing subsidy, and an IT
introduction subsidy. Specifically, the IT Introduction Subsidy provides grants to small
businesses for projects to improve labor productivity by at least 3% after one year and 9% after
three years. Size requirements vary across sectors, with manufacturing companies eligible if they
have less than 300 million yen in capital and less than 300 full-time employees while retail
companies are eligible if they have less than 50 million yen in capital and less than 50 full-time
employees. Firms can receive up to 4.5 million yen (USD 42,118), which in addition to supporting
new technology adoption, can retroactively cover the costs of leasing computers and other
hardware to April 7.
Singapore’s Ministry of Finance announced total measures of SGD 500 million (USD 359 million)
to support businesses in digital transformation. These measures target firms of different sizes.
The first measure, which targets sole traders and microenterprises, provides SGD 300 per month

for five months to stall holders in “hawker centres, wet markets, coffee shops, and industrial
canteens” to adopt e-payment platforms and avoid handling cash. The second measure expands
an existing support program for SMEs, the SMEs Go Digital program, which assists SMEs in the
adoption of new technology. The government is augmenting this program with a Digital Resilience
Bonus of up to SGD 5,000. The bonus is available to firms that adopt electronic payment and
invoicing solutions, in addition to business process and e-commerce solutions. Furthermore, food
and beverage and retail firms that have already adopted such technologies can be eligible for SGD
5,000 if they adopt advanced solutions. The government also has announced a package that
covers 80% of the value of remote working equipment, such as laptops, under the SMEs Go Digital
Program.
South Korea is also encouraging small businesses to go online. Under the government’s proposed
“Digital New Deal” package, it will provide 160,000 SMEs with 4-million won (USD 3,315)
vouchers for accessing remote work platforms, such as videoconferencing.
Loans
Rather than providing direct grants to small businesses, some governments have announced
lending programs for SMEs, with the requirement that firms use the loans exclusively for the
adoption of new technologies.
Bank Negara Malaysia, Malaysia’s central bank, announced multiple credit facilities for SMEs,
one of which is the RM 300 million (USD 70.6 million) Automation and Digitalization Facility to
improve productivity and efficiency. Eligible SMEs can obtain up to RM 3 million in financing at
a 4% interest rate with a maximum term of 10 years. These funds are to be used exclusively for
the purchase of equipment, machinery, hardware, software, and IT solutions and services. The
facility is available through the end of 2020.
Spain’s government announced the SMB Accelerate Plan which is a package designed to
incentivize small businesses to adopt new technologies. One component of the plan is a EUR 200
million credit line through the Official Credit Institute (ICO) to lend to SMEs for the purchase and
leasing of equipment and services for digitalization. Specifically, the government encourages
companies to use the funding to purchase equipment and services for remote work.
Other countries have similarly established lending facilities to encourage technology
adoption. South Korea announced that it would increase total funding for small business loans to
1 trillion won, with 200 billion specifically allocated to encourage businesses to go
online. Argentina also announced a 7.2 billion credit line for SMEs, with funds to be used
exclusively for the purchase or lease of remote working technologies or products.
Free online platforms
To help SMEs navigate government support programs, shift to remote working, and improve
general business management or technical skills, many countries offer free online training courses
and materials. In some cases, the governments themselves provide the training, and in other cases
the training is provided by private companies (often technology companies) and facilitated by the
government. Such platforms can assist SMEs in making the transition to new technologies, in
order to resume operations, expand sales channels, or provide safer working conditions for
employees.

Ireland’s eiLearn platform provides learning resources and hosts training programs, workshops,
and networking events online for SMEs affected by the crisis. The platform is operated
by Enterprise Ireland, a government organization responsible for development and growth of
Irish enterprises. Another Irish government agency, Skillnet, brings together private businesses
and provides training support to SMEs.
The governments of Italy and Austria both provide subsidized use of remote working technologies
like videoconferencing, collaboration tools, internet access, and cloud computing. Austria also
announced the creation of a virtual department store that would allow retailers to become more
visible to existing digital stores like Amazon and Google. Spain’s SMB Accelerate Plan provides
similar resources through its online portal.
In Greece, the government announced a digital solidarity platform where large technology
companies provide free online marketing and account management training to SMEs. The
government also announced an initiative to help SMEs establish an online presence.
The government of New Zealand created an online calculator tool that helps small businesses
forecast their cash flow in the COVID-19 context.
Consulting and advisory services
A question that many SMEs face in response to the COVID-19 pandemic is how to adjust their
business models for the short and long-term. Many governments have introduced programs that
supplement, or fully pay for, advisory services for SMEs.
On April 3, the German government announced an assistance program that would cover up to
EUR 4,000 in consultancy services to help SMEs find solutions for coping with the crisis and
economic shutdown. SMEs quickly drew down the full amount allocated to the program and the
government agency running the program announced that the program had closed sooner than
anticipated.
Korea included significant support for consulting services as part of its recently announced Digital
New Deal. One measure of the plan is to provide 25,000 SMEs with free security testing and
consulting services. The plan also includes funding for consulting services for companies looking
to introduce remote working.
In Spain, the government expanded its Digital Transformation Office program and improved its
personalized advisory services. As part of a March 20 announcement, the government
of Finland indicated that it would dedicate EUR 500,000 to subsidizing counselling and support
services for entrepreneurs. The government of Costa Rica announced support for business
development services to help companies navigate returning to economic activity once the crisis is
over.

MicroFinance Ireland: Targeted Lending for Microenterprises Impacted by

COVID-19
By Mallory Dreyer
Original post here.

Ireland is expanding an existing direct lending program to help small businesses deal with
declining revenues during the coronavirus crisis.
The coronavirus pandemic is projected to have a large and detrimental impact on small and
medium-sized enterprises (SMEs). Many countries have established government credit
guarantee programs to ensure that SMEs can access liquidity. Some countries, like Ireland, have
programs for direct government lending to SMEs in addition to or in lieu of guarantees.
MicroFinance Ireland was established in 2012 by the Microenterprise Loan Fund Act. Its
lending activities are limited to microenterprises with no more than 10 employees and less than
€2 million in revenue that do not meet the risk criteria of private banks. Applicants
are required to prove that they have been refused financing by a bank before their applications
are considered. Thus, the fund was designed so that it does not replace traditional bank lending.
In response to Covid-19, MicroFinance Ireland has launched an emergency lending program.
Microenterprises must demonstrate that they are facing a negative impact on their business
from the coronavirus pandemic, with a minimum expected impact of 15% in lost profits or
revenue. Applicants submit financial projections in a template showing expected monthly
cashflows for six months.
The lending limit for loans under the emergency program is €50,000, an increase from the
normal €25,000, with a maximum three-year term limit. Microenterprises that apply directly to
MicroFinance Ireland will be charged a 7.8% interest rate while those that apply to a local
enterprise office will be charged a 6.8% interest rate. A key feature of the loans is that for the
first six months they will be interest-free and have a payment moratorium, which is designed to
address cash flow uncertainty due to the coronavirus pandemic.
Because MicroFinance Ireland has been operational since 2012, it is already equipped to offer
emergency lending to microenterprises impacted by Covid-19.The program could serve as a
crisis-response model for other countries with institutions similar to MicroFinance Ireland,
although it could be difficult for countries without similar institutions to replicate given the need
for an urgent response.

Federal Reserve Announces Main Street Lending Program
By Mallory Dreyer
Original post here.

On April 9, the Federal Reserve announced the details of its new Main Street Lending
Program to purchase up to $600 billion in small business loans.
The program consists of the Main Street New Loan Facility (MSNLF) and the Main Street
Expanded Loan Facility (MSELF). The Fed established the facilities under its emergency lending
authority under Section 13(3) of the Federal Reserve Act and approved by the Treasury
Secretary. In support of these facilities, the Treasury will make a $75 billion equity investment in
a special purpose vehicle (SPV) using funds appropriated to the Exchange Stabilization Fund
under the CARES Act. The Fed will in turn provide recourse loans to the SPV. The SPV will
purchase a 95% participation in eligible loans while lenders retain the remaining 5%. The SPV
will purchase up to $600 billion in loans.
Eligible lenders include United States insured depository institutions, bank holding companies,
and saving and loan holding companies. Lenders may originate new loans (MSNLF) or expand
the size of existing loans to eligible businesses (MSELF). Both facilities have a minimum loan
size of $1 million.
Under the MSNLF, the maximum size is the lesser of either $25 million or the amount that does
not bring the borrower’s total existing debt to four times its 2019 EBITDA (EBITDA measures a
company’s earnings before interest, tax, depreciation, and amortization). Under the MSELF, the
maximum loan size is equal to the lesser of $150 million, 30% of the borrower’s existing
outstanding and committed but undrawn debt, or the amount that does not bring the borrower’s
total existing debt to six times its 2019 EBITDA.
Lenders can set loan interest rates at the Secured Overnight Financing Rate (SOFR) plus 250-
400 basis points. Loans will have a maturity of four years. Principal and interest payments can
be deferred for one year. Loans purchased pursuant to the MSNLF must be unsecured, while
those purchased under the MSELF may be collateralized.
Businesses with up to 10,000 employees or up to $2.5 billion of revenue in 2019 are eligible for
loans under the program. Eligible businesses must be organized in the United States with
significant operations and a majority of their employees in the country. Businesses eligible to
receive forgivable loans under the Paycheck Protection Program through the Small Business
Administration (SBA) can also participate. A borrower cannot participate in both the program
and the Primary Market Corporate Credit Facility (PMCCF). Borrowers also cannot utilize both
the MSNLF and the MSELF.
Eligible borrowers must commit to making “reasonable efforts” to maintain payroll and retain
employees over the life of the loan. Borrowers must follow compensation, stock repurchase, and
dividend restrictions set forth in the CARES Act for direct loan programs. Businesses with
conflicts of interest, as defined in Section 4019(b) of the CARES Act, cannot participate.
Borrowing under the program cannot be used to pay off existing debt, including pre-existing
portions of eligible loans that are extended under the MSELF.

The Federal Reserve defines fees for participating in the facility, as well as origination and
servicing. Under the MSNLF, eligible lenders will pay the SPV a facility fee of 100 basis points of
the principal amount of the loan participation purchased by the SPV, though the lender can
require the borrower to pay. Borrowers pay an origination fee of 100 basis points of the principal
for loans under the MSNLF. Under the MSELF, borrowers will pay a fee of 100 basis points on
the increase in principal under the expanded loan. The SPV will pay lenders 25 basis points of its
participation in the principal amount per year for loan servicing under both facilities.
The program is set to purchase loans through September 30, though Chair Jerome Powell, in
an interview, said that the end date is tentative and will be extended if necessary, depending on
the state of the economy. The Federal Reserve Board of Governors and the Treasury Department
will be required to approve a proposed extension.

Federal Reserve Introduces Paycheck Protection Program Liquidity Facility
By Kaleb Nygaard
Original post here.

On April 9, the Federal Reserve released the details of its new Paycheck Protection Program
Liquidity Facility (PPPLF), through which financial institutions can use eligible loans made to
small businesses as collateral when borrowing from the Fed. The purpose of the program,
authorized under Section 13(3) of the Federal Reserve Act, is to facilitate such lending to small
businesses.
The CARES Act rescue package, signed into law in the United States on March 27, includes in
Section 1102 the establishment of the Paycheck Protection Program (PPP). The PPP allocates
$349 billion of taxpayer funds to guarantee Small Business Administration (SBA) loans made by
financial institutions to certain small businesses with up to 500 employees. The Fed had made a
brief announcement on April 6 indicating that it was developing a program to provide term
financing backed by PPP loans.
Under the PPP, financial institutions originate loans to eligible businesses. The SBA fully
guarantees these loans. By accessing the PPPLF, the financial institutions can now use these
PPP loans as collateral for loans at their regional Federal Reserve Bank. Such loans will be made
on a non-recourse basis, meaning that the Fed is limited to recovery of collateral in the event
loans are unpaid.
The PPPLF is available to all depository institutions that originate PPP loans. Under section
1102 of the CARES Act, a PPP Loan will be assigned a risk weight of zero percent under the risk-
based capital rules that apply to depository institutions. The Fed has indicated that it will work
to expand eligibility to other PPP lenders in the near future.
The Fed will not apply a haircut to the principal value of the PPP loan, which means it will
accept the collateral at face value. The Fed will charge an interest rate of 35 basis points, but
there is no participation fee. The maturity of the Fed’s loan to the financial institution is set to
match the maturity of the financial institution’s loan to the small business, subject to
acceleration in the event the underlying PPP loan defaults or is forgiven under the terms of the
PPP.
The Fed announced that it will not extend new credit via the PPPLF after September 30.
However, in an interview, Fed Chair Jerome Powell said, “we will be in no hurry to pull back...on
these programs. They are tentatively scheduled to stop lending on September 30. If they have to
go longer, then of course they will. We’ll be looking to make sure the economy really is on a solid
footing before pulling back. And then, as we start pulling back, we will do so very gradually.”

Germany Launches New Support Program After Partial Guarantee Insufficient
to Promote Lending to Small Businesses
By Mallory Dreyer
Original post here.

On April 6, Germany introduced a fully guaranteed loan program to support small businesses
after an earlier partial government guarantee did not achieve its intended results. The Quick
Loan Program will provide fully-guaranteed “instant” loans of up to EUR 800,000 to eligible
businesses.
The earlier KfW 2020 Special Program (KfW-Sonderprogramm 2020), launched on March 23,
provides 80% or 90% credit guarantees to companies experiencing financing difficulties due to
the COVID-19 pandemic. It is available to companies of all sizes, and features lower interest
rates. However, as Bloomberg reported on April 1, banks were reluctant to take on new risk
given the economic circumstances, and private lenders requested full government guarantees on
lending.
The new Quick Loan Program (KfW-Schnellkredit 2020) provides SMEs with loans that are
fully government guaranteed. KfW, the state-owned development bank, will provide banks with
100% liability waivers backed by the government. Firms are eligible for the loans if they have
been active since at least January 1, 2019, were profitable in 2019, and have more than 10
employees. Firms can receive loans for up to three months of 2019 revenue. Loans are capped at
EUR 800,000 for firms with 50 or more employees and EUR 500,000 for those with between 10
and 50 employees. Loans will carry 3% interest for terms of 10 years and include two years of
payment deferral. In order to expedite approval, applications will be approved without risk
assessment by banks or by KfW. Applications will be available starting April 15.
The European Commission (EC) approved the program on April 11, as it aligns with the EU’s
amended Temporary Framework for state aid. The amended framework allows Member States
to provide zero-interest loans or guarantees on loans covering 100% of the risk for loans up to
EUR 800,000 per company.
Support to SMEs in Germany in response to the COVID-19 crisis is not limited to the Quick
Loan Program and the new KfW 2020 Special Program. Small and mid-sized businesses, the
Mittelstand, make up 99.5% of firms, generate 35% of total revenue, and employ approximately
60% of workers in Germany. Thus, according to the Economic Affairs Minister, Peter Altamaier,
the government is working to “safeguard this unique, broad-based cornerstone of [the]
economy.”
On March 23, Germany announced a EUR 50 billion package, the Immediate Assistance
Program, to provide direct cash assistance to small firms, including self-employed individuals
and freelancers. The program provides taxable grants, not loans, to small businesses in all
sectors of the economy with up to 10 employees. One-time payments of up to EUR 9,000, to
cover a period of three months, are available to firms with up to 5 employees while firms with up
to 10 employees can receive one-time payments of up to EUR 15,000. Firms must be
facing financial distress due to the COVID-19 pandemic and declare in the application that their
business is at risk of collapse or experiencing liquidity shortages. The program is financed by the
federal government, but the state (Länder) level handles the granting of aid. On March 29, the

German Länder and the federal government announced that an agreement was reached to begin
implementing the program. The program processed approximately 140,000 applications in a
handful of days and has paid out approximately EUR 1.3 billion. Some firms received the money
within 24 hours.
Two additional measures to provide support to SMEs include expanded export-credit insurance
guarantees and a package to provide venture capital financing to startups. On March 30, the
government announced an expanded scope for export-credit guarantees. This allows the federal
government to issue export guarantees for transactions with short-term payment obligations
within EU and OECD countries. Germany announced a EUR 2 billion package on April 1 to
support venture capital financing for startups, technology companies and small businesses
during the Covid-19 crisis.

Federal Reserve Waives Restriction on Wells Fargo to Allow Lending to Small
Businesses
By Kaleb Nygaard
Original post here.

On April 8, the Federal Reserve temporarily waived a growth restriction on Wells Fargo & Co. so
that it can provide additional lending to small businesses.
The growth restriction is part of an enforcement action that the Fed originally issued on
February 2, 2018. It forbids Wells Fargo from expanding its balance sheet. It also removed a
third of the company’s board of directors.
The enforcement action outlined widespread consumer abuses, including opening millions of
unauthorized customer accounts, forcing people to buy unnecessary auto insurance, and
overcharging members of the military for their mortgages. The enforcement action is still in
effect and will be “until [Wells Fargo] sufficiently improves its governance and controls.”
Wells Fargo, the nation’s fourth-largest bank holding company by assets, announced on April 5
that it had committed $10 billion to lend under the Paycheck Protection Program (PPP). It said
this amount was the upper limit of what it believed it could lend without exceeding the growth
restriction. Some have argued that Wells Fargo could have reduced lending in other areas to
make funds available to issue additional PPP loans.
Congress created the PPP in the CARES Act to provide small businesses with access to
inexpensive, fully-guaranteed, forgivable loans to help replace cash flow and pay expenses
during this period of social-distancing-caused closures. Section 1102 of the CARES Act allocates
$349 billion to the program. For comparison, on April 7, Bank of America indicated that it had
received applications for $40 billion in PPP loans.
The Fed’s April 8 announcement stated that the waiver will be narrow. Loans issued under the
PPP or the Main Street Lending Program (another support program that is available to a wider
range of businesses) will not count against the growth cap. The Fed also required that economic
benefits from the PPP and the Main Street Lending Program be transferred “to the U.S.
Treasury or to non-profit organizations approved by the Federal Reserve that support small
businesses.” These benefits include processing fees that other banks are allowed to keep as part
of the loan origination process under these emergency lending programs.
Shortly after the waiver was issued, Wells Fargo committed to expanding its participation in the
PPP. However, media reports have indicated that it has not been able to process the large
quantity of applications. The company sent a letter to small business customers who had applied
but had not yet received funds indicating that they may want to apply elsewhere.
The waiver will last for the duration of the PPP and Main Street Lending Program.

Italy Expands and Updates its Credit Guarantee Programs
By Kaleb Nygaard
Original Program and its Expansion

Amount of total committed funds
On March 17, the Italian government set aside EUR 100 billion for loan guarantees. This amount
proved insufficient to meet the demand, so in two communications on April 9 and April 10, the
EC approved an increase in the amount of funds available for the guarantees of EUR 400 billion.
It indicated that the guarantees would be administered by two groups within the state lender
Cassa Depositi e Prestiti. The state SME-guarantee-fund Fondo di garanzia per le PMI would
administer 60%, targeting domestic companies, and the state export agency Servizi Assicurativi
del Commercio Estero (SACE) would administer the remaining 40%, targeting companies
working in international markets.
Guarantee structure and credit analysis
In both the initial allotment as well as the addition, the government created a tiered system of
guarantee ratios based on company size. This complex structure (outlined below) allows the
government to more narrowly target the support, but some market participants say it has
also increased the loan origination time and burden for the banks.
• 100% for loans up to EUR 25,000
• 90% for companies with less than 5,000 employees and turnover less than EUR 1.5
billion
• 80% for companies with more than 5,000 employees and between EUR 1.5 billion and
EUR 5 billion in turnover
• 70% for companies with turnover of more than EUR 5 billion
The cost of the guarantee also changes based on the size of the company, reaching as high as 2%
for larger companies.
Although state agencies administer the guarantees, the banking system ultimately is responsible
for making lending decisions for new and refinanced loans. Since a large portion of the loans are
not 100% guaranteed, banks take on a portion of the credit risk and therefore conduct extensive
due diligence reviews before issuing the loans.
New Program for Small Businesses
Although the programs outlined above are open to companies of all sizes, on April 14, the
EC approved an additional, much more generous, Italian credit guarantee program specifically
targeting the self employed and small businesses with up to 500 employees. This program
includes grants in the form of waivers on the guaranteed loan application fees. For loans up to
EUR 800,000 the program guarantees 100%, for loans larger than this amount the program
guarantees 90%. The program’s EUR 800,000 threshold for a full guarantee is significantly
higher than the previous EUR 25,000. Italy now has three major guarantee programs: (1) for

entrepreneurs and small businesses, (2) for medium and large businesses in domestic markets,
(3) for medium and large businesses in international markets.
Usefulness of Loans
Many businesses simply cannot afford to take on debt, even inexpensive debt. For them, revenue
lost during the economic shutdown may never be recovered and new revenue generated after the
economy is reopened may not be enough to cover regular expenses and additional debt
repayments. One Italian restaurant owner’s open letter to the prime minister explaining this
dilemma has received a lot of attention. Other countries provide direct cash grants to small
businesses instead of or in conjunction with credit guarantees

UK Expands Support for Small Businesses After Limited Impact of Initial
Program
By Mallory Dreyer
Original post here.

The UK is no longer requiring would-be borrowers in its crisis-lending program to confirm that
they tried and failed to find funding from a commercial bank. This requirement slowed loan
approvals during the first two weeks of the program.
On April 3, the United Kingdom announced updates to the Coronavirus Business Interruption
Loan Scheme (CBILS) for small and medium-sized enterprises (SMEs) after the initial program
failed to provide widespread liquidity support. On the date of the announced updates, over
130,000 inquiries had been submitted, but only 983 loans had been granted. The updated
scheme became operational on April 6.
The amendment opens the scheme to more borrowers. Initially, the program was limited to
small businesses that were unable to receive standard commercial financing. The guarantee was
designed to incentivize lenders to provide financing to these small businesses. As originally
designed, firms that met a lender’s requirements to receive standard commercial financing were
unable to participate in CBILS, but the government eliminated this requirement as part of the
update, expanding the number of borrowers who can benefit. This appears to alleviate some of
the administrative burden on lenders, as banks considered the process of determining eligibility
to be difficult.
UK based firms with annual turnover less than GBP 45 million are eligible for CBILS. The
program excludes banks, insurers and reinsurers, public sector bodies, grant-funded
educational institutions, and state-funded primary and secondary schools. Firms must certify
that they have been adversely impacted by COVID-19 and have a borrowing proposal that the
lender would consider viable during normal times.
The British Business Bank (BBB), a government-owned business development bank, operates
CBILS through more than 40 accredited lenders. These include traditional banks, but also asset-
based lenders, challenger banks (small, recently-created banks competing with longer-
established institutions), and smaller specialist local lenders. On April 11, the BBB announced
the addition of four new lenders under the program. It will continue to review applications to
accredit more lenders under CBILS.
CBILS provides 80% guarantees on credit facilities up to GBP 5 million. Lending can be in
the form of term loans, overdrafts, invoice finance, and asset finance. Loans can have terms of
up to 6 years.
The government made other changes. First, the amendment prohibits lenders from taking
personal guarantees on loans less than GBP 250,000. For loans greater than GBP 250,000,
personal guarantees are permitted based on the lender’s discretion but are capped at a
maximum of 20% of the facility after applying the proceeds of the business assets. Principal
private residences cannot be taken as security for the facility. Second, lenders are
to retroactively apply the updates to firms that received CBILS facilities prior to April 6. The

government also requested that lenders bring non-CBILS facilities offered since March 23 onto
CBILS when possible.
The government will make a Business Interruption Payment to cover the first 12 months of
interest payments and any lender fees. However, this does not include principal repayments. In
addition, the Treasury has not capped the interest that banks can charge. For some SMEs,
specifically those that have been forced to temporarily close, a loan increases the debt burden at
a time when no revenue is collected.
By April 15, more than GBP 1.1 billion was lent to approximately 6,000 small businesses under
CBILS. UK Finance reported that state backed lending to SMEs had risen by GBP 700 million
(150% increase) and loan approvals doubled in the week leading up to April 15.
Despite the updates and increase in lending, some remain concerned that the scale and speed of
the rollout are not sufficient, given delays, administrative complexity, and demand for liquidity.
In addition to updating CBILS, the government announced the creation of a new credit
guarantee scheme for larger businesses, the Coronavirus Large Business Interruption Loan
Scheme (CLBILS) on April 3. Under CLBILS, the government provides an 80% guarantee to
banks for lending to firms with an annual turnover between GBP 45 million and 500 million.
Loans will be capped at GBP 25 million and offered at commercial interest rates. However, this
program remains limited to borrowers that are unable to secure regular commercial financing.
The Treasury announced that the program will begin lending on April 20.
In addition to credit guarantee schemes, the Bank of England (BOE) announced on April 6 that
the Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises
(TFSME) would begin operations on April 15, which is earlier than anticipated. As of the BOE’s
April 15 Weekly Report, no lending under the facility had been recorded on the bank’s balance
sheet. The TFSME allows eligible banks and building societies to access four-year funding at
rates very close to the bank rate to incentivize credit provision to businesses and households.
For more information on the TFSME, see Central Banks Launch Funding for Lending Programs.

Switzerland Programs Serve as Model for Quick Support to Small Businesses
By Mallory Dreyer
Original post here.

In response to the COVID-19 crisis, the Swiss government quickly established a program to
provide small businesses with rapid access to funds. Some countries, including Italy, are
looking to Switzerland as a model for how to provide immediate relief to small businesses.
The Federal Council of Switzerland approved an emergency package to provide support to small
and medium-sized enterprises (SMEs) on March 25, and the program became operational on
March 26. The package provides SMEs with fast access to guaranteed loans to bridge liquidity
shortages caused by the COVID-19 pandemic. The application process is streamlined, as the
government provides a standardized loan application online, which firms submit to their bank,
and requires minimal documentation. Loans of up to CHF 500,000 carry a 100% government
guarantee, and lenders are not required to perform credit risk assessments for these smaller
loans. Borrowers must attest that turnover has been impacted by the COVID-19 pandemic,
unlike other countries which require a level of expected or actual losses.
Between March 26 and April 2, 76,034 credit agreements worth an estimated CHF 14.3 billion
($14.8 billion) were approved under the program. Based on the total amount of aid and the
number of agreements, it appears that smaller loans are more common. Given the high demand,
the Federal Council approved increasing the funding for guarantees from CHF 20 billion to CHF
40 billion on April 3.
Loans are limited to 10% of annual turnover and capped at CHF 20 million. Loans have a 5 year
term but can be repaid as soon as the firm returns to profitability. Loans that are less than CHF
500,000 carry zero interest and are fully guaranteed by the government while loans that exceed
CHF 500,000 have an 85% government guarantee. These larger loans require more rigorous
credit assessments, and the interest rate is currently set at 0.5%. Firms with more than CHF 500
million in turnover are not eligible.
Implementation of the program appears to align with the government's objectives of minimum
bureaucracy and rapid access to liquidity. The Financial Times reports that the Swiss “were able
to roll out the scheme almost overnight” as it leveraged existing infrastructure and bank-client
relationships. 121 banks in Switzerland are participating lenders, and the largest, UBS,
processed 10,000 applications in the first two days.
The scheme also temporarily allows PostFinance, the banking arm of the country’s postal
service, to provide eligible SME business clients with access to credit up to CHF 500,000. This
ensures broad accessibility of the program for financially constrained SMEs, as many SMEs in
Switzerland do not have bank loans and only have a bank account with PostFinance, which is
otherwise banned from providing credit facilities based on current law.
While other countries elected to provide grants or forgivable loans to SMEs, Switzerland opted
to provide support through guaranteed loans. The Federal Council believes that the program will
aid SMEs during the COVID-19 pandemic without requiring non-repayable advances.

Congress Expands Support to Small Businesses
Original post here.

On April 23, the U.S. Congress passed emergency legislation to appropriate an additional $310
billion for the Paycheck Protection Program (PPP), $50 billion for Economic Injury Disaster
Loans (EIDL), and $10 billion for EIDL Emergency Advances. Congress created the PPP and
EIDL Emergency Advance programs on March 27 in the CARES Act.
The PPP began operating on April 3 and exhausted its initial $349 billion in funding by April 16.
The emergency legislation brings its total funding to $659 billion. Despite the increased
funding, lenders are calling for more as they anticipate that the new appropriations will be
exhausted in a matter of days.
Unlike the original CARES Act, the new legislation earmarks a portion of the funds for smaller
financial institutions. It sets aside $30 billion for depository institutions and credit unions with
between $10 billion and $50 billion in consolidated assets and $30 billion for those with less
than $10 billion in consolidated assets. It appears that the $60 billion for community, small, and
mid-sized banks is designed to target smaller businesses that do not have pre-existing
relationships with larger commercial lenders.
Under the PPP, lenders extend forgivable loans to small businesses. They may use the funds to
cover eight weeks of payroll expenses and other eligible expenses, such as mortgage interest,
utilities, and rent. The Treasury has not changed its guidance on the use of the loans. The
government will forgive the loan on the condition that a business uses at least 75% for
payroll expenses.
Between April 3 and 16, the SBA guaranteed approximately one million loans. The overall
average loan size was $206,000. Many small business owners have complained that lenders
prioritized larger borrowers and their existing customers. All but two of the top 15 lenders had
average loan sizes greater than the overall program average, and the largest lender by total
approved dollars had an average loan size of $515,000. Still, 74% of the loans made to date were
$150,000 or less.
The EIDL program offers loans of up to $2 million to small businesses affected by COVID-
19. Payments on the loans are deferred for one year. As of April 20, the SBA had approved nearly
27,000 loan applications worth a total of $5.6 billion. Media reports indicate approximately 4
million businesses have applied. The SBA has stopped accepting new applications and said they
were processing the applications already submitted on a first-come, first-served basis. The April
23 bill appropriated an additional $50 billion to the loan program. The bill also expanded
eligibility to agricultural enterprises, which had previously been eligible for PPP but not EIDL
funds.
SMEs that apply for EIDLs are also eligible to receive additional support in the form of
an Emergency Advance of up to $10,000. The initial March 27 law allocated $10 billion for these
advances that effectively serve as grants and do not need to be paid back even if the loan
application is not approved. However, if the SME receives a PPP loan, the amount of the loan
that is forgiven will be reduced by the amount of the advance. On April 23, Congress extended

the program by $10 billion. As of April 20, the program had made over 750,000 grants worth a
total $3.3 billion.
The bill also makes an additional $2.1 billion available for SBA salaries and expenses until
September 30, 2021, to be used for COVID-19 related activities. For comparison, the SBA’s most
recent budget request, issued before the crisis, was for $819 million.

Germany Provides Public Funding for Recapitalization and Startup Equity
By Mallory Dreyer
Original post here.

In response to the COVID-19 pandemic, Germany has announced two programs that would use
public funds to purchase equity in domestic companies. EUR 100 billion is available for
recapitalization of companies impacted by COVID-19 and EUR 2 billion is available for
startups.
A central component of the German fiscal response is the Economic Stabilization
Fund (Wirtschaftsstabilisierungsfonds or “WSF”), which the Bundesrat (the German federal
council) approved on March 27. The WSF has EUR 600 billion in funding, of which EUR 100
billion is earmarked for recapitalization of nonfinancial companies, EUR 400 billion is for loan
guarantees, and EUR 100 billion is for direct lending. The new legislation amends a 2008 law
that authorized the government to recapitalize financial institutions.
The Federal Ministry of Finance and the Federal Ministry of Economic Affairs and Energy will
decide measures for companies that apply for support under the WSF. The agencies will
consider the importance of the company in the German economy, the urgency, and the impact
on the labor market and competition.
Using the EUR 100 billion earmarked for recapitalization, the WSF can acquire subordinated
debt, hybrid bonds, profit participation rights, silent participations or convertible bonds. The
WSF can also acquire shares or other components of equity. Recapitalization measures can be
implemented until December 31, 2021, and will be based on market terms. The recapitalization
measures must ensure that the company is a going concern after the pandemic.
In order to benefit from recapitalization under the WSF, a company must require financial
support because of the COVID-19 pandemic and could not be considered in difficulty (per the
EU’s definition) as of December 31, 2019. Eligible companies must be unable to access other
sources of finance in order to benefit from the WSF funds. Eligible companies must also meet
two of the following size requirements:
• At least EUR 43 million in total assets
• At least EUR 50 million in turnover
• More than 249 employees on average
However, exceptions can be made for smaller companies, on the condition that they are
important for critical infrastructure or economic and national security. Companies that have
been valued at minimum of EUR 50 million in a financing round since January 1, 2017, can also
receive support.
On April 1, Germany announced a EUR 2 billion package to support startups during the COVID-
19 pandemic. The package is designed for companies that are unable to receive assistance from
the other government support measures. The package has three elements which will be
implemented gradually and will leverage existing programs.

First, a portion of the EUR 2 billion in funding will be available for public venture capital
investors. These include KfW Capital, the investment arm of the national development bank; the
European Investment Fund (EIF); the High-Tech Startup Fund (High-Tech Gründerfonds);
and Coparion, a co-investment fund established by KfW and Federal Ministry for Economic
Affairs and Energy. These state-owned venture capital investors can co-invest alongside private
investors in financing startups. The public funding cannot exceed 70% of the total co-
investment. KfW Capital and the EIF will receive additional public funding in order to take over
the stakes of funds that pull out. Also, venture capital financing and equity replacement
financing will be facilitated for small businesses and new startups that do not have existing
venture capitalist shareholders.
The government will also continue to work on a EUR 10 billion “future fund” for startups.
Additional information about this fund is not yet available.
During non-crisis times, Germany provides various financing instruments to support startups,
as they are less likely to secure traditional bank financing. The Federal Ministry for Economic
Affairs and Energy provides grants, equity investment, promotional loans, and guarantees to
startups. The German Micro-Mezzanine Fund (Mikromezzaninfonds Deutschland) and the
High-tech Startup Fund (High-Tech Gründerfonds) are sources of direct investment, while other
programs offer incentives for private investors to provide equity to startups, such as the INVEST
Grant for Venture Capital.

ECB Considers Adopting EU Bad Bank
By Mallory Dreyer
Original post here.

On April 19, the Financial Times reported that the European Central Bank (ECB) had discussed
the creation of a bad bank, or asset management company (AMC), for the eurozone with
European Commission (EC) leaders.
Bad banks acquire and manage distressed assets, including non-performing loans, from
financial institutions in order to remove toxic assets from a lender’s balance sheet to allow them
to provide new loans. The idea faces opposition within the EC, and the Financial Times reported
that the discussions have stopped. However, officials did not rule out future discussions later in
the COVID-19 pandemic.
During the Global Financial Crisis, many governments established bad banks, including some
European countries such as Ireland, Spain, and Germany. However, the Bank Recovery and
Resolution Directive (BRRD), adopted in 2014, restricts EU Member States from creating bad
banks unless it is part of the official process to resolve a failing bank. In 2017, a European
Banking Authority official, who is now chair of the ECB supervisory board, proposed a eurozone
bad bank, but it was met with similar resistance by EU officials.
For more information and the working drafts of detailed case studies on previous AMCs, see
the YPFS Resource Library.

UK Announces Support to Innovative Firms
By Kaleb Nygaard
Original post here.

On April 20, the United Kingdom (UK) announced a GBP 1.2 billion ($1.49 billion) support
package for “innovative firms.” The government, in partnership with private investors in some
instances, will deploy the money through a new program called the Future Fund and the
expansion of an existing program called Innovate UK.
Future Fund
The package allocates GBP 250 million to the Future Fund, a new partnership between Her
Majesty’s Treasury and the British Business Bank, a wholly-government-owned development
bank. Only unlisted UK businesses that have raised at least GBP 250,000 in aggregate from
third-party investors in previous funding rounds in the last five years may participate. The
government will partner with third-party investors to issue the convertible loans to eligible
businesses. The government’s portion of the loan will consist of between GBP 125,000 and GBP
5 million. The third-party investors will match at least one-to-one the government’s investment.
The government will have limited corporate governance rights during the term of the loan and
as a shareholder after conversion.
The loans convert at a minimum conversion discount rate of 20% on the next funding round. If
the business is sold or goes public, the loan must be repaid at a premium of 100% of the
principal or converted to equity at the discount rate, whichever is higher for the lenders. The
program forbids businesses from using the money to pay off previous debts or make dividend or
bonus payments to staff, management, shareholders, or consultants.
The initial phase of the program is expected to launch in May and accept applications through
September. The government left open the option to extend the timing beyond September and to
increase the total allocation.
Innovate UK
The GBP 750 million commitment to the government’s innovation, Innovate UK,
will target support to research and development intensive small and medium size firms through
Innovate UK grants and loans.
The announcement indicated that GBP 550 million will be made available to businesses with
existing loans or grants with Innovate UK. The program will also provide 1,200 businesses
without a current relationship with Innovate UK with up to GBP 175,000 each. Innovate UK
expects to deliver the first payments in mid-May. In addition to the newly allocated money, the
government will accelerate delivery of GBP 200 million in grants and loans already approved for
2,500 businesses with existing relationships with Innovate UK. Participation in the acceleration
of delivery of funds will be optional to the eligible businesses.
Other measures
Before the COVID-19 pandemic, the government had a number of programs designed to support
innovative and high growth businesses as part of an initiative to double overall public
investment in research and development from GBP 11 billion to GBP 22 billion by 2025. The

programs include the GBP 2.5 billion government venture capital fund British Patient
Capital and other measures from the British Business Bank, like the GBP 600 million Life
Sciences Investment Programme.

Federal Reserve Announces Changes to Main Street Lending Program
Original post here.

On April 30, the Federal Reserve Board announced updates to the Main Street Lending
Program, after receiving more than 2,200 comments from individuals, businesses, and
nonprofits on the initial terms of the program announced on April 9. Major changes include
creating a third facility that accepts riskier borrowers, lowering the minimum loan size, lowering
the interest rate, and expanding the pool of eligible borrowers.
The Main Street Lending Program is an attempt to encourage lending to small and medium-
sized enterprises (SMEs) by having the Fed purchase up to $600 billion in such loans. Initially,
the program consisted of two facilities: the Main Street New Loan Facility (MSNLF) and
the Main Street Expanded Loan Facility (MSELF).
The newly-announced Main Street Priority Loan Facility (MSPLF) is for new lending, like the
MSNLF; MSELF is for increased lending under existing loans or revolving credit facilities.
MSPLF requires that lenders retain 15% of the loan, compared to 5% under MSNLF and MSELF.
This higher-risk sharing ratio is for borrowers that may be more highly leveraged, as the
maximum loan size under the MSPLF is six times 2019 adjusted EBITDA (earnings before
income, tax, depreciation, and amortization) compared to four times 2019 adjusted EBITDA for
MSNLF.
The earlier term sheets for the Main Street facilities referred only to EBITDA. The reference to
“adjusted” EBITDA represents a significant concession to the industry. It allows a lender to
calculate EBITDA under the same methodology it used previously for the borrower or similarly
situated borrowers. In recent years, lenders have inflated EBITDA by as much as a third by
adding back transaction costs and expected savings that are often not realized.
Businesses with up to 15,000 employees or up to $5 billion in annual revenue are now eligible
for all three facilities, compared to the prior limit of 10,000 employees or $2.5 billion in
revenue. The new MSPLF has a minimum loan size of $500,000. The Fed also lowered the
minimum loan size from $1 million to $500,000 for the MSNLF. This change opens the
program to smaller businesses that were unable to participate under the initial terms.
The Board raised the minimum loan size for MSELF to $10 million from $1 million. The
maximum is now the lesser of $200 million, 35% of the borrower's outstanding and undrawn
available debt, or six times the 2019 adjusted EBITDA. The program originally had a maximum
of $150 million or 30% of the borrower’s outstanding and undrawn available debt. The limit of
six times 2019 EBITDA remains the same. Similar to the reduced minimum loan size under
MSNLF and MSPLF, the increased maximum loan size under MSELF expands the pool of
eligible borrowers.
The Main Street Lending Program is broad-based and does not target specific industries.
Industry groups responded during the window for comments to lobby for access to the
program. Retail and hospitality groups expressed concerns regarding the debt requirements,
and investment professionals sought guidance surrounding EBITDA calculations. Oil and

gas groups also lobbied for changes such as allowing companies with higher debt to borrow
under the program and permitting companies to use the funds to pay down existing debt.
All three facilities have the same eligible lender criteria, which now includes US branches of
foreign banks, and the same borrower eligibility criteria. Loans all have the same 4-year
maturity and the same interest rate. Initially, the interest rate was set at the Secured Overnight
Financing Rate (SOFR) plus 250 to 400 basis points. The new guidance sets the interest rate for
eligible loans at LIBOR (1 or 3 month) plus 300 basis points. All loans also have a deferral of
principal and interest for a year and no penalty for early repayment. For MSNLF loans, one-
third of the principal will be due at the end of each year. Loans under MPSLF and MSELF will
have 15% of principal due at the end of the second and third years with the remaining 70% due
at the end of the fourth year.
Borrowers under the program are also permitted to borrow under the Paycheck Protection
Program (PPP), provided that the borrowers meet the eligibility criteria of the PPP. All
borrowers must make “commercially reasonable efforts” to retain employees and maintain
payroll in order to borrow under the program. In contrast to PPP lending, these loans are not
forgivable.
The Board has not yet announced the start date for the program. The program end date is
currently set for September 30, 2020. The Federal Reserve Bank of Boston will administer the
program and will establish and operate the Main Street Special Purpose Vehicle (Main Street
SPV). The Department of the Treasury will make a $75 billion equity investment in the Main
Street SPV, which will be used to purchase up to $600 billion of participations in eligible loans
under the three facilities.These facilities are established under the Federal Reserve’s authority
under Section 13(3) of the Federal Reserve Act.
Once operational, the Board will disclose information regarding the operations of all three
facilities including the names of lenders and borrowers, amounts borrowed, interest rates
charged, overall costs, revenues, and other fees. Aggregated values of balances under each
facility will be published weekly. One year after terminating the program, the Board will disclose
more details about participation in the program, including the name and identifying details of
each borrower, the amount borrowed, and information about their collateral or pledged assets.
The Board is evaluating a separate program for nonprofits. They are currently ineligible.

Comparison of Main Street Lending Program Facilities
Loan Details MSNLF MSPLF MSELF
Term 4 years 4 years 4 years
Minimum $500,000 $500,000 $10M

Loan Size
Maximum Size Lesser of $25M or 4X Lesser of $25M or 6X Lesser of $200M, 35% of outstanding and
2019 adjusted EBITDA 2019 adjusted EBITDA undrawn available debt, or 6x 2019 adjusted
EBITDA
Lender Risk 5% 15% 5%

Sharing
Repayment Year 1: 0% Year 1: 0% Year 1: 0%

Year 2: 33.33% Year 2: 15% Year 2: 15%
Year 3: 33.33% Year 3: 15% Year 3: 15%
Year 4: 33.33% Year 4: 70% Year 4: 70%
Rate LIBOR + 300 bps LIBOR + 300 bps LIBOR + 300 bps
Source: Federal Reserve

UK Announces New 100% Loan Guarantee Program Targeted at Smallest
Businesses
By Kaleb Nygaard
Original post here.

On April 27, the United Kingdom (UK) announced a new loan guarantee program called
the Bounce Back Loans Scheme targeted at the smallest of small businesses. In contrast to the
80% coverage offered in the UK’s existing credit guarantee program, the government will
guarantee 100% of Bounce Back Loans.
The new program widens eligibility to any UK-based business that has been affected by the
COVID-19 pandemic and was not an “undertaking in difficulty” on December 31, 2019.
Businesses can apply for guaranteed loans between GBP 2,000 and up to 25% of turnover with a
limit of GBP 50,000 ($62,948). The term of the loans will be up to six years. In the first year, no
payments will be required, and the government will cover any fees and interest. The government
also indicated it will work with lenders to agree on a low rate of interest for the loans. The
government did not announce a maximum number of loans or the total amount of money that
would be available in the program.
A business cannot access the Bounce Back Loans Scheme if it already has a loan under the
earlier loan guarantee program called the Coronavirus Business Interruption Loan
Scheme (CBILS). The government guarantees 80% of CBILS loans. If a business already took
out a CBILS loan that is less than GBP 50,000, it can work with the lender to convert the CBILS
loan to a Bounce Back Loan. Businesses have until November 4 to make this conversion.
Accredited lenders will issue the loans, though the list of lenders has not been released yet.
Similar to a loan guarantee program in Switzerland, the government has created a short,
simplified, standard online application that businesses will fill out and take to the lenders. The
government expects businesses to have access within days, often within 24 hours.
The government indicated that the Bounce Back Loans Scheme would be open and operational
on May 4.

Federal Reserve Expands Access to Paycheck Protection Program Lending
Facility to Non-Depository Institution Lenders
By Kaleb Nygaard
Original post here.

On April 30, the Federal Reserve (Fed) announced that it had expanded access to its Paycheck
Protection Program Lending Facility (PPPLF) to allow non-depository institution lenders to
participate.
The Fed’s PPPLF compliments the Small Business Administration’s (SBA) Paycheck Protection
Program (PPP), which guarantees loans made by financial institutions to small businesses with
less than 500 employees. Eligible lenders can use the PPP loans as collateral to borrow from the
Fed. On April 23, Congress expanded the size of the PPP to $659 billion.
The SBA had approved non-bank lenders like Paypal, Square, and Intuit to issue PPP loans, but
the PPPLF was originally only open to depository institutions. In its first PPPLF term sheet,
effective April 9, the Fed indicated that it was working to expand access to other lenders. With
the expansion, the PPPLF is now open to all lenders that are eligible to issue PPP loans. Beyond
financial technology companies, new lenders also include Community Development Financial
Institutions, members of the Farm Credit System, and SBA-licensed small business lending
companies.
Whereas the PPPLF originally only accepted PPP loans that lenders had originated as collateral,
it will now accept PPP loans that the lender either originated or purchased.
The Fed also updated, as outlined in the table below, the Reserve Bank through which the newly
eligible lenders will access the program.
Eligible Borrower Type Reserve Bank
Depository institution or credit union The Reserve Bank in whose District the eligible
depository institution is located (see Regulation D, 12
CFR 204.3(g)(1)–(2), for determining location)
Community development financial institution as defined Federal Reserve Bank of Cleveland

in 12 U.S.C. § 4702 and certified by the U.S. Treasury (that
is not a depository institution or credit union)
Member of the Farm Credit System (that is not a Federal Reserve Bank of Minneapolis
depository institution or credit union)
Small business lending companies as defined in 13 CFR Federal Reserve Bank of Minneapolis
120.10 (that is not a depository institution or credit union)
Other eligible borrower type not listed above Reserve Bank of San Francisco

PPP Rules Changed to Better Target Funds
Original post here.

The Paycheck Protection Program (PPP) has undergone multiple revisions and updates since its
launch at the beginning of April in order to better target funds to high-need small businesses
and clarify program eligibility and operations.
The PPP is a key component of the US response to the COVID-19 crisis and provides forgivable
loans for eight weeks of payroll and other expenses to eligible small businesses that retain or
rehire employees. The program launched on April 3 and expended the initial $349 billion in
funding by April 16. Congress appropriated an additional $310 billion in funding to the
program, and the Small Business Administration (SBA) began accepting applications for the
second round on April 27.
Rule changes and updates issued during the second round of the program include guidance to
target small businesses through smaller lenders, exclude larger companies, manage application
volumes, and clarify program requirements.
Targeting Small Businesses Through Lender Eligibility
On April 26, the day before it began accepting applications again, the SBA announced that it
would cap the total amount that a single bank could lend at $60 billion (approximately 10% of
the total). According to the SBA, no lender accounted for more than 5% of the total in the first
round. The SBA also announced on April 26 that it would allow lenders to submit applications in
bulk, with a 15,000 loan minimum. The SBA lowered this to 5,000 on April 27.
The SBA also expanded a previous interim final rule which allowed non-bank lenders and non-
insured depository institutions to lend under the PPP if they originated, maintained and
serviced at least $50 million in commercial loans for at least a 12-month period in the past three
years. Lenders who perform only one of the origination, maintenance or servicing activities,
subject to the same volume and time period requirements, are now eligible. Lenders that have
originated, maintained and serviced at least $10 million in commercial loans are eligible to lend
under the PPP if it is a community development financial institution (other than federally
insured banks or credit unions) or if its lending portfolio includes a majority of businesses that
are women, minority, or veteran/military-owned.
On April 29, the SBA announced that it would only accept loans from lending institutions with
asset sizes less than $1 billion between 4:00 p.m. and 11:59 p.m. ET. These lenders can also
submit applications during normal operations. This eight-hour period was designed to ensure
that the smallest lenders and their customers have access to the program.
Excluding Larger Companies and Types of Firms
On April 28, the Treasury and SBA announced that all PPP loans greater than $2 million will be
reviewed by the SBA in order to verify that the businesses receiving such loans need the funds to
continue operations. In order to receive a PPP loan, a borrower is required to make a good faith
certification that the loan is necessary for the business to continue operating. The loans are
subject to review prior to the amount being forgiven. In an interim final rule on April 24, the

SBA clarified that borrowers that certified that they needed the funds due to economic
uncertainty but then fully repaid the loan prior to May 7 would be considered to have made the
certification in good faith. According to press coverage, multiple larger companies, including
Shake Shack, received funding under the PPP but have announced plans to repay their loans. On
May 1, Treasury Secretary Steven Mnuchin tweeted that some private K-12 schools with large
endowments received loans under the PPP, and he argued that they should return the funding,
although he did not take any formal action against these schools.
On April 28 the Treasury also explicitly prohibited hedge funds and private equity firms from
accessing PPP loans. No reporting had indicated that they had accessed the funds.
On April 30, the SBA and Treasury released an interim final rule which limited the maximum
loan size for a single corporate group to $20 million. The limit became effective immediately. A
business is considered a part of a corporate group if it is majority owned, either directly or
indirectly, by a common parent. The maximum loan size for a single beneficiary remains $10
million. Previously the SBA had not set a limit on corporate groups.
Managing the Application Process and Volume
The SBA began accepting applications again on April 27 at 10:30 a.m. ET. In order to manage
the expected load on the online system, the SBA informed lenders that it would pace the
submission of applications into the system at 350 loans per bank per hour. Despite the
limit, lenders reported issues with accessing the system. In response to the burden on the online
system, the SBA informed lenders on April 28 that they could no longer use robotic processing
automation (RPA) to submit PPP loans. The SBA claimed that this would allow the processing
system to become more reliable and equitable for small businesses.
Adding Lender Requirements for Disbursement and Processing Fees
The Treasury and SBA also released an interim final rule on disbursements on April 28. This
rule requires lenders to distribute the loan funds within 10 days of approval in a single
disbursement. Multiple disbursements are not permitted. The rule also formalizes the process
through which the SBA will refund lenders’ processing fees. To receive the refund, the lenders
will be required to upload a SBA Form 1502 to report on PPP loans. Once the SBA makes the
form available, lenders will be required to submit the form within 20 calendar days of loan
approval and upload the form for loans made prior to the form becoming available by May 18.
Calculating Seasonal Employment Payroll
The SBA released an interim final rule on April 27 allowing seasonal employers to use an
alternate method to calculate the maximum loan amount. Because these employers have
seasonal variation in their total employment and payroll expenses, the SBA guidance allows the
borrower to elect a prior 12-week period between March 1, 2019 and June 30, 2019.
Lending to Date
By April 29, the SBA had approved 960,000 new loans amounting to $90 billion. Of these loans,
lenders with assets less than $10 billion made 587,000 loans totalling $43 billion; lenders with
assets between $10 and $50 billion made 206,000 loans totalling more than $20 billion; and
lenders with total assets more than $50 billion made 167,000 loans for more than $25 billion.

Denmark Extends Duration of COVID-19 Support Programs and Introduces
New Measures
By Mallory Dreyer
Original post here.

On April 18, Denmark announced two new credit facilities to support small businesses and
extended previously announced temporary support programs which will increase total spending
by DKK 100 billion (US$15 billion).
Introduction of New Measures for Lending Based on VAT and Payroll Taxes
The government announced a new credit facility for businesses based on value-added tax (VAT)
payments. Companies with fewer than 250 employees can apply to the government for a zero-
interest loan based on the amount of VAT paid in 2019. Companies with revenue less than DKK
5 million can receive a loan based on VAT paid in the second half of 2019, while companies with
revenue between DKK 5 million and DKK 50 million can receive a loan based on the VAT paid in
the fourth quarter of 2019. These loans must be repaid by April 1, 2021, or interest will be
charged.
The government also made a lending facility available to small businesses that are exempt from
VAT based on their payroll taxes. This is open to businesses including dentists, doctors, and
taxis. These firms can access a loan with a value of the payroll tax paid for the first quarter of
2020 and a quarter of the payroll tax paid in 2019. Similar to the loans based on VAT payments,
these loans will carry no interest and must be repaid by April 1, 2021.
Extension of Wage Subsidy Program
The announcement also extended existing temporary support measures, including the wage
subsidy program. It will be available through July 8, a month longer than initially planned. The
wage subsidy program provides 75% of total salary expenses or 90% of total wages for non-
salaried employees to companies, with a maximum of DKK 30,000 per employee per month.
Under the wage subsidy program, 95% of the companies that applied for the program as of May
1 received support, with more than DKK 6 billion paid.
Extension and Modification of Fixed Cost Compensation Scheme
The fixed cost compensation scheme will also be available through July 8. In addition to
extending the program, the government modified terms and criteria. Companies can
now receive compensation of 25% of fixed costs if revenue falls between 35-60%, compared to
the prior requirement of 40-60%. The government lowered the minimum fixed cost criteria so
that companies with fixed costs of DKK 12,500 over a three-month period are eligible, compared
to the prior DKK 25,000 requirement. The government raised the limit on support to DKK 110
million per company, up from DKK 60 million.
The government also introduced a new eligibility condition for the fixed cost compensation
scheme that prohibits companies that receive more than DKK 60 million from the scheme from
paying dividends or buying back shares in 2020 and 2021. A company that intends to either buy
back shares or pay dividends in 2020 or 2021 must repay funds in excess of DKK 60 million.

Extension and Modification of Compensation Scheme for Self-Employed
The government also extended the compensation scheme for the self employed and freelancers
and increased the compensation rate from 75% to 90% of lost income or revenue. For those who
are unable to open due to the government ban, the compensation rate is 100%.

FHFA Allows Federal Home Loan Banks to Take PPP Loans as Collateral
By Vaasavi Unnava
Original post here.

On April 23, the FHFA announced that Federal Home Loan Banks (FHLBs) could take Paycheck
Protection Program (PPP) loans guaranteed by the Small Business Administration as collateral
for their advances providing some financial institutions two channels through which to finance
such loans.
The FHFA (the Federal Housing Finance Agency) implements this new policy through its
supervisory responsibilities over the 11 regional FHLBs that make up the FHLB system. The
FHLBs are each separately chartered, member-owned institutions. The system as a whole has
over 6,000 financial institutions as members. Most members are banks and credit unions, but
the membership also includes 60 community development financial institutions and nearly 500
insurance companies.
The FHLB system provides liquidity to its members to promote housing finance. It acted
extensively as a “lender of next-to-last resort” during the Global Financial Crisis. A YPFS blog
noted, based on discount note and bond utilization rates, that the system is stepping into a
similar, though smaller, role now during the COVID-19 crisis.
The PPP, authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was
originally established as a $349 million program pursuant to which the SBA guaranteed loans to
small businesses whose operating expenses were affected by COVID-19 due to social distancing
guidelines.The principal of the loans may be forgiven if certain criteria are met, e.g., if borrowers
maintain payrolls for employees. The U.S. government recently expanded the PPP with an
additional $310 million allocation.
On April 9, the Federal Reserve established the Paycheck Protection Program Lending
Facility (PPPLF), meant to provide liquidity to depository institutions that originated PPP loans
by permitting the use of such loans as collateral when borrowing from the Fed. In the PPPLF
term sheet, the Fed stated that it was working to expand the group of eligible borrowers. On
April 30, the Fed announced that nondepository institutions originating PPP loans would also
be eligible to participate in the PPPLF providing two channels for such lenders wishing to
finance their PPP loans.
FHLBs’ PPP collateral terms differ from the Fed’s PPPLF terms. FHLB members seeking
advances from an FHLB by pledging collateral must have at least a CAMELS rating of 3 or
higher or a credit rating in the top 60% of all members; the lower rating of the two is used to
determine eligibility. (Bank examiners use CAMELS to rate banks’ condition). In comparison, all
originators of PPP loans may borrow from the PPPLF.
Bank regulators said they will not require banks to hold capital against PPPLF loans. The FHFA
did not mention capital forbearance in announcing its PPP policy.
While the Fed doesn’t require any haircuts on collateral, FHLBs must apply at least a 10 percent
haircut on any unpaid balances of PPP loans pledged as collateral (a rate lower than the FHLBs
apply to other collateral). However, the haircut increases should a member lose eligibility. If an
FHLB member loses eligibility to use PPP loans as collateral by either receiving a CAMELS

rating of 4 or falling into the bottom 20-40% of members by credit rating, the lending FHLB
must apply an 80 percent haircut to the collateral. If an FHLB member receives a below 5
CAMELS rating or falls into the bottom 20% of members by credit rating, the lending FHLB
must apply a 90 percent haircut to the collateral.
PPP loans may only constitute 20% of a member’s collateral with its FHLB, and a member may
not pledge more than $5 billion of PPP loans as collateral.
As FHLB banks may accept agency securities as collateral for FHLB advances,
FHFA interpreted PPP loans as agency securities, given that the Small Business Administration
(SBA) guarantees the principle on all unpaid balances of PPP loans. The SBA published an
interim final rule clarifying that lenders could pledge their PPP loans to the Fed or an FHLB as
collateral, without the SBA’s prior consent. The FHFA determined that, in the event of default,
FHLBs could sell any PPP loans received as collateral to another SBA lender, with the SBA’s
consent, preserving the benefit of the SBA guarantee.
Non-depository institutions originally ineligible for the PPPLF may utilize the FHLB system to
finance PPP loans and improve liquidity. However, with the PPPLF’s new expansion of
eligibility, such institutions have two channels to choose between in financing PPP loans, with
the PPPLF’s terms being less restrictive, as shown in the table:
PPPLF FHLB System
Haircut 0% 10%
Eligibility All institutions originating PPP loans All FHLB Members originating PPP loans
Required Supervisory Rating (banks) CAMELS Rating < 5 CAMELS Rating ≤ 3
Rate 35 bps Determined by FHLB Banks
Limit N/A $5 billion
Capital Risk Weighting (banks) 0% N/A
In explaining the new policy, FHFA said that “accepting PPP loans will provide additional
liquidity for small and community banks to borrow from their FHLBank to support the small
businesses in their communities.” The FHFA earlier relaxed standards for mortgage
servicers facing liquidity constraints. By permitting the FHLBs to take PPP loans as collateral,
FHFA can increase liquidity for small community financial institutions, providing additional
support to small businesses.

US Businesses Navigate Multiple Government Support Programs
By Mallory Dreyer
Original post here.

In response to the COVID-19 pandemic, the United States has adopted multiple programs
providing support to businesses, specifically targeting job retention, while at the same time
expanding unemployment insurance benefits and eligibility. Programs to support businesses
vary across types of benefit and eligibility criteria. This post summarizes government support
options available to businesses in the United States and some potential considerations for
employers and employees.
Available programs include the following; however, the list is non-exhaustive, as state and local
governments have also announced programs:
• Paycheck Protection Program
• Employee Retention Tax Credit
• EIDL Loans and Grants
• Short-time Compensation
• Main Street Lending Program
• Unemployment Insurance
In determining how to respond to the COVID-19 pandemic, firms may evaluate the following:
• What support is the firm eligible to receive?
• When will the business receive support and how easily can it be accessed?
• How do wages compare to unemployment insurance benefits?
• What are the restrictions on using the support?
• When will the business be able to reopen and how will operations change upon
reopening?
Available Programs
Paycheck Protection Program
On March 27, Congress passed the CARES Act which established the Paycheck Protection
Program (PPP). Under the program, small businesses apply for SBA-guaranteed loans from
eligible lenders, and the government forgives up to 100% of the value of the loan if it is used
primarily for payroll expenses. The PPP will cover up to $100,000 in annualized salary or wages
per employee, and the maximum loan amount is $10 million.
The program incentivises small businesses to maintain their payroll, as a decrease in the payroll
numbers proportionally decreases the amount of the loan that can be forgiven. If an employer
rehires an employee it laid off earlier, the payroll expenses can be forgiven. If an

employer attempts to rehire an employee and the employee declines, the amount of forgiveness
will not be reduced.
The SBA exhausted the $349 billion in appropriations by April 16, but Congress allocated an
additional $310 billion in funding through emergency legislation on April 23. The SBA began
accepting applications again on April 27. The Small Business Administration and Treasury have
released multiple interim final rules, clarifying eligibility criteria and operations.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit to employers that are
required to fully or partially suspend operations in 2020 (during any calendar quarter) due to a
government mandate or that experience a 50% decline in gross receipts compared to the same
quarter in 2019. The credit amount is determined based on the number of employees. For firms
with more than 100 full-time employees, only the wages paid to employees who are not working
are considered qualified wages. For firms with fewer than 100 employees, all employee wages
are considered qualified wages. Only wages paid between March 13 and December 31, 2020 are
eligible. Employers will receive a fully refundable tax credit of 50% of up to $10,000 in qualified
wages per employee. Firms borrowing under the PPP cannot claim the ERTC.
EIDL Loans and Grants
The SBA has another lending program for small businesses, the Economic Injury Disaster Loan
program (EIDL), which provides grants of up to $10,000 and loans on favorable terms. Similar
to the PPP, initial appropriations were expended in mid-April, but the emergency legislation
made additional funds available. The SBA announced on May 4 that EIDL loans and grants
would only be available to eligible agricultural businesses going forward. Applications that were
submitted prior to the temporary suspension of application submissions will be processed in the
order received.
Short-time Compensation
The CARES Act also provides federal funding for short-time compensation (STC) programs.
States with new or existing short-time compensation programs will receive 100% federal
funding for payments under these programs through December 31. Short-time compensation is
a program within the unemployment insurance system that provides benefits to workers whose
hours are reduced. Employers can reduce hours of work for employees rather than laying off
some employees, and those whose hours are reduced will be able to collect a percentage of
unemployment compensation benefits to replace some of their lost wages.
Twenty-six states currently have operational programs, but there is variation across state
administration and requirements. For example, Connecticut allows for a 10-60% reduction in
work hours, while Michigan allows for a 15-45% reduction.
In order to receive support, an employer must submit the work plan to the responsible state
agency and obtain approval. Employers are required to maintain health, retirement and other
benefits for employees in the program. During the covered period, an employer cannot lay off
employees who are receiving short-time compensation.
Short-time work schemes are common in Europe, and the European Commission announced a
temporary initiative to support short-time work schemes in Member States.

Main Street Lending Program
The Federal Reserve Board announced the Main Street Lending Program on April 9 and
updated terms on April 30. Under the program, the Federal Reserve will purchase participations
(either 85 or 95%) in eligible loans to companies with up to 15,000 employees or less than $5
billion in revenue.
Unlike the PPP, these loans are not forgivable and will carry a higher interest rate. Borrowers
must make “commercially reasonable efforts” to maintain payroll and retain employees.
However, the program only requires borrowers to undertake “good-faith efforts” and allows
firms that have already laid off or furloughed workers to apply for Main Street loans. The
Federal Reserve Board has not yet announced the start date of the program.
Unemployment Insurance
Some employers are laying off or furloughing workers in response to COVID-19. The CARES Act
expanded unemployment insurance in the United States through three components.
• The Pandemic Unemployment Assistance (PUA) makes benefits available to individuals
who are self-employed, seeking part-time employment, or who otherwise do not qualify
for unemployment insurance benefits under state or federal law.
• The Federal Pandemic Unemployment Compensation (FPUC) program provides an
additional $600 in unemployment benefits per week to eligible individuals through July
31, 2020.
• The Pandemic Emergency Unemployment Compensation (PEUC) program allows
individuals to receive 13 additional weeks of benefits.
The Bureau of Labor Statistics reported in the April employment report that the unemployment
rate increased by 10.3 percentage points to 14.7%. Temporary layoffs accounted for 18.1 million
of the 20.5 million job losses in April.
Potential Considerations For Employers and Employees
What support is the firm eligible to receive?
Eligibility criteria differ across programs. The PPP targets small businesses, though it has
received heightened press coverage and criticism as some larger companies have received aid.
The SBA and Treasury have released interim final rules regarding eligibility to attempt to limit
larger companies with access to public financing from accessing the program. Private equity
firms and hedge funds are explicitly excluded from the program.
The Main Street Lending Program is available to companies with up to 15,000 employees or $5
billion in revenues, making it available to companies of larger sizes, though nonprofits are not
eligible.
The ERTC does not have a size restriction, though companies with more than 100 employees can
only claim the tax credit for employees who are paid but not working in the quarters it is
applied. The ERTC is available to companies that experience a 50% decline in gross receipts
compared to the same quarter of 2019, thus targeting firms that have experienced a significant
decline in revenue.

The EIDL program is only available to agricultural businesses as of May 4.
When will the business receive support and how easily can it be accessed?
For many small businesses, containment measures have led to an urgent need for support.
According to a recent survey of small businesses, approximately 25% of firms surveyed did not
have enough cash to cover more than one month of expenses. Approximately 50% had enough
cash to cover between one and two months of expenses. Recent Federal Reserve Bank of New
York research found that less than 20% small businesses in the US can continue normal
operations with their cash reserves if they experience a two-month revenue loss. Thus, the speed
at which a program provides support to businesses is an important consideration.
A week after announcing the PPP, the SBA began administering the program. Businesses that
are able to submit applications through their lenders and receive approval can quickly receive
funds. However, in the first phase of the program, many borrowers were not able to receive
funds due to the first-come-first-serve nature. The SBA has not yet announced details regarding
the process for loan forgiveness.
For businesses that need immediate support, the Main Street Lending Program may not provide
quick relief, as the Federal Reserve Board has not yet announced the start date.
The ERTC provides support through a tax credit, which can provide immediate benefits.
Employers report the total qualified wages for the ERTC in quarterly federal employment tax
returns. These employers can fund the qualified wages by accessing withheld federal
employment taxes or requesting an advance for the credit from the IRS. Short-time
compensation programs vary across states but an employer’s plan requires approval from the
responsible state agency.
How do wages compare to unemployment insurance benefits?
According to another recent survey of small businesses, many firms surveyed had already laid
off workers in response to the economic shock of COVID-19.
Reducing payroll can provide immediate relief to firms, and individuals who are laid off can
apply for unemployment insurance, which is augmented by an additional $600 per week from
the federal government.
Some have noted that unemployment benefits exceed the prior earnings of some individuals, as
the $600 addition averages to $15 per hour for a 40-hour work week, which is above state
minimum wages. It is important to note that employees generally cannot quit a job in an
attempt to receive unemployment benefits. The Department of Labor released recent guidance
that workers who quit a job without good cause in an attempt to receive UI will have committed
fraud. Additionally, some employers and employees may find that reduced hours as opposed to
layoffs may be preferable to unemployment as relationships remain intact. Workers in job-
protected leave or in partial unemployment status may be able to retain healthcare coverage or
other benefits.
The CARES Act also waives the one-week waiting period for unemployment benefits, which is
standard in many states. The speed at which individuals are able to receive unemployment
benefits depends on the state unemployment system and infrastructure. Many systems are

overburdened in response to the more than 33 million new claims since the start of the COVID-
19 pandemic.
What are the restrictions on using the support?
Some programs place restrictions on how the funds can be used. For example, 75% of
PPP forgivable loans have to be used on payroll expenses. This has been criticized by firms with
high non-payroll expenses, such as rent. PPP loan forgiveness also decreases in proportion with
reductions in the number of employees, which is designed to incentivize employee
retention. Some firms are awaiting clarification on loan forgiveness from the Treasury and SBA.
The Main Street Lending Program is not targeted at microenterprises, as the minimum loan size
is $500,000. Under the Main Street Lending Program, payroll retention is encouraged but not
required explicitly, as borrowers must make a good faith certification that they will attempt to
retain employees.
PPP participants cannot claim the ERTC. Businesses that meet criteria for both the Main Street
Lending Program and the PPP are able to use both. STC programs supplement an employee’s
wages through the unemployment insurance system, thus directly providing support to the
individual.
When will the business be able to reopen and how will operations change upon
reopening?
Uncertainty regarding the timeframe for reopening remains. The PPP provides eight weeks of
payroll support, which some worry may not be adequate if current containment measures
remain. Other countries, such as Denmark, have already announced extensions of programs to
support businesses and individuals.
UI benefits are available for an additional 13 weeks, but during the Global Financial Crisis, the
eligibility period was extended multiple times so that individuals could receive up to 99 weeks of
UI benefits.
As the economy reopens, some argue that the increased unemployment benefits will make it
challenging for businesses to rehire workers that are collecting more in unemployment
insurance benefits than they would be working. However, workers that refuse a work offer
generally will not be able to continue to collect unemployment insurance benefits.
Some companies may not be willing to take on debt given the economic uncertainty; thus
programs that operate as grants may be more appealing. Given the likelihood of a long period
of economic recovery, businesses that reopen may not see an immediate return to pre-COVID-19
operations. This may impact an employer’s ability to rehire all employees and may make
borrowing unattractive.
STC programs may be attractive to employers who want to adjust operations in response to the
COVID-19 pandemic while retaining employees and maintaining relationships. Businesses will
also need to take safety precautions and modify operations in order to account for government
guidance related to testing, sanitation, and physical distance.

The Philippines Provides Support to Workers in the Informal Economy
Original post here.

The Philippines government has included a temporary short-term work program that aims to
employ close to 1 million workers in the informal sector in its COVID-19 response
package.The TUPAD #BKBK program provides temporary employment opportunities to
workers in the informal sector, as these workers are particularly vulnerable to economic
hardship due to the COVID-19 pandemic.
Informal sector workers are those who do not have secure employment contracts and generally
do not have benefits or access to a social safety net. According to the International Labour
Organization, the informal economy in the Philippines consists of independent, self-employed
small scale producers and distributors of goods and services. Nearly 40% of the workforce in the
Philippines is considered employed in a “vulnerable” source of employment, which is a proxy
measure for the informal economy.
The Department of Labor and Employment (DOLE) manages the TUPAD #BKBK program
(Tulong Panghanapbuhay sa Ating Disadvantaged/Displaced Workers, Barangay Ko, Bahay Ko).
The TUPAD #BKBK program provides the minimum wage to unemployed informal sector
workers to perform disinfection and sanitation work of their dwellings and the surrounding
areas for 10 days. Individuals will also undergo an orientation on safety and health and be
enrolled in group micro-insurance (insurance policies specifically targeted to disadvantaged
individuals).
The TUPAD program is an existing DOLE program that provides short-term employment
opportunities to displaced, underemployed or seasonal workers for a minimum of 10 days and a
maximum of 30 days. Individuals work on infrastructure projects such as repair or maintenance
of public facilities or bridges, and agro-forestry projects such as reforestation. The TUPAD
#BKBK program is an emergency measure specifically designed to support individuals during
the COVID-19 pandemic. Funding for the TUPAD #BKBK program comes from the DOLE’s
2020 budget, with more than PHP 1 billion spent as of April 29.
As of May 10, 337,000 workers received benefits from the TUPAD #BKBK program, with a total
of 540,000 expected to benefit from the TUPAD #BKBK program and a total of 962,000
expected to benefit from all TUPAD measures.
The DOLE is expanding the emergency program to allow local government units to provide
short-time employment for delivery of essential goods and services, including PPE. Local
governments can also hire workers for the packaging of support equipment, transportation of
front-line workers, and sanitation and disinfection of communities.
At the end of April, the DOLE announced that it planned to continue to leverage the TUPAD
program during the COVID-19 recovery phase. The post-COVID TUPAD program, which has
PHP 4 billion in funding, is set to operate in May and June in regions under the general
community quarantine.
Providing short-term public employment appears to be a relatively uncommon emergency
measure to support informal sector workers. However, the Philippines is also providing

financial assistance in the form of cash grants to individuals, including those in the informal
sector. The Emergency Subsidy Program is a PHP 205 billion emergency subsidy program for 18
million low-income families. Families with low incomes, including those who work in informal
sector jobs, are eligible. Families receive between PHP 5,000 and 8,000 for two months. By May
2, PHP 60.6 billion had been distributed to 11.3 million beneficiaries, and the government added
an additional 5 million families on May 4. The Department of Social Welfare and Development
will also provide Livelihood Assistance Grants (LAGs) to beneficiaries of the existing Sustainable
Livelihood Program, who have at least one family member who works in the informal sector who
is displaced by the lockdown measures. LAGs will be granted after the quarantine ends.

EU Expands Temporary Framework For State Aid to Allow Recapitalization
By Mallory Dreyer
Original post here.

On May 8, the European Commission (EC) approved new measures under the Temporary
Framework for State Aid, which allow Member States to purchase equity and subordinated debt
from non financial companies. The EC will allow recapitalization measures through June 30,
2021, a time period six months longer than other measures under the Temporary Framework.
The European Commission adopted the Temporary Framework for State aid on March 19.
The initial framework allows Member States to provide direct grants, selective tax advantages,
and advance payments to companies, in addition to allowing public guarantees on loans and
subsidized public loans to companies.
The EC adopted the first amendment to the framework on April 3. The first amendment allows
Member States to grant aid for coronavirus-related research; or provide support for
construction of testing facilities or production of supplies related to the COVID-19 outbreak.
Member States can provide targeted support to companies through tax or social security
contribution deferrals and wage subsidies.
The second amendment allows Member States to provide public support to companies in the
form of equity or hybrid capital instruments. Recapitalization can be in the form of equity or
hybrid capital instruments. This includes new common or preferred shares, profit participation
rights, silent participations, and convertible secured or unsecured bonds.
Under the Treaty on the Functioning of the European Union (TFEU), Member States that take
equity stakes in strategic companies by buying existing shares at market price, or invest pari
passu with private shareholders, are not considered to have provided State aid.
The EC established a set of conditions for the use of recapitalization measures related to
appropriateness, remuneration, exit strategy, governance, and cross-subsidization or acquisition
of competitors.
Appropriateness
Recapitalization should only be used if there is no other appropriate solution and should only be
used to ensure the viability of the company. In order to be eligible for recapitalization aid, a
beneficiary must not be able to find affordable financing on the market. Aid should not go
beyond restoring the company’s pre-COVID-19 capital structure, and companies that were
considered in difficulty as of December 31, 2019, are not eligible.
Remuneration
Member States must be sufficiently remunerated for the risks assumed through
recapitalization.
Equity Instruments
For equity instruments, the price paid by the Member State cannot exceed the average share
price of the beneficiary over the 15 days prior to the request for assistance. If the company is not

publicly traded, the price will be based on an estimate of the market value established by an
independent expert.
Recapitalization measures should include a step-up mechanism to increase the remuneration of
the State to incentivize a beneficiary to buy back the State’s equity investment. The step-up
mechanism can be in the form of additional shares or other mechanisms. The step-up
mechanism will be activated if the State has not sold at least 40% of its participation after four
years for publicly-listed companies or five years for private companies. If the State has not sold
its participation in full after six years for publicly-listed companies or seven years for private
companies, the step-up mechanism will be activated again. The step-up mechanism will increase
the State’s share by at least 10%. For example, if the State’s stake is 40% after four years, the
participation will increase by at least 4 percentage points. Hybrid capital instruments converted
to equity will also be subject to the step-up mechanism.
Hybrid Capital Instruments
Remuneration for hybrid capital instruments must take into account the level of subordination,
risk, payment modalities, incentives to exit, and an appropriate benchmark interest rate. Hybrid
capital instruments must pay a minimum of the 1-year interbank offered rate (IBOR) plus the
rate from the following table:
Recipient Type Year 1 Years 2-3 Years 4-5 Years 6-7 Year 8 and after
Small and medium-sized enterprises 225 bps 325 bps 450 bps 600 bps 800 bps
Large Companies 250 bps 350 bps 500 bps 700 bps 900 bps
Hybrid capital instruments can be converted to equity.

Governance
Companies are banned from share buybacks and dividends for as long as the Member State has
an equity share. In addition, companies must adhere to a strict limitation on management
compensation, including a ban on bonus payments, as long as 75% of the recapitalization is
outstanding. Companies are also banned from t
Member states will be required to report the identity of the beneficiaries of recapitalization
measures within three months. The EC encourages but does not require Member States to
incorporate a focus on green or digital transformation in recapitalization measures. However,
large companies will be required to annually report on how the aid is used, specifically related to
the EU objectives of green and digital transformation.
Preventing Distortion of Competition
If recapitalization of a single beneficiary with significant market power exceeds EUR 250
million, the Member State will be required to take additional action to preserve competition in
the market. In addition, large companies receiving recapitalization support are not permitted to

acquire more than a 10% stake in competitors, companies in the same line of business, or
upstream and downstream suppliers, as long the State retains at least 75% of its stake.
Exit Strategy
A Member State can sell its equity stake at market prices to buyers other than the beneficiary at
any time after the initial investment.
Large companies that receive recapitalization equal to at least a 25% equity stake must develop
and submit an exit plan for the participation of the State unless the State’s stake is reduced to
less than 25% after one year. The exit plans must include a planned payment schedule for the
remuneration and the redemption of State investment. Beneficiaries are required to submit
plans within 12 months of receiving aid, and the Member State is required to approve the plan.
If the Member State’s stake is 15% or greater after six years for a publicly-listed company or
seven years for all other companies, the EC will require a restructuring plan for the beneficiary.
Subordinated Debt
The second measure in the amended Temporary Framework allows Member States to buy
subordinated debt. In such cases, the State’s position is subordinated to that of ordinary senior
creditors in insolvency proceedings. Subordinated debt provided to companies above the
established limits for aid to a beneficiary will be subject to the conditions for recapitalization.
For large companies, aid in excess of two-thirds of the annual wage bill or 8.4% of the total
turnover in 2019 will be subject to the recapitalization conditions. For small and medium-sized
enterprises, the limit is either the full annual wage bill or 12.5% of the total turnover in 2019.
Subordinated debt cannot be converted to equity while a company is a going concern.
The following table provides a summary of the measures of the Temporary Framework for State
Aid, which was adopted on March 19 and amended on April 3 and May 8.

Date Included Measures
March 1. Direct grants, selective tax advantages and advance payments up to EUR 800,000
19
2. State guarantees for loans taken by companies from banks
3. Subsidized public loans with favorable interest rates to companies
4. Safeguards for banks that channel State aid to the real economy
5. Short-time export credit insurance
April 3 1. Support for COVID-19 related research and development

2. Support for the construction and upscaling of testing facilities
3. Support for the production of products relevant to the COVID-19 outbreak
4. Targeted support in the form of deferral of tax payments or social security contributions
5. Targeted support in the form of wage subsidies for employees
6. Expands the provisions in the initial temporary framework, allowing companies to receive up to
EUR 800,000 in aid through zero-interest loans, 100% guarantees
May 8 1. Recapitalization of nonfinancial companies through equity and hybrid equity instruments
2. Support to companies through subordinated debt at favorable terms

Nepal Expands Public-Works Program
By Kaleb Nygaard and Mallory Dreyer
The Nepali government introduced the public-works program, called the Prime Minister
Employment Program, in early 2019, “to create job opportunities within Nepal and end Nepal
youth dependency on jobs abroad.” Unemployed persons between the ages of 18 and 51 are
eligible to apply. They are assigned jobs based on their qualifications and interest areas, and
receive vocational and skill-oriented training.
The jobs include traditional infrastructure projects like tree planting, public toilet construction,
road construction and improvements, drainage repair, playground improvements, soil
irrigation, drinking water and irrigation projects, and trekking trail building.
Originally, the program guaranteed a minimum of 100 days of work along with a subsistence
allowance; however, due to a relatively slow start, the guarantee was reduced to 30 days. For the
first year, the government allocated NPR 3.1 billion (USD 25.6 million) for the program, NPR
100 million of which was to be spent on administration. Each project, administered at the local
level, could receive up to NPR 500,000. The program faced accusations of malpractice and
fraud. Government statistics show that 175,909 were hired for these public-works projects but
only for an average of 13 days per person.
On December 30, 2019, the Nepali government announced an expansion of the Prime Minister
Employment Program. The government allocated an additional NPR 5.01 billion for the fiscal
year. The larger total was made possible by a loan from the World Bank worth NPR 2.62 billion.
This year’s program saw a number of amendments. Localities now must submit their project
proposals first before funds will be given; local units must spend at least 70%of the allocated
budget on payment for work to the registered citizens; and projects like rearing stray animals
and gardening are no longer allowed.
In addition to the employment program, on April 26 Nepal announced that informal sector
workers who had lost their jobs due to the crisis would receive 25% of a local daily wage if they
chose not to participate in the public-works projects.

Bank of Japan Introduces New Facility to Support Bank Lending to Small and
Medium-Sized Firms
Original post here.

On May 22, the Bank of Japan (BOJ) announced a new, 30 trillion yen ($279 billion) facility to
support bank lending to small and medium-sized enterprises (SMEs).
The Japanese government announced an emergency program to support lending to SMEs in
early March. Under this program, small businesses can take out zero-interest, unsecured loans
of up to 30 million yen from financial institutions, including the Japan Finance Corporation,
Shoko Chukin Bank, local banks, shinkin banks, and credit unions. The terms allow banks to
defer principal payments for up to five years.
Through the new facility, the BOJ will offer loans for up to one year at a 0% interest rate to
financial institutions. However, the BOJ will also pay financial institutions 0.1% interest on the
amount of loans made under the new facility. Thus, the loans effectively carry a negative 0.1%
interest rate, which is the same rate the BOJ pays (charges) on excess reserves. As collateral for
the loans, the financial institutions may post loans, or pools of loans, made under the emergency
government programs or loans with similar terms and counterparties.
The BOJ will begin extending loans under this new facility in June, taking into account loans
made by financial institutions as of end-May. The new facility will operate through March 31,
2021.
The BOJ’s new facility is similar to the Federal Reserve’s Paycheck Protection Program Liquidity
Facility (PPPLF). Under the PPPLF, eligible lenders can use PPP loans made to small businesses
as collateral when borrowing from the Fed.
Prior to the May 22 announcement, the BOJ announced separate facilities to support lending to
corporations through commercial paper or corporate bonds. This facility has 45 trillion yen in
funding, which brings the BOJ’s total support for lending to businesses to 75 trillion yen.

Poland’s Financial Shield Provides Support to Businesses
By Mallory Dreyer
Original post here.

In response to the COVID-19 pandemic, on March 31, the Polish government announced its
“Anti-Crisis Shield,” which includes the “Financial Shield” to support microenterprises, small
and medium-sized enterprises, and large companies. The Financial Shield has PLN 100 billion
(USD 24.8 billion or approximately 4.5% of 2019 GDP) in total funding. The Polish
Development Fund (PFR), a state-owned financial group, is responsible for the administration
of the Financial Shield.
As of June 1, more than 222,000 companies (both microenterprises and SMES) with 2.1 million
employees benefited from the Financial Shield, and the PFR has paid out more than PLN 42
billion (USD 10.7 billion). Support to microenterprises and SMEs is in the form of a repayable
advance with partial forgiveness.
Support to large companies will be in the form of liquidity financing, preferential financing, or
equity financing. The European Commission (EC) approved the liquidity financing component
of the Financial Shield targeting large companies on May 26. The equity and preferential
financing components are under EC review and awaiting approval. After receiving approval, the
PFR will begin administering the support measures for large companies.
Financial Shield for Microenterprises and SMEs
Support to microenterprises and SMEs will be in the form of repayable advances, which are
similar to forgivable loans. These advances carry the possibility of redemption (forgiveness) of
up to 75% after 12 months, contingent upon the firm maintaining employment and business
operations. Eligible microenterprises have 1 to 9 employees and eligible SMEs have 10 to 249
employees. These firms must have been in operation as of December 31, 2019.
Under the Financial Shield, PLN 25 billion (USD 6.2 billion) is allocated for repayable advances
to microenterprises, and PLN 50 billion is allocated for repayable advances to SMEs. To be
eligible, firms must report a revenue decline of at least 25% compared to the same month of
2019. The scheme explicitly requires beneficiaries to have a tax residence in the European
Economic Area, and firms cannot have a tax residence in a “tax haven” as defined by the
EU. Funds granted to firms under the measure are not taxable.
On April 27, the European Commission approved the Financial Shield measures for
microenterprises and SMEs. The PFR began accepting applications from eligible firms on April
29. Repayable advances to microenterprises and SMEs are channeled through commercial
banks, but banks cannot charge fees or commissions to beneficiaries or to the PFR. Commercial
banks are not responsible for the lending decisions or eligibility conditions, as the PFR carries
those responsibilities. Participation in the program is voluntary, and more than 15 banks have
registered.
Aid to microenterprises and SMEs can be granted through July 31; the government may extend
the scheme through December 31. Funds are granted to firms based on the order in which
applications are received.

Microenterprise Advance Size and Forgiveness
The amount of the advance for a microenterprise is determined by the amount of revenue lost
and the number of employees. The amount per employee ranges from PLN 12,000 to PLN
36,000, depending on the revenue lost, and advances are capped at PLN 324,000 per firm.
The amount a firm is required to repay is dependent on its continued operations and employee
retention. A firm will be required to fully repay the advance if it suspends business activity,
begins a restructuring process, or undergoes liquidation. If the firm maintains the business
activity over the 12 months following the advance, it will be required to repay the first 25% of the
advance. The remaining 75% of the advance can be forgiven based on the number of employees
maintained; firms that maintain full employment will be forgiven the full 75%.
SME Advance Size and Forgiveness
The size of the repayable advance for an SME is determined by the firm's revenue in 2019 and its
revenue decline. The advance size, which is dependent on the scale of the revenue decline,
ranges from 4% to 8% of 2019 revenue. The maximum advance amount, regardless of the
revenue lost, is PLN 3.5 million.
Similar to the scheme for microenterprises, an SME will be required to fully repay the advance if
it suspends business activities, liquidates, or begins restructuring activities. All other SMEs will
be required to repay the first 25% of the advance. The next 25% will be decreased by the total
cash loss during the year after the advance was received. Thus, if the cash loss exceeds 25% of
the size of the advance, the SME will not be required to repay the next 25% of the advance. The
remaining 50% of the advance will be forgiven based on employee retention; firms that maintain
the same employment numbers will be forgiven the full 50%.
Financial Shield for Large Corporations
Support for large corporations can be through liquidity financing, preferential lending, or equity
financing. The government has allocated PLN 25 billion in total funding to support larger
corporations, with PLN 10 billion for liquidity financing and PLN 7.5 billion each for preferential
financing and equity financing.
Liquidity Preferential Financing Equity Financing

Financing
Total Funding PLN 10 billion PLN 7.5 billion PLN 7.5 billion
Instruments Loans, bonds, Partially forgivable loans (up Shares, subscription warrants, or convertible
purchase of to 75%) loans
receivables, or
warranties
Maturity 2 years with 3 years with option to extendN/A

option to extend for 1 year
for 1 year
Maximum PLN 1 billion PLN 750 million Capped at either 50% of shares or the amount of
Amount per Firm loss due to COVID-19

The liquidity financing instruments contain a “cash sweep” mechanism to accelerate repayments
if the company’s financial situation improves.
Firms receiving preferential financing are prohibited from using the funds to make payments to
the owner or acquire shares. Additionally, firms cannot use the funds for mergers or
acquisitions, or for the refinancing or early repayment of existing debt.
The measures are available to firms with at least 250 employees, turnover of at least EUR 50
million (USD 55 million), or a consolidated balance sheet of at least EUR 43 million. However,
the government has also established criteria to allow some SMEs to participate in the scheme.
Eligible SMEs have at least 150 employees and annual turnover of at least EUR 100 million. To
participate, SMEs must either be in a specific sector affected by COVID-19, such as medicine or
personal protective equipment production; or project a funding gap that exceeds PLN 3.5
million.
Beyond size criteria, large companies must either operate in a specific industry or meet at least
one criteria related to inability to operate or access financing, revenue decline, or nonreceipt of
payments. Similar to the support to microenterprises and SMEs, eligible companies must have a
residence in the European Economic Area and cannot be registered in a “tax haven.”
The PFR is accepting initial applications from eligible companies prior to EC approval of all
three financing options. After receiving a decision from the EC, the PFR will begin operations.

Bank of Mauritius Granted Permission to Make Equity Investments in
Companies
By Kaleb Nygaard
Original post here.

On May 16, in response to the economic downturn caused by COVID-19, the government of
Mauritius passed a law granting permission to the Bank of Mauritius (BOM), the country’s
central bank, to make equity investments in companies.
As announced by the BOM on May 22, it will establish a special purpose vehicle called the
Mauritius Investment Corporation (MIC) to make the capital investments. The announcement
indicated the purpose was to “mitigate contagion of the ongoing economic downturn to the
banking sector, thus limiting macro-economic and financial risks.”
The MIC will operate independently and be governed by a board of directors consisting of the
first vice-governor and the second vice-governor of the BOM as well as three other independent
members chosen from the private sector. A committee of professionals and advisors from the
private sector will conduct in-depth analysis on the funding requests from companies and then
submit their recommendations to the board of directors, who will have the final say on
investments made by the MIC.
The MIC will make investments through a range of equity and quasi-equity instruments. The
funds will be directed to “domestic systemic economic operators.” The announcement said this
would help preserve jobs. In a press interview, the BOM Governor expanded, “by helping the
economic operators who have a systemic importance, the MIC intends to avoid these companies
from being in an irreversible financial situation and to provoke a shock wave which will affect
the banking system and, by extension, the whole economy.”
The law allowing the BOM to initiate these new equity investments indicated that funding for
the MIC would come from the BOM’s foreign reserves. As of April, the BOM held MUR 280
billion (USD 7 billion), roughly half of the country’s GDP. No additional details are available at
this time.
The same law that allowed BOM to establish the MIC also allowed BOM to make a one-time
grant of MUR 60 billion to the government to be used “to assist it in its fiscal measures to
stabilise the economy of Mauritius.” The grant was issued on May 22.

United States Congress Passes Amendments to Paycheck Protection
Program
By Kaleb Nygaard
Original post here.

On June 3, the United States Congress passed the Paycheck Protection Program (PPP)
Flexibility Act of 2020. The update includes three significant changes to the PPP.
First, Congress reduced to 60% the portion of a government-backed loan that a company must
spend on payroll to be eligible for forgiveness. Under the original law, Congress listed a number
of expenses that a small or medium size enterprise (SME) could cover with a loan from the PPP.
These expenses included payroll costs, payments of interest on any covered mortgage obligation,
payments on any covered rent obligation, and covered utility payments. The Treasury
later stipulated that 75% of the funds must be spent on payroll expenses for the government to
forgive the loan. In the PPP Flexibility Act, Congress added a paragraph to the law that explicitly
defines the portion of the loan that must be spent on payroll to be eligible for forgiveness at
60%. This was in response to many complaints noting that SMEs face significant other fixed
expenses beyond payroll and that supporting the employees will only be useful if the company is
able survive the downturn.
Second, the PPP Flexibility Act extends, from 8 weeks to 24 weeks, the timeframe within which
the SMEs must use the funds to be eligible for forgiveness. Reports indicate that lawmakers
made this change because the COVID-19 pandemic and economic shutdown have lasted longer
than originally anticipated. This change highlights the importance of not underestimating the
potential duration of a crisis. Doing so can result in relief efforts that are designed to handle
short-term disruptions, but that leave limited ability to respond if the disruptions become
longer-term.
Third, the law moved the last day on which a SME can use PPP funds to hire back employees
previously laid-off from June 30 to December 31. Congress passed the original PPP law a few
weeks into the COVID-19 pandemic and by that time many SMEs had already been forced to lay-
off employees.
Congress outlined the PPP in section 1102 and 1106 of the CARES Act, which was signed into
law on March 27. The law originally allocated $349 billion (expanded to $659 billion on April
23) for the forgivable, government guaranteed loans to SMEs with up to 500 employees.
As of June 3, 4.5 million loans had been approved worth $511 billion.

SBA and Treasury Issue Guidance on PPP Loan Forgiveness
Original post here.

On June 8, the Treasury and Small Business Administration (SBA) announced greater flexibility
for loan forgiveness in a joint press statement on the Paycheck Protection Flexibility Act.
Prior to the passage of the Paycheck Protection Flexibility Act on June 3, Treasury guidance
required borrowers to spend at least 75% of the loan amount on payroll expenses in order for
their loan to be eligible for forgiveness from the federal government. In the Act, Congress set
that level at 60%.
Even after Congress passed the Act, potential borrowers expressed concerns about the “60%
cliff” effect: borrowers who spent less than 60% of their loan amount for payroll expenses would
receive no forgiveness.
In the June 8 joint press release, the Treasury and SBA loosened the loan forgiveness
requirements so that borrowers who use less than 60% of their loan amount on payroll expenses
can now receive partial loan forgiveness. Their forgiveness will be calculated such that 60% of
the forgiven amount has been used for payroll expenses.
For borrowers that use less than 60% of the loan for eligible payroll expenses, the formula to
calculate the total amount eligible for forgiveness is the amount of the loan spent on payroll
multiplied by 1 ⅔.
The following table provides two example scenarios based on a $100,000 loan, one which is
eligible for full forgiveness and the other which is eligible for partial forgiveness:
Partial Forgiveness Full Forgiveness

(Less than 60% on payroll) (60% or more on payroll)
Total loan amount $100,000 $100,000
Amount spent on payroll $50,000 $60,000
Amount spent on other eligible expenses $50,000 $40,000
Total amount forgiven $83,350 $100,000

(Calculation: $50,000 x 1 ⅔)
Other eligible expenses include payments of interest on any covered mortgage obligation,
payments on any covered rent obligation, and covered utility payments.
The following chart shows the portion of the loan eligible for forgiveness based on the portion
spent on eligible payroll expenses.

Federal Reserve Amends Main Street Lending Program
Original post here.

On June 8, the Federal Reserve announced significant changes to the Main Street Lending
Program, a new facility designed to support lending to small and medium-sized businesses. The
changes include decreasing the minimum loan amount for some loans, increasing the maximum
loan amount, amending the loan repayment schedule, and extending the loan term.
Through the Main Street Lending Program, the Fed will purchase up to $600 billion of
participations in loans to so-called “main street” businesses, which are firms with up to 15,000
employees or $5 billion in annual revenue. The Fed has not yet launched the program.
The Main Street Lending Program has three facilities: the Main Street New Loan Facility
(MSNLF) and Main Street Priority Loan Facility (MSPLF) are for new loans while the Main
Street Extended Loan Facility (MSELF) is for increases to existing loans or credit facilities. The
Fed will purchase a 95% participation in all loans under the program; previously, it had
announced that it would purchase a 95% participation in loans under both the MSNLF and
MSELF and an 85% participation in loans under the MSPLF.
The June 8 announcement increased the term of each loan option to five years, up from the
previous term of four years. The announcement also delays the principal repayment for two
years, up from the prior one-year deferral.
The table below summarizes the three different loan facilities with previous guidance in
parentheses.
With the changes announced on June 8, the MSPLF and MSNLF have very similar terms,
despite the MSPLF being designed for more highly leveraged borrowers. The Fed retained a
measure to mitigate risk for MSPLF lending by requiring these loans to be secured if the
borrower has other secured debt. A secured MSPLF loan must have a collateral coverage ratio of
at least 200%; if not, then a loan’s collateral coverage ratio must be not less than the aggregate
collateral coverage ratio for the borrower’s other secured loans, excluding mortgage debt.
However, the Fed does not prohibit borrowers from using MSPLF loans to refinance existing
debt to other lenders, unlike MSNLF loans, which cannot be used for refinancing.
Unlike the Paycheck Protection Program (PPP), loans made under the Main Street Lending
Program are not forgivable. Businesses cannot participate in more than one of the three Main
Street facilities and are also prohibited from accessing the Primary Market Corporate Credit
Facility (an emergency facility to purchase corporate bonds). However, PPP borrowers can also
borrow under the Main Street Lending Program if they meet the eligibility criteria.
The Main Street Lending Program appears to be the only Federal Reserve program under the
CARES Act that is subject to the full set of restrictions on share buybacks, executive
compensation, and dividend payments outlined in the CARES Act. Other programs appear to
have received waivers from the Treasury Secretary under 4003 (c)(3)(a)(iii) (p. 519).
On May 27, the Federal Reserve Bank of Boston (FRBB), which will administer the program,
released additional documentation for borrowers and lenders. These include the lender

MSNLF (New Loans) MSPLF (Priority Loans) MSELF (Extended Loans)
Purpose Initial facility for new loans to Announced on April 30 for new Increased lending (upsized
borrowers loans to highly leveraged tranche) to existing borrowers
borrowers
Term 5 years (previously 4 years) 5 years (previously 4 years) 5 years (previously 4 years)
Minimum $250,000 (previously $250,000 (previously $10M

Loan Size $500,000) $500,000)
Maximum The lesser of $35M, or an The lesser of $50M, or an The lesser of $300M, or an
Loan Size amount that, when added to amount that, when added to amount that, when added to
outstanding and undrawn outstanding or undrawn outstanding or undrawn
available debt, does not exceed available debt, does not exceed available debt, does not exceed
4.0x adjusted EBITDA 6.0x adjusted EBITDA 6.0x adjusted EBITDA
(previously $25M) (previously $25M) (previously $200M)
Participation 95% 95% (previously 85%) 95%
Principal Year 1-2: Deferred Year 1-2: Deferred Year 1-2: Deferred
Repayment
Year 3: 15% Year 3: 15% Year 3: 15%
Year 4: 15% Year 4: 15% Year 4: 15%
Year 5: 70% Year 5: 70% Year 5: 70%
(Previously deferred for year 1, (Previously deferred for year 1, Previously deferred for year 1,
33.33% due in years 2-4) 15% for year 2, 15% for year 3, 15% for year 2, 15% for year 3,
70% for year 4) 70% for year 4)
Interest Deferred for 1 year Deferred for 1 year Deferred for 1 year
Payments
Interest Rate LIBOR + 300bps LIBOR + 300bps LIBOR + 300bps
registration documents, loan participation and servicing agreements, and borrower covenants.
The Fed also updated the FAQs to provide more information about program
requirements. Changes made on May 27 include rules about affiliation, foreign subsidiaries,
documentation, and specific updates to each facility related to security and subordination,
among others.
The Fed has faced criticism for the amount of time it has taken to establish the Main Street
Lending Program and begin operations. Others consider the program to be “heading for trouble
before it even gets under way” as some potential borrowers view the interest rates as too high.
Others considered the previous four-year term too short. In a webinar on May 29, Federal
Reserve Chair Jerome Powell called the Main Street Lending Program “far and away the biggest
challenge of any of the 11 facilities” the Fed set up in response to the COVID-19 pandemic. The
Fed “expects that Main Street program” to be open for lender registration soon and to be
actively buying loans shortly afterwards.”

The FRBB chose State Street Bank and Trust as the third-party vendor custodian and accounting
administrator for the Main Street Lending Program.
The Fed announced the Main Street Lending Program on April 9 and accepted comments
through April 16. Following the 2,200 plus comments, the Fed announced modifications to the
program on April 30. The Fed will operate the program until September 30, unless the Federal
Reserve Board and Treasury Department decide to extend its operations.

Germany Introduces Fixed Cost Support for SMEs
Original post here.

On June 12, the German government’s executive cabinet provided new details on the EUR 130
billion (USD 146 billion) round of fiscal stimulus measures meant to support the economy
during the COVID-19 pandemic. The measures include a EUR 25 billion fixed-cost subsidy
scheme for small and medium-sized enterprises (SMEs).
The fixed-cost subsidy scheme is available to businesses that experience a sales decline of at
least 60% in April and May of 2020 compared to the same period in 2019. Non-public
companies across all sectors are eligible, including nonprofit organizations.
The aid is provided in the form of a grant that is available for a maximum of three months. The
grants reimburse a portion of fixed costs that a company incurs between June and
August. These grants will be required to be repaid if the company ceases operations before
August 2020. Companies can apply for aid through August 31.
Funding can be used on a broad range of fixed costs. These include rent and lease costs, interest
expense on loans, financing costs for leases, utility expenses, maintenance costs for fixed assets,
property taxes, insurance, licensing fees, training expenses, tax consultant or auditor fees for aid
applications, and other personnel expenses that are not covered by short-time compensation, or
Kurzarbeit.
The maximum funding available to a firm is EUR 150,000. Reimbursement rates are based on
the percent decline in revenue:
• 80% reimbursement of eligible fixed costs for firms with a decline of 70% or more
• 50% reimbursement of eligible fixed costs for firms with a decline between 50% and 70%
• 40% reimbursement of eligible fixed costs for firms with a decline between 40% and 50%
• Companies with up to five employees can receive up to EUR 9,000 for three months, and
those with up to ten employees can receive up to EUR 15,000 for three months. The
maximum reimbursement for firms with up to five or ten employees can be exceeded
only in exceptional cases, such as when the total eligible reimbursable fixed costs are
more than two times the maximum reimbursement amount.
Companies are required to prove the revenue decline and fixed cost expenses in a two-stage
process. The first stage, or the application stage, requires the company to provide a forecast or
estimate of the sales decline based on the sales decline in April and May of 2020. In addition,
the company is required to provide an estimate of the fixed costs over the period it is requesting
aid. This first stage of the process is required to be completed by a tax advisor or consultant and
submitted to the government application system. The second stage of the process is the
verification process in which the actual sales decline is compared to the forecasted decline. If the
sales decline is less than forecasted, and thus a company receives more in subsidies than it was
eligible for, it will be required to repay the excess. If too little was paid because the forecasted
decline in sales was too low, the subsidy will be increased.

The government also included other, smaller support measures in the stimulus package. For
example, it committed to facilitating an electromobility fleet exchange program for electric
utility vehicles for craftsmen and other SMEs.
The measures are based on the June 3 Coalition Committee’s comprehensive stimulus package.
The measures will go through the parliamentary legislative process before becoming law. This
new stimulus package follows a previous one from March worth EUR 750 billion.

Main Street Lending Program Opens for Lenders
Original post here.

On June 15, the Federal Reserve Bank of Boston (FRBB) announced that lender registration for
the Main Street Lending Program is now open.
The Main Street Lending Program is designed to support lending to small- and medium-sized
enterprises (SMEs). Through a special purpose vehicle (SPV) established by the FRBB, the Fed
will purchase a 95% participation in loans made by eligible lenders to eligible borrowers with up
to 15,000 employees or $5 billion in annual revenue. The Treasury injected $75 billion in capital
into the SPV, allowing the SPV to purchase up to $600 billion in loan participations.
To register for the program, lenders must complete the required registration certifications and
covenants. These documents must be signed by the principal executive officer and principal
financial officer. Lenders must also register through the FRBB’s lender portal. The FRBB
estimates that the lender registration process could take several business days.
Once the program is operational, eligible borrowers can apply for loans through an eligible
lender.
For more information about the Main Street Lending Program, see previous YPFS blog posts:
• Federal Reserve Amends Main Street Lending Program
• Federal Reserve Announces Changes to Main Street Lending Program
• Federal Reserve Announces Main Street Lending Program

Small Business Administration Announces Updates to Small Business
Support Programs
Original post here.

The Small Business Administration (SBA) and Treasury recently released guidance related to
the Paycheck Protection Program (PPP) to clarify that they will forgive loans to employers that
are unable to rehire or maintain employment levels. The agencies also released a simplified
forgiveness application.
At the same time, the SBA and Treasury removed a restriction on Economic Injury Disaster
Loans (EIDL) and Advances to allow all small businesses, not just agricultural businesses, to
benefit.
Clarifying forgiveness rules for business owners that cannot rehire employees
On June 16, the SBA released an amended interim final rule on the PPP that clarifies that
borrowers that demonstrate an inability to rehire employees will not face a proportionate
decline in the amount of the loan forgiven. This clarification is based on the PPP Flexibility Act,
which was signed into law on June 5. Congress indicated that if an employer is unable to rehire
employees or individuals that are similarly qualified due to compliance with requirements or
guidance issued by health authorities, then the employer will not be penalized by a reduction in
the proportion of the loan amount forgiven. This loosens a key requirement of the program, as
the program was designed to incentivize employers to maintain employment levels and salaries.
As of June 17, the SBA had approved 4.6 million PPP loans worth a total $513 billion.
Changes to simplify the PPP forgiveness application forms
On June 17, the SBA and Treasury released a new, streamlined loan forgiveness application form
for borrowers under the PPP.
For eligible loans under the PPP, borrowers can benefit from full or partial forgiveness of the
borrowed amount. The new forgiveness application, the “EZ” application, is available to
borrowers that meet one of the following criteria:
• Borrowers that are self-employed with no employees
• Borrowers that did not reduce employee salaries or wages by more than 25% and did not
reduce the number of hours of the employees
• Borrowers that experienced a reduction in business activity as a result of government
health directives that did not reduce employee salaries or wages by more than 25%
This application requires less documentation from borrowers than the standard full forgiveness
application. The application is three pages and requires fewer calculations than the standard,
five-page application.
The SBA also modified the standard application, which was initially released on May 15.

Both applications now give borrowers the option of using the 8-week covered period or the 24-
week covered period, as amended by the Paycheck Protection Program Flexibility Act (PPPFA)
on June 5. The extension of the covered period under the PPPFA allows borrowers to use the
loan proceeds to cover eligible expenses over a longer period of time. For borrowers that elect
the 8-week covered period, the maximum payroll covered per employee is $15,385, which is
equivalent to 8 weeks of pay under a $100,000 salary. Under a 24-week covered period, the
maximum amount per employee is $20,833, which is equivalent to approximately 24 weeks of
pay under a $45,000 salary.
Reopening of EIDL Loans and Advances and to all small businesses
The CARES Act, signed into law on March 27, included an expansion of the SBA’s EIDL
programs. Qualified small and medium-sized enterprises (SMEs) could apply for loans on
favorable terms and grants of up to $10,000. Within a few weeks of launching, the SBA
announced that it had exhausted the programs’ funds. On April 24, Congress allocated
additional funding for the EIDL programs in the law that expanded the PPP.
On June 15, the SBA reversed a prior decision to limit the EIDL loans and advances to
agricultural businesses. It announced that it would begin to accept applications for EIDL loans
and advances from small businesses and agricultural businesses.
On May 4, the SBA and Treasury had restricted the EIDL support to agricultural businesses. The
same May 4 announcement also clarified that non-agricultural businesses that had submitted
applications by April 15 (the day the SBA stopped accepting new applications under the initial
funding allotment) would continue to be processed, but other non-agricultural firms could not
apply for the EIDL loans and advances.
As of June 12, the SBA had issued 3.2 million advances worth $10.7 billion and 1.3
million loans worth $90.9 billion.
According to the US Census Small Business Pulse Survey, as of June 11, 74% of surveyed
businesses had requested support from the PPP and 28% had requested support under the EIDL
program. 71% of respondents had received support from the PPP by June 11 while 18% had
received support under the EIDL programs. Overall, 24% of respondents had received no
financial assistance from the federal government since March 13, 2020, with 18% of respondents
not requesting any financial assistance.

SBA Will Disclose Certain Recipients of Paycheck Protection Program Aid
Original post here.

On June 19, the US Treasury and Small Business Administration (SBA) announced that certain
recipients of Paycheck Protection Program aid will be disclosed to the public.
For each business that receives a loan of $150,000 or more, the SBA will disclose the business
name, address, industry, zip code, business type, demographic data, non-profit information, and
jobs supported by the PPP funding. The SBA will not disclose the exact size of the loan; rather, it
will report the loan amount based on the following ranges:
• $150,000 to $350,000
• $350,000 to $1 million
• $1 million to $2 million
Given the reported ranges above, it is not clear how the SBA will report a loan of
exactly $350,000, $1 million, $2 million or $5 million.
Loans of $150,000 or more account for approximately 75% of approved funding; however,
nearly 86% of the total number of borrowers took out a loan worth less than $150,000. For
loans below $150,000, the SBA will release totals aggregated by zip code, industry, business
type, and demographic categories. The Treasury and SBA have not yet announced the specific
demographic data that will be released in the public reports.
To date, PPP recipients have been identified through voluntary information sharing or through
SEC filings.
The Treasury and SBA have not yet provided timing regarding the public reporting, including
when the first report will be made public and the frequency of disclosure.
Prior to the announcement, the Treasury Secretary, Steven Mnuchin, had indicated that the
administration would not release names of borrowers or loan-level information. Disclosure had
received full support from Democrats in both houses of Congress and had received some
Republican support. In late May, a bill in the House called the TRUTH Act received support
from all Democratic members and 38 Republican members. The bill would have required the
SBA to publish recipients, the number of employees, the lender, and demographic data for each
loan under the PPP. Because the bill was put on a fast-track approval process, it required a two-
thirds majority in the House, which it did not get. On June 3, the Chairman (a Republican) and
Ranking Member (a Democrat) of the Senate’s Committee on Small Business &
Entrepreneurship sent a letter to Secretary Mnuchin asking that the SBA release loan-level
information, including demographic breakdowns.

As of June 19, the SBA had approved 4.7 million PPP loans worth $514.5 billion. The program,
as expanded on April 23, has $659 billion in total allocated funds.

Support for Individuals
Support for individuals includes all policies implemented to reduce the economic impact of a
downturn on households. These measures support households by offsetting the decline in
disposable income they face as a result of adverse economic conditions. Policies implemented to
achieve this include direct payments, expanded unemployment benefits, or income tax cuts.

Analysis
Government Support to Individuals and Households During Crises

By Kaleb Nygaard, Pascal Ungersboeck, Mallory Dreyer, Rosalind Z. Wiggins, and Greg Feldberg
Original post here.

Many countries are adopting programs to provide support to individuals in response to the
COVID-19 pandemic, which has entailed unprecedented government-directed curtailment of
economic activity. These programs are designed to provide cashflow support for individuals and
households who may be struggling due to economic uncertainty and hardship. Measures to
support individuals vary and either enhance cashflows or decrease required expenses. In the
former category, countries have adopted measures to provide enhanced income support to the
unemployed, direct payments to individuals, and favorable access to retirement savings. Tax
cuts and filing extensions are examples of the latter.
This post begins by describing the challenges facing policymakers in designing support for
individuals, provides an overview of options to support individuals, outlines a few examples of
countries implementing a mix of these policies, and concludes by offering some key takeaways
about why certain interventions to support individuals may be preferable in different scenarios
Governments must determine how to structure and implement effective, targeted support to
individuals. With businesses shuttering in response to the COVID-19 pandemic, millions of
individuals across the world are losing jobs and sources of income. Though the shock from the
pandemic is expected to be temporary, many face immediate financial hardship with limited
savings. Governments face the task of determining which tools to use to quickly provide large-
scale, targeted support to individuals.
Policymakers must consider who will be eligible for support. Some tools are broad by nature,
while others provide support to a specific subgroup. Eligibility can be complicated by immigrant
and resident status. Funding for individual support is generally fiscal in nature, either through
unemployment insurance, direct payments, tax measures, or housing relief, but the mechanism
for funding is important. Some support programs require large, upfront expenditures, such as
increased unemployment support or direct payments to individuals, while tax deadline
extensions and tax cuts impact the timing or amount of revenue the government ultimately
collects. Some programs, such as increased unemployment support, rely on existing systems,
while others require that new processes be established.
In order to design policies to optimally target individuals, governments must consider the
following:
1. How quickly will individuals receive aid under the program?
2. How much support should be provided?
3. Who will receive support?
4. How long should support be provided?

5. How will the government fund the program?
6. How should the tools be combined in the policy mix?
Options to Support Individuals

1. Unemployment Insurance and Wage Subsidies
2. Direct Payments
3. Income Tax Cuts
4. Other Tax Cuts
5. Deadline Extensions and Penalty Waivers
6. Access to Retirement Savings
7. Housing Relief
Unemployment Insurance and Wage Subsidies
Many countries provide support to employees who lose their jobs or who are at risk of losing
their jobs. Two common approaches are unemployment insurance and short-time work schemes
or wage subsidies. Unemployment insurance replaces some of an individual's lost income
through direct benefits. Short-time work schemes and wage subsidies provide income support to
individuals who are temporarily laid off or working reduced hours. Governments can utilize
these systems to address individual hardships during times of economic downturn by increasing
the amount of the usual support, lengthening the term of the support, or broadening the group
of individuals who are eligible for the support.
Under unemployment insurance, governments provide direct benefits to individuals who meet
qualifying criteria. During crises, countries can expand or provide additional support through
their existing unemployment insurance system. The United States CARES Act temporarily
increases the weekly unemployment benefit by $600 (about 50% of GDP/capita, annualized),
prolongs the covered period, and expands eligibility criteria. During the 2007-09 Global
Financial Crisis (GFC), the United States extended the entitlement period multiple times, with
unemployed workers eligible to receive up to 99 weeks of benefits.The Coronavirus
Supplement in Australia provides an additional AUD 550 in unemployment benefits to eligible
individuals every two weeks, on top of the JobSeeker Program. Greece will provide EUR 800
(58% of GDP/capita, annualized) to individuals who lose jobs due to the economic impact of
COVID-19, while Belgium provides additional daily allowances to individuals whose job loss is
due to a “force majeure” such as the COVID-19 pandemic.
Under short-time work schemes or wage subsidy schemes, an employer that is experiencing
economic difficulties may temporarily reduce the hours worked by employees or temporarily
furlough them, while paying employees some portion of their wages that is subsidized by income
support from the government. These schemes help employers retain employees rather than lay
them off, helping to keep unemployment levels down and presumably fuelling a quicker
recovery.

Short-time work schemes are common in many European countries, and many are expanding
short-time work schemes in response to the COVID-19 pandemic. The duration of Germany’s
program has been expanded to provide support for up to 12 months. Since the onset of the
pandemic, 650,000 German employers have notified the government that they intend to use the
country’s Kurzarbeit scheme. The French system has seen dramatic increases since the onset of
the crisis and is so far covering a third of the country’s private-sector workers, at an expected
cost of EUR 24 billion over the next three months. The United Kingdom has announced a new
scheme under which it promises to pay employers 80% of workers’ pay, as long as they don’t lay
them off. The EU recently approved an initiative, the Support to Mitigate Unemployment Risks
in an Emergency (SURE), to lend up to EUR 100 billion to Member States to support increased
public spending on short-time work schemes.
During the GFC, usage of short-time work schemes increased. The German
Kurzarbeit supported 1.4 million individuals. The Czech Republic, Hungary, the
Netherlands and several other countries adopted new schemes. Other countries extended the
duration of short-time work scheme support or increased the benefit amount.
Governments must determine what percentage of lost income to provide in benefits. This can be
a flat rate amount. For example, the JobKeeper wage subsidy program in Australia provides
AUD 1,500 (49% of GDP/capita, annualized) every other week; the New Zealand wage subsidy
provides NZD 585 (47% of GDP/capita, annualized) per week for full-time workers and NZD
350 for part-time workers. Other countries provide benefits based on a percentage of each
individual’s average earnings, with a cap on the benefit amount. The percentage of lost income
covered, or the replacement rate, is typically 60% to 80%. For example, Belgium reimburses
70% of lost wages up to EUR 2,750 per month (82% of GDP/capita, annualized); Canada’s wage
subsidy covers 75% lost wages, up to CAD 847 per week (73% of GDP/capita, annualized).
Governments may also choose to expand unemployment or wage support benefits to individuals
not usually covered by such programs. and many have expanded the scope of programs in
response to the COVID-19 pandemic. The CARES Act provides benefits to self-employed
individuals and sole proprietors through the existing state-administered system, although such
individuals would not normally be eligible. Unlike the existing program, which is state-funded,
this coverage is fully-funded by the federal government. The government estimates it will
cost $250 billion. Other countries are similarly expanding coverage. The Austrian program now
includes apprentices, and temporary workers are eligible in Germany. The EU SURE initiative
permits funds to be used for short-time work or similar schemes for the self-employed.
Similarly, during the GFC, some countries expanded eligibility to part-time workers or fixed
contract workers. The Netherlands and Slovenia required that participants undergo training
during the hours not worked in order to receive benefits. Other countries incentivized
participation in training programs by providing greater income support.
In the European short-time work and wage subsidy programs, benefits are typically provided
through the employer. In such cases, the business must meet a set of criteria; many COVID-19
related programs are available only to businesses in hard-hit sectors or that have experienced
large declines in sales or workforce. In Australia, companies with more than AUD 1 billion in
revenue are eligible for the JobKeeper wage subsidy program if revenue decreases by 50%;
smaller companies are eligible if revenue decreases by 30%. In the United Kingdom, the wage
subsidy program is available to furloughed workers who do not provide revenue-generating
services for their employer. Some countries, such as Estonia, require employers to contribute a

certain amount of employee wages, while other countries request, but do not require, employers
to try to cover the difference between the subsidy and the employee's standard wages
Some countries are waiving criteria and application materials in order to expedite the approval
and payment process. In France, the government must make a decision on an employer’s wage
subsidy application in two days; otherwise, it will be automatically granted. Other countries,
such as Australia, are waiving application materials for individuals applying for unemployment
insurance.
For more specific information about Unemployment Insurance and Wage Subsidy programs,
see Support to Individuals through Unemployment Insurance and Short-Time Work Schemes
Direct Payments
To address financial distress and cash-flow issues, some governments send money directly to
residents. The US and Hong Kong have the largest and broadest of such programs. The US will
send $1,200 (approximately 1.9% of GDP/capita) to adult residents and $500 per child. The
Hong Kong government has announced that it will send a similar amount of HKD10,000
($1,290; approximately 2.7% of GDP/capita) to all adult permanent residents. For comparison,
the US conducted a direct payment program in 2001 and 2008 with maximum payments to
adults of $300 and $600, respectively. In March of this year, the Australian government
introduced a program that provides up to two payments of AUD750 ($482; approximately 0.8%
GDP/capita) to approximately 6.5 million Australians described as all welfare recipients and
concession card holders, including all pensioners.
In the current US program, for those who filed taxes previously and included bank account
information, the Internal Revenue System (IRS) will directly deposit the stimulus funds. The
IRS is working on a website portal where eligible individuals will be able to provide bank
account information. If no bank account information is available and where physical address
information is available, the IRS will mail checks. By sending payments via direct deposit, the
quickest distribution seems assured for most recipients; the government estimates that the first
monies will arrive within three weeks.
The choice of administrative process affects the timing of the payment and thus how effective it
is in implementing the intended policy. Eligible Australians were groups that already received
government welfare payments and began receiving the COVID payments within three weeks.
Hong Kong and Singapore announced direct payment plans, in February and March,
respectively, but the payments are not expected to be distributed until summer. The reasons for
the delay in the Hong Kong payment include approval of the budget, legal and technical issues,
and the requirement that residents register for the benefit. Distribution is expected to begin in
August. In contrast, Singapore, subsequently announced that it would distribute part of the
payments as early as April using known resident information and direct deposits in a manner
similar to the US.
Direct payments programs often, though not exclusively, target those at lower income levels.
Australia's program is designed with this objective. Funds are targeted at groups who need the
funds and would spend them, thus assisting the individuals and the economy. A number of other
countries announced direct payments to lower income groups as follows: “1,500 vulnerable
families” in Barbados, “12 million low-and modest-income families” in Canada, and “3 million of
the poorest” in both Iran and Thailand.

The US and Canadian direct payment programs target a significant portion of the population.
The payments begin to taper as income increases above a specified threshold, eventually
reaching zero. The $1,200 payment for a single adult in the United States begins to taper as
income rises above $75,000 (approximately 120% median income) and reaches zero at $99,000.
In a similar program in Canada, the taper begins at around $20,000 (approximately 80% of
median income). Hong Kong is unique in offering stimulus payments to all adult permanent
residents regardless of income level.
In some countries, including the US and Canada, parents of dependent children are eligible for
additional funds, $500 and CAD300 per child, respectively. The 2001 US program did not
include additional funds for children, but the 2008 US program in response to the GFC included
an additional $300 per child. Australia conducted a direct payment program in 2008 that
included AUD1,000 per child.
As of the time of this writing, most programs announced have been single payments; however,
Thailand and Barbados offer monthly direct payments. The program in Thailand is expected to
last three months, and Barbados did not announce an end date to its program. Australia’s
current direct payment program has two installments; the second is available to fewer residents
than the first. Recurring payments provide additional flexibility and scalability that one-time
payments do not.
For more specific information about Direct Payments programs, see Support to Individuals
through Direct Payments and Tax Cuts
Income Tax Cuts
Some governments are providing stimulus funds to individuals via general income tax cuts.
However, it is important to note that income tax cuts only allot funds to those who still have
jobs, and therefore income. (However, sometimes individuals have to pay income tax on
unemployment insurance payments).
Indonesia and Kenya have passed some of the largest income tax cuts. Indonesia’s program
decreases the income tax rate by 30% for workers in most sectors, and cuts the rate to 0% at
certain low-income levels. Kenya’s program cuts the tax rate to 0%. Hong Kong has taken a
different tactic and exempted the first HK$20,000 of income from tax for all workers. The cost
to the government of such programs is less clear, as it represents a loss of future income as
opposed to an increase in immediate expenses. The US cut income taxes during the 2001
recession.
Although income tax cuts also increase household disposable income, the increase is often not as
perceptible as direct payments. Surveys of past tax cuts have shown that they often go unnoticed
by the beneficiaries. However, this may be a more viable method for countries with limited
resources with which to fund direct payments or augment unemployment support.
Other Tax Cuts
Governments can also lower taxes on certain goods and services so that households experience a
relative increase in purchasing power. By cutting taxes other than income taxes, more
individuals potentially benefit, whether or not they have income. For example, decreasing sales
taxes benefits consumers across the country. But governments can also target tax cuts to certain

hard-hit sectors. There are three broad categories of taxes that have been cut in response to the
COVID-19 crisis:
1. Sector specific: many countries cut taxes on goods and services related to the tourism
and travel industry, which has been hit particularly hard by the virus, including: El
Salvador, Indonesia, Norway, and Turkey.
2. Basic food items: countries cut taxes on basic food items, including El Salvador and
Gibraltar.
3. Healthcare and medical related items: many countries cut taxes on goods and services
related to the medical, emergency, and hygiene industries, including: Colombia,
Curacao, and Greece.
This type of specific, targeted tax cut appears to be a relatively new policy option in response to
the current COVID-19 pandemic. Note that our resource guide focuses almost exclusively on
national programs and therefore does not capture actions related to taxes below the national
level.
Deadline Extensions and Penalty Waivers
In response to the COVID-19 crisis, many countries have extended the filing deadline for income
taxes, or waived the fees, penalties, and interest associated with late payments, even if they have
not decreased their tax rate. Both measures allow households to temporarily delay their tax
obligations and thus, may provide liquidity support to a significant portion of households in a
country. While more countries have adopted explicit deadline extensions, both measures have
seen widespread application. Deadline extensions have been used for short horizons, some as
short as two weeks, as in Egypt, but most have been for between one and three months.
The US extended the deadline to file and pay personal income taxes by three months. Penalty
waivers have been used to provide longer-term relief. Switzerland implemented a penalty waiver
for any federal taxes due between March and December 2020, providing up to nine months of
relief. On average, these programs provide taxpayers with an additional three months to meet
their income tax obligations.
Deadline extensions can be implemented on a targeted or universal basis. While many countries,
like the US, chose to extend the deadline for all taxpayers, other countries offer relief on the
basis of need with defined eligibility criteria. This is the case in Germany, where taxpayers have
to be “directly and not insignificantly affected” by current conditions to defer their tax payment.
In such cases, targeted programs require taxpayers to submit an application to the tax authority
to establish eligibility. Such application systems have also been implemented
in Belgium, Singapore, and El Salvador. Singapore follows the German approach and targets
taxpayers who are experiencing financial difficulties. El Salvador provides relief to all taxpayers
who owe less than USD 10,000 in taxes. For taxpayers employed in the tourism industry, this
cap is increased to USD 25,000. In general, tax authorities can grant penalty waivers to eligible
taxpayers without requiring an application.
These programs provide relief to taxpayers by allowing postponement of tax payments while the
government bears a cost in the form of delayed fiscal revenue. To find a balance, some countries
permit taxpayers to opt into installment plans to spread the tax burden over time, instead of
simply delaying payment. Portugal, Singapore, El Salvador, and Belgium have implemented
such programs.

Extending filing tax deadlines (and the related penalty relief) provides an easy-to-implement
and readily available tool to provide liquidity support to taxpayers. The actual benefit for an
individual, however, varies and may be limited, especially in countries where taxes are collected
throughout the year through payroll deductions. The benefit would be the greatest for
individuals who have under-withheld or who are required to make direct installment payments
to the revenue agent. By making extended deadlines optional, taxpayers entitled to refunds
would still be able to file earlier in order to secure them. Also, it should be noted, there may be
taxes, other than income taxes, for which this type of deadline extension and penalty waiver
treatment would also apply.
For more specific information about Deadline Extensions and Penalty Waivers programs,
see Support to Individuals through Tax Deadline Extensions and Penalty Waivers
Access to Retirement Savings
Some countries - including the US, Australia, and Malaysia - have temporarily suspended the
taxes, penalties, and fees associated with early withdrawals from tax-advantaged retirement
accounts. Many programs have an explicit cap on the amount that can be withdrawn.
Retirement accounts typically offer special tax treatment and other incentives to encourage
individuals to save money for retirement. To discourage withdrawals from these accounts before
retirement, the government charges a penalty for early withdrawals. Suspending these penalties
and fees provides impacted households with improved access to liquidity. In the US, individuals
impacted by the COVID-19 crisis may withdraw up to $100,000 from a tax-deferred account
without having taxes or the 10 percent penalty withheld. Provided that the individual
contributes an amount equal to the withdrawal to the account within three years, the taxes and
penalty will be waived. To facilitate the return contribution, yearly contribution caps have also
been waived. Taxes will still be owed on any amounts not repaid within three years. A similar
eight percent penalty was waived in Malaysia. In Australia, individuals may withdraw up to AUD
10,000 without penalty.
The US did not waive the 10 percent tax on early withdrawals during the GFC. Empirical
evidence suggests that individuals still tapped into their retirement accounts to absorb income
shocks. The policy currently in place substantially lowers the cost of this option and thus makes
it viable to a wider range of liquidity-constrained households. However, the benefits of such
policies remain limited to middle- and higher-income individuals who are more likely to have
contributed to a retirement account. A 2019 Federal Reserve study found that only around 60%
of US households had a retirement account.
Housing Relief
Since housing costs are often the largest fixed costs of households, during a crisis governments
may provide targeted support for homeowners and renters through mortgage and rent
forbearance and debt restructuring. Some governments have funded mortgage purchase
programs and changed accounting rules to provide flexibility for debt restructuring in order to
provide relief for individuals. For information about government policy options targeting
homeowners and renters, see Residential Mortgage and Rent Relief During Crises.

Illustrative Examples
In a separate post, we outlined the combination of individual support measures taken to date in
the United States in response to COVID-19. We briefly outline two additional countries’ policy
actions to support individuals below.
Germany
Germany, like many other European countries, made use of its established welfare
infrastructure to provide support. Through its short-time work scheme, Kurzarbeit, the
government was able to provide rapid relief to underemployed individuals, preventing lay-offs
and the associated cost of mass unemployment. As a result, Germany has not provided
emergency support to individuals, which would have entailed an additional administrative
burden. Use of the short-time work scheme increased in March, with nearly 650,000 businesses
notifying the government that they intend to use the program.
Similar to a majority of OECD countries, the German government also offered the possibility
to defer individual income-tax payments. Only households directly affected by the current crisis
are eligible.
Thailand
One of the first actions the Thai government took in this crisis was to delay the deadline for
income tax filings. In early February, it pushed the deadline from March to the end of June. On
March 24, the government approved a direct payment of THB 5,000 ($154) per month for three
months for three million of the country’s poorest residents. The Thai government also cut the
income withholding tax from 3 percent to 1.5 percent for six months, from April to September.
Key Takeaways
Below we outline a number of important considerations that policymakers review in providing
support to individuals and households.
How quickly will individuals receive aid under the program?
The amount of time it takes financial support to reach eligible individuals varies across
programs and across countries.
Traditional unemployment insurance programs and short-time work programs are considered
automatic stabilizers, as they are preexisting programs designed to support individuals through
their normal operations without additional government legislation. In times of crisis, some
countries expand or modify such programs to increase the speed of support or expand reach.
For example, the United States waived the one-week waiting period for unemployment benefits.
Many European countries with short-time or wage subsidy programs have in the current and
past crises utilized existing infrastructure and thus appear to be able to quickly deliver benefits
to individuals through employers.
In a crisis, countries can also increase the amount of support or provide supplemental benefits.
These expansions can be implemented as quickly as funds are made available by the legislature
and processed through the administrative infrastructure. Of course, a significant influx of new
applications, as the US has experienced with its unemployment insurance programs during the
COVID-19 crisis, may create administrative log-jams that slow the delivery of funds.

Cutting taxes, extending tax deadlines, and waiving penalties can all be implemented with
relatively little administrative burden. The main challenge is to clearly communicate the
decision and its terms. Therefore, the support can arrive fairly quickly. However, as noted above,
the support this tool provides in terms of cash flow can be limited.
Direct payment programs may require new programs to be passed by the legislature, as in the
US and Hong Kong, or may rely on augmenting an existing program, as occurred in Canada.
Once approved, individuals receive support only as quickly as the government can get financial
information or physical addresses for all eligible individuals. Where an existing program is used
as a means of distribution, as in Canada, payments may be quicker to implement, but
administrative times vary greatly. In the US, where the government is using available taxpayer
information, the money is scheduled to arrive within three weeks. However, in Hong Kong, the
money is not scheduled to arrive until five months after the announcement of the program,
which requires that individuals register for the benefit.
How much support will be provided?
The size of individual support programs varies across countries, as economic activity and per
capita GDP differ. Some variation in policy mix appears to be based on preexisting, non-crisis
support programs. For example, direct payments in the US appear necessary to support
individuals; in contrast, several European countries have large existing safety net programs and
have not chosen to create new direct-payment programs.
Certain interventions have an explicit, predetermined size, such as direct payments, while other
interventions, such as unemployment insurance, are dependent on exogenous variables such as
labor market demand. For example, a country can determine how large direct payments to
individuals will be and the total number of individuals eligible to receive the payments, and thus
estimate the total size of the support program. For example, the direct payments in Hong
Kong are estimated to benefit seven million individuals with a total cost of HKD 71 billion.
However, unemployment insurance claims will vary based on the number of unemployed, which
can be projected, though uncertainty about the total size of the program will remain. Certain
countries, including Belgium and Australia, are providing additional benefits to individuals
impacted by the Covid-19 pandemic. Countries frequently determine the size of support to
individuals based on projected income loss to households.
Who will receive support?
Support to individuals can be targeted or universal. Programs such as unemployment insurance
and facilitated access to liquidity from retirement accounts are targeted by design. However,
most programs discussed above can be implemented in various ways depending on the specific
subgroups of the population that policymakers want to target. Even unemployment support can
be broadened to cover groups not traditionally covered, as demonstrated by various short-term
work schemes in Europe, such as temporary workers in Germany and apprentices in Austria.
Eligibility for income tax cuts or direct payments can be assessed based on income to ensure
that benefits are allocated following a need-based approach. Tax deadline extensions can be
implemented on a universal basis and thus benefit all taxpayers. When implementing an
individual support program, policymakers must determine how to deliver support to the
segment of the population that needs it. The policy design can be adjusted to ensure benefits are
allocated efficiently and match the country’s fiscal capacity.

How long will support be provided?
Support programs can be a single instance of support or can be spread out over time. In times of
crisis, governments can extend the duration of unemployment insurance and wage subsidy
programs. Denmark’s new wage subsidy program is available for three months, while Germany’s
extended short-time work scheme, Kurzarbeit, is available for 12 months. The US CARES Act
extends the unemployment entitlement period from 26 weeks to 39 weeks; in the GFC, the US
ultimately expanded the entitlement period to 99 weeks.
Most direct payment programs we reviewed were one-time, with the exception of Thailand
(three monthly payments), Barbados (monthly payments for an unspecified period of time), and
Australia (two installments, although the second is available to a smaller subset of those eligible
for the first). Tax cuts provide recurring support to the taxpayer each time they pay the tax at the
lower rate. In response to COVID-19, most countries have delayed tax deadlines by a few
months.
How will the government fund the program?
Most of the programs for funding to individuals come from public expenditures. Direct
payments to individuals are publicly funded through fiscal stimulus measures.
For some wage subsidy programs and short-time work schemes, employers are required to chip
in a certain percent of wages to the employee, in addition to what the government subsidizes,
normally between 60% and 80%. During times of crisis, employers may face difficulties in
meeting the required contribution; thus, not all wage subsidy programs or short-time work
schemes require employer contributions.
In the United States, standard unemployment insurance benefits are typically paid from
employer contributions to the federal government and to the insurance funds of the states in
which they operate. However, the expansion of the US unemployment insurance system in
response to COVID-19 is federally funded. Income tax cuts or changes to other taxes impact
government revenue, potentially delaying or decreasing total government revenues for the year.
With a direct payment, the government spends cash immediately, but with tax cuts, the
government foregoes future revenue. Policymakers considering direct support to individuals
should consider how the program is funded, specifically whether direct cash spending is feasible
in contrast to forgoing future tax revenue.
How can the tools be combined?
When designing a policy mix to support individuals, it is critical to identify the main policy
objectives. These include desired recipients, size, and timing of the support. At the same time,
policymakers need to be mindful of a country’s policy environment and fiscal capacities. The
optimal mix will depend on country-specific variations in these two factors as much as on the
policy objectives. For instance, expanding unemployment benefits may be an efficient channel to
provide support to a large number of households in countries with a preexisting infrastructure,
but may not reach individuals who are ineligible for the scheme. Direct payments may be
preferred in countries with less developed or more fragmented unemployment systems or as a
way to provide a benefit to the broad citizenry or targeted groups. And different benefits can be
combined to deliver different assistance to different groups. For example, a direct payment can
be targeted at low-income earners, while greater access to retirement savings is targeted to high-
wage earners. Similarly, countries with extensive fiscal capacities can implement programs such

as wage subsidies or universal payments and incur a large cost in the present. For governments
facing fiscal constraints, it may be preferable to implement support programs by forgoing
present revenue through tax cuts, tax deadline extension and various penalty waivers.
Given policy objectives and country-specific factors, the set of programs discussed above can be
combined and tailored in many different ways to support households through a downturn.

US Supports Individuals and Households in Response to COVID-19
By Mallory Dreyer, Kaleb Nygaard, and Pascal Ungersboeck
Original post here.

The $2.2 trillion CARES Act, which the US Congress passed on March 27, 2020, provides direct
payments to individuals, temporarily expands unemployment insurance, and eases restrictions
on withdrawing money from retirement accounts for those affected by the coronavirus. The
government also offered mortgage forbearance to certain households and extended the tax filing
deadline. These policies specifically provide support to individuals and households during the
COVID-19 crisis.
Direct payments
One of the most widely publicized aspects of the CARES Act is the $290 billion allocated for
direct payments to eligible residents of the country. The Economic Impact Payments represent
13% of the stimulus in the Act and 1.5% of 2019 GDP. The one-time payment allots $1,200 for
eligible adult tax filers and recipients of Social Security and railroad retirees who are not
required to file a return.
The payments begin to taper at an adjusted gross income of $75,000 ($150,000 per couple) and
reach zero at $99,000 ($198,000 per couple). The $75,000 threshold represents approximately
120% of the median US income. Parents are eligible for up to $500 extra for each dependent
child under age 17. The Internal Revenue Service (IRS) will directly deposit the funds to eligible
individuals for whom they have bank account information. It is developing an online system to
allow individuals to provide this information outside of a tax filing. The IRS will mail checks to
individuals for whom it has no bank account information, if it can locate a physical address.
Individuals who did not file a return for 2018 or 2019 have until the end of the year to do so in
order to receive the payment. The IRS is developing a simplified form for those who otherwise
are not required to file. Social Security recipients, however, will generally not have to file as the
IRS will rely on Social Security data for their information.
Unemployment Insurance
The CARES Act supplements state unemployment benefits with an additional $600 on top of
the state’s weekly benefit. Based on an average 40-hour work week, this equates to an average
per hour benefit of at least $15. The temporary expansion also allows individuals to claim an
additional 13 weeks of benefits, on top of the standard 26 weeks.
In the US, the state and federal governments jointly fund unemployment insurance, and states
administer it. The level of benefits differs across states. As of February 2020, benefits range
from $215 in Mississippi to $550 in Massachusetts and average $387 per week nationally. The
duration of benefits also varies, with most states offering benefits for 26 weeks. During the
Global Financial Crisis, the government extended the number of weeks individuals could claim
benefits multiple times.
The Act extends coverage to those otherwise ineligible for state benefits, such as self-employed
individuals and gig-economy workers. It also extends benefits to workers who left their jobs for
a specific COVID-19-related reason and who can’t telework or take paid leave. These two groups

are eligible for a benefit equal to the state unemployment benefit plus the $600 per week top-
up. The federal government will fully fund the benefit for up to 39 weeks.
Retirement Accounts
For people impacted by COVID-19, the CARES Act temporarily waives the income-tax
withholding requirement and temporarily waives the income-tax withholding requirement
and the 10 percent tax penalty for early withdrawals from retirement accounts. Individuals who
withdraw early from their retirement account savings can repay the withdrawal back into a
retirement account over a period of three years or pay income taxes on the withdrawal over a
period of three years. This provision allows individuals to tap into their retirement savings
without penalty.
Mortgage Forbearance
Both individuals with single-family mortgages and landlords with multifamily mortgages are
eligible for mortgage forbearance. Individuals are entitled to 180 days with a one-time extension
for another 180 days. Landlords can request forbearance for 30 days and two extensions for 30
additional days each.
Mortgage servicers may not foreclose on loans during the 60-day period beginning March 18.
Vacant properties are exempt from the policy. Similarly, no tenant residing in a federally-
subsidized housing or in housing covered by a federally-backed mortgage loan can be evicted
during the 120-day period beginning March 27.
Finally, the act provides that creditors who accommodated borrowers for making late payments
must report these obligations as “current” until the later of 120 days after enactment of the
CARES Act or 120 days after the end of the national emergency concerning COVID-19.
The federal government or government-sponsored entities generally bear the cost of these
programs. However, given that an increasing number of mortgages are serviced by nonbank
servicers, the industry has asked authorities to create a liquidity facility to finance the policies.
Tax filing and payment extensions
On March 18, the IRS said it will allow individuals to defer income tax payments due on April 15
until July 15. The intervention followed the President’s emergency declaration on March 13. The
IRS said it considered all taxpayers with payments due on April 15 to be adversely affected by
the pandemic. Under the policy, taxpayers can postpone payments of up to $1,000,000
regardless of their filing status.
The stimulus in the CARES Act is funded via deficit spending; offsets or other funding
mechanisms are not included.
Programs Support Individuals through Unemployment Insurance and Wage

Subsidies
By Mallory Dreyer, Rosalind Z. Wiggins, and Greg Feldberg
Original post here.

Governments are providing extraordinary relief to the unemployed during the COVID-19
pandemic. Countries are both extending existing coverage and establishing temporary new
income-support programs to help individuals who have been furloughed, lost their jobs, or face
an imminent layoff. Key considerations for these programs include:
1. Channel: What is the channel for providing the benefits?
2. Size: What is the monetary value of the benefits provided?
3. Private-sector Funding: Do employers share the cost?
4. Eligibility: Who is eligible to receive the benefits?
5. Length: What is the timeframe for the benefits?
6. Administration: How does the individual receive the benefits?
Channel
Governments can provide income support directly to individuals or through their employers.
Standard unemployment insurance programs provide direct support and payments to
individuals who are laid off. In response to the COVID-19 pandemic, the US CARES Act expands
existing unemployment insurance benefits. Australia replaced existing unemployment insurance
programs with the expanded JobSeeker Program. The Australian government also announced
the Coronavirus Supplement, which provides an additional AUD $550 every other week to
eligible individuals.
The other channel is through the employer, which is common in some European countries.
The European Commission for example, has announced a plan based on the German
Kurzarbeit, or “Short-Time Work Scheme,” which provides wage support to eligible employers
who would otherwise lay off employees due to a forced suspension or reduction of work. During
the Global Financial Crisis, this program supported more than 1.4 million individuals. In
response to COVID-19, multiple countries are adopting or expanding temporary short-time
work schemes, such as France, Austria, Australia, Denmark, New Zealand, and others. Though
the support is based on employer eligibility, the aid ultimately benefits the individual who would
otherwise be unemployed.
Size
Governments may base the size of a benefit on an individual’s average earnings or pay a flat rate
to everyone, regardless of their prior income. Australia's JobKeeper program pays a flat rate of
AUD 1,500 per employee every other week, which is the equivalent of 70% of the median wage
in Australia. Greece will provide EUR 800 per month to all individuals who are unable to work
due to the COVID-19 pandemic. The New Zealand wage subsidy program provides a weekly flat
rate payment based on the employee’s average weekly hours: $585 for those working more than
20 hours per week, or full-time, and $350 for those working less than 20 hours per week.
Most European countries provide benefits based on a replacement rate, that is, a percentage of
an individual’s average earnings. Replacement rates vary across countries but are typically
between 60 and 80 percent. For example, Germany pays 60% of lost wages or 67% for people
with children. Belgium provides direct benefits equal to 70% of an individual’s prior average
earnings. In Belgium, individuals can also receive additional daily allowances if they lose work

due to a “force majeure” such as the coronavirus or economic conditions. In Bahrain, a
parliamentary committee passed a provision on March 30 mandating the unemployment fund
to pay the full salaries of all private-sector employees for three months.
Most countries cap the benefit per individual. Belgium’s program has a monthly cap of EUR
2,755. Denmark initially capped monthly government support at DKK 23,000 for salaried
employees and DKK 26,000 for hourly employees. It increased the limit to DKK 30,000,
regardless of hourly or salaried status a few weeks after announcing the program. Germany and
France limit monthly benefits of wage-subsidy programs to EUR 6,700 and EUR 6,927
respectively, while the monthly maximum benefit in Italy, Spain, and Ireland is less than EUR
2,000 per month.
Private-sector Funding
Some countries require employers to chip in to participate in wage-subsidy programs. The
Danish government pays 75 percent of an employee’s salary and requires the employer to pay 25
percent; for hourly wage employees, the government covers 90 percent. Estonia pays 70% of
salaries, but requires employers to also provide EUR 150 in wages. For employees in New
Zealand whose usual wages are more than the subsidy, their employer must try to pay at least
80% of their usual wages, though employer contributions are not required.
Eligibility
Governments must determine who is eligible. Countries with existing programs already have
criteria for eligibility. For example, some countries do not allow people who quit their jobs to
claim unemployment benefits. However, some countries have expanded eligibility in response to
the COVID-19 pandemic. Significantly, the United States and Australia now allow individuals
who are self-employed or contractors to claim benefits, through expansions of existing programs
or under new benefits. The US also includes employees who leave their job for a COVID-19-
related reason, such as inability to work due to quarantine or caring for a family member with
the virus.
For programs such as short-time work programs that are channeled through the employer,
eligibility is based on the company, rather than the individual. In France, wage subsidies are
available to employers who are forced to suspend or reduce business activity due to COVID-19.
Other countries set more specific criteria. Bulgaria extends its program to employers in sectors
most affected by the pandemic, such as retail, land and air transportation, and restaurants;
employers forced to suspend activities because of quarantine; and employers that experienced a
20 percent decline in sales in March. Other countries do not specify sectors but limit their
programs to those experiencing a certain percent decline in sales or workforce, such
as Denmark and Estonia. In order for employees to receive wage subsidies in Denmark, the
employer must document that it has retained employees during the covered period. Other
countries, such as New Zealand, make wage subsidies available to employers who rehire
employees they recently let go due to COVID-19.
Most wage-subsidy programs cover all employees, though programs differ on whether or not
employees who still work can be covered under the program. In the UK, for example, employees
must be placed on furlough and cannot provide work or services for the employer while
receiving the wage subsidy. In Denmark, employees must take five paid vacation days to be
covered under the program. Denmark’s program provides coverage for both full- and part-time

employees, in addition to self-employed or sole-proprietors. Other countries provide wage
subsidies for employees who work reduced hours, such as Germany and France.
Length
Unemployment insurance and wage-subsidy programs are generally limited in duration. For
unemployment insurance, many countries have a maximum number of weeks that an individual
is entitled to receive benefits. The US CARES Act provides an additional 13 weeks of
unemployment insurance, on top of the standard 26 weeks. During the 2008-2009 crisis in the
United States, the government extended the entitlement period multiple times, with
unemployed workers eligible to receive up to 99 weeks of benefits.Wage-subsidy programs vary
widely. Italy will provide wage subsidies for nine weeks. Denmark’s modified wage-subsidy
program is available for three months. The wage subsidy in Germany’s Kurzarbeit program can
be collected for up to 12 months.
Administration
Many countries will leverage existing infrastructure and systems to pay benefits. These include
Germany, France, and Spain.
Some countries are also streamlining application processes to expedite support. For example,
the process in Belgium occurs entirely online and requires forms from both the individual and
the employer. In New Zealand, the employer applies for support on behalf of the employees it
plans to cover under the wage subsidy. In France, the government must decide within two
business days whether to provide support to an employer through the short-time work scheme.
If the employer receives no decision, the support will be granted automatically. Bulgaria
similarly requires the government to make timely decisions.
In response to the COVID-19 pandemic, many countries are implementing and extending
various policies to provide support to individuals. For an overview of different types of
programs, see “Government Support for Individuals in Response to COVID-19.”

Programs Support Individuals through Direct Payments and Tax Cuts
By Kaleb Nygaard, Greg Feldberg, and Rosalind Z. Wiggins
Original post here.

During this COVID-19 crisis, many countries have provided cash directly to individuals and
households through direct payments and tax cuts. Though programs differ across countries,
some key considerations for these temporary income support programs include:
2. Size: What is the monetary value of the benefits provided?
Channel
Governments are providing financial support to individuals, whether or not they’ve lost their
job. One channel is via direct payments, where the government sends money to residents. A
second channel is via income tax cuts, where the government decreases the amount of money
withheld from paychecks or required of contractors and self-employed individuals. Both
channels seek to increase the amount of disposable income available to households in need.
The United States (US) and Hong Kong are implementing sweeping direct payment programs in
response to COVID-19. Indonesia and Kenya have made large cuts to their income tax rates.
Many countries have implemented one or both of these types of programs; see the Resource
Guide for dozens of examples.
Size
Broadly speaking, the size of a program can be measured by: (1) the amount offered to each
eligible individual, and (2) the total size of the program and that total compared to the size of
the country’s GDP.
The US and Hong Kong appear to have set up the largest and broadest direct payment
programs. The US is sending $1,200 to eligible adults and $500 per child to eligible parents. The
CARES Act, signed into law on March 27, authorizes $290 billion for this program. This
represents 13% of the stimulus in the CARES Act and 1.5% of US GDP. The Hong Kong direct
payment program, of similar size, would send HK$10,000 ($1,290) to eligible adults.
The announcement indicated that it would reach 7 million people, providing HK$70 billion of
stimulus, which represents 21% of GDP. A number of other countries have announced direct
payment programs, including Canada, Thailand, and Barbados.
Indonesia and Kenya have passed some of the largest income tax cuts. Indonesia’s program
decreases the income tax rate by 30% for workers in most sectors. Kenya’s program decreases
the tax rate to 0%. Both programs have cut the rate to zero, up to certain income levels. The cost
to the government is less clear as it represents a loss of future income as opposed to an increase
in immediate expenses. Although income tax cuts also increase household disposable income,

the increase is often not as perceptible as direct payments. Surveys of past tax cuts have shown
that they often go unnoticed by the beneficiaries. However, this may be a more viable method
for countries with limited resources with which to fund direct payments.
Eligibility
The direct payments programs often, though not always exclusively, target those at lower
income levels. A number of countries announced direct payments to lower income groups as
follows: “1,500 vulnerable families” in Barbados, “12 million low- and modest-income families”
in Canada, and “3 million of the poorest” in both Iran and Thailand.
The US and Canadian direct payment programs target a significant portion of the population.
The payments begin to taper as income increases above a set point, eventually reaching zero.
The $1,200 payment for a single adult in the United States begins to taper as income rises above
$75,000 (approximately 120% median income) and reaches zero at $99,000. In a similar
program in Canada, the taper begins at around $20,000 (approximately 80% median
income). Hong Kong is unique in offering stimulus payments to all adult residents, regardless of
income level.
In some countries, including the US and Canada, parents of dependent children are eligible for
additional funds, $500 and C$300 per child, respectively. The US program directly pays almost
all adults with Social Security numbers. The Hong Kong program directly pays all permanent
residents over the age of 18.
Income tax cuts are not a substitute for direct payments. It is important to note that income tax
cuts only increase disposable income for those who pay income taxes, and thus are generally
employed. This excludes a significant portion of the population that is in the most need during a
recession. For this reason, governments often choose not to implement income tax cuts. In
response to COVID-19, the government of Indonesia and Kenya both cut income taxes to zero,
up to a certain income (KES24,000 for Kenya, which represents approximately 25% GDP per
capita). Austria’s program allows taxpayers directly affected by COVID-19 to reduce their
quarterly income tax, in some instances all the way to zero. Australia’s program increased the
“low-income threshold” for families and individuals increasing eligibility for tax offsets that
reduce the amount of tax payable.
Length
The duration of direct payment programs come in two categories: one-time payments and
recurring payments. The majority of direct payment programs, including those of
the US and Hong Kong, are one-offs; however, programs in Thailand and Barbados offer
monthly payments. The program in Thailand is expected to last 3 months, and the program in
Barbados did not announce an end date. Recurring payments do provide some additional
flexibility and scalability that one-time payments do not.
The announced duration of the 30% income tax cut in Indonesia is 6 months.
Administration
The Internal Revenue Service (IRS) of the US will administer the disbursement of funds to
eligible individuals and families and expects to send the first payments by April 9. For those who
filed taxes previously and included bank account information the IRS will direct-deposit the
stimulus funds. The IRS is working on a website portal where eligible individuals will be able to

provide bank account information. If no bank account information is available and where
physical address information is available, the IRS will mail checks.
Although the Hong Kong government announced the direct payment program at the end of
February, the program will not be available “until the start of summer.” And because the
program will require residents to register it will take even longer to process payments.
Normally, the tax authority simply announces and then administers the tax cuts. A significant
advantage to tax cuts is their relative ease of implementing and administering in comparison to
direct payments.
policies to provide support to individuals. For an overview of different types of programs,
see “Government Support for Individuals in Response to COVID-19.”

Programs Support Individuals through Tax-Deadline Extensions and Penalty
Waivers
By Pascal Ungersboeck, Greg Feldberg, and Rosalind Z. Wiggins
Original post here.

Several governments have extended the payment deadline for 2019 income taxes or adopted
waivers for late-payment penalties as measures to support household income. Among the
OECD’s 36 member countries, more than half have implemented such measures. In essence,
both policies achieve the same objective which is to relieve households from the burden of a
pending income tax payment while affected by the current adverse economic environment.
There are two channels through which governments have supported households by momentarily
lifting the income tax burden: (a) an explicit extension of the deadline to pay 2019 income taxes,
and, less commonly, (b) waivers of fees, penalties or interest payments related to late income-
tax payments. The intervention is especially relevant given that in many countries the national
tax deadline is scheduled in the spring. These policies extend the deadline for tax filing and
payment by 3 months on average.
Both tax deadline extensions and penalty waivers have seen widespread use across the world
and constitute a simple tool to provide relief for cash-strapped households effectively addressing
cash-flow issues. At the same time, they provide policymakers with flexibility to extend the
length of the program or target especially vulnerable households.
Key considerations in the design of a deadline extension or penalty waiver for income taxes
include:
Channel
As discussed above two different channels are available to policymakers: explicit extensions and
penalty waivers. In general, the decision appears to depend on the intended length of the
extension; extensions of deadlines have been used for short extensions with a large majority
providing two or three month relief. Penalty waivers have been used for longer horizons.
Eligibility
Some countries’ programs require taxpayers to fulfill certain eligibility criteria to obtain the
extension or waiver. These criteria ensure that the policy targets high-need households and
eliminate concerns that the policy could lead to tax non-compliance for reasons other than
financial need. German taxpayers, for instance, have to be “directly and not insignificantly
affected” by current conditions to defer their tax payments. The tax authority assesses eligibility
based on an application that taxpayers submit. Belgium, El Salvador and Singapore
implemented similar application systems. In Singapore, as in Germany, the policy targets

taxpayers who are experiencing financial difficulties. El Salvador’s criteria are sector- and
industry-based and ensure that only small taxpayers or those employed in particularly affected
industries delay payment. The tax authority can assess eligibility for penalty waivers without
requiring taxpayers to apply. The US has taken a universal approach automatically extending
the filing and payment deadlines for three months for all taxpayers.
Length of the program
The length of the extension is another key feature of the policy. Horizons vary although many
countries opted for a relief period between two and four months. Switzerland and Germany
provide the longest relief at 9 months. On the other end of the spectrum, Egypt provides the
shortest with a two week extension. The following table provides a more detailed breakdown.
Table 1. Length of the program.

Length Number of Countries
Countries
up to 1 month 8 Egypt, Canada, El Salvador, Japan, Poland, Sweden, Taiwan, Turkey
Between 1 and 2 11 Norway, Algeria, Brazil, Bulgaria, Chile, Cyprus, Dominican

months Republic, Israel, Lithuania, Malaysia, Thailand
Between 2 and 3 12 Bosnia-Herzegovina, Czech Republic, India, Iran, Ireland,

months Montenegro, Netherlands, Peru, Portugal*, Slovakia, United States,
Netherlands
Between 3 and 4 1 Uzbekistan

months
Between 4 and 5 None

months
Between 5 and 6 3 Canada*, Ecuador, United Kingdom

months
Between 6 and 7 None

months
Between 7 and 8 1 El Salvador

months
9 months 2 Germany*, Switzerland*
*denotes countries that implemented a penalty waiver
Administration
In most cases, the program’s direct benefit is an ability to postpone tax payments. However,
some countries offer an intermediate solution by allowing taxpayers to opt into installment

plans to spread the tax burden over time, instead of simply delaying payment. Singapore, El
Salvador and Belgium have implemented such programs. In each case, taxpayers have to submit
an application and fulfill their respective country’s eligibility criteria.
policies to provide support to individuals. For an overview of different types of programs,
see “Government Support for Individuals in Response to COVID-19.”

EU Proposes Support for Short-Time Work Schemes

By Mallory Dreyer
Original post here.

On April 2, the European Commission (EC) announced a proposal to extend loans to Member
States to preserve employment. The Support to Mitigate Unemployment Risks in an
Emergency (SURE) initiative would provide loans to Member States to support the creation and
expansion of short-time work schemes. It is meant to act as a “second line of defence” to back up
Member States’ increased public expenditures. The Council of the European Union (EU) must
vote on the SURE proposal before it can take effect.
The SURE initiative would complement the European Union Solidarity Fund (EUSF). The EU
established the EUSF in 2002 to aid Member States when large-scale disasters occur, and its
scope was recently amended to incorporate large-scale public health emergencies such as the
COVID-19 pandemic. The EUSF is a permanent facility that provides grants, while the SURE
initiative would be a temporary program that provides loans. The SURE initiative joins a series
of proposals under the umbrella of the Coronavirus Response Investment Initiative
(CRII) which the EU announced on March 13 and implemented on April 1. The CRII allows
Member States to benefit from more financial support and targeted assistance particularly in the
most exposed sectors, such as healthcare, small businesses, and labour markets; and the most
affected territories in Member States and their citizens.
Under the SURE proposal, the EU would extend loans to Member States to help cover costs
directly related to the creation or extension of national short-time work schemes and similar
measures for the self-employed. Short-time work schemes allow companies experiencing
economic difficulties to temporarily reduce hours of, or lay off, employees while the employees
receive income support from the government for hours not worked. The SURE initiative would
make up to EUR 100 billion in loans available and would be backed by EUR 25 billion in
voluntary guarantees from EU Member States. The EC would be authorized to borrow on the
capital markets or with financial institutions on behalf of the EU to fund the program. The
United Kingdom will not participate in the SURE initiative as it has left the EU.
The German short-time work scheme, Kurzarbeit, is one of the oldest such programs in Europe,
with roots back to 1910. Short-time work schemes gained popularity and widespread adoption in
response to the Global Financial Crisis (GFC), as countries, including the Czech Republic,
Hungary, Mexico, the Netherlands, New Zealand, Poland and the Slovak Republic, created new
short-time work schemes. Other countries, such as Denmark, France, Italy, Japan, and Spain,
operated short-time work schemes prior to the GFC. In Germany during the GFC, more than 1.4
million individuals received income support. The OECD credits the German program with
preventing unemployment for nearly 500,000 individuals.
Evidence suggests that short-time work schemes prevent layoffs and enable employers to adjust
workers’ hours in response to an economic downturn. Short-time work schemes can
promote equity in the labor market, as the burden of adjustment is shared more equally across
the workforce. Short-time work schemes also promote labor market efficiency, as they prevent

temporary downturns from destroying efficient labor market allocation. These programs allow
employers to retain valuable staff and maintain relationships during the downturn. An OECD
analysis concludes that short-time work programs used in response to the GFC had significant
positive effects, and that countries without such programs could benefit from their
introduction.
However, some note that short-time work schemes could lead to labor market
distortions and inefficient allocation of labor in the long run. If such programs remain in place
indefinitely, workers may not have an incentive to move to more productive firms. During the
COVID-19 crisis, when many companies have been forced to close due to exogenous
circumstances, there is less concern about inefficient allocation of labor.
In response to the COVID-19 crisis, countries with existing short-time work schemes are seeing
an increase in uptake. Between March 1 and March 27, 2020, 470,000 companies applied for
the program in Germany, under which the government covers 60% of lost wages and 67% for
those with children. Denmark announced a wage subsidy program on March 14, 2020, and over
11,000 companies applied by March 30, 2020. Only employees who do not work are eligible for
the Danish program, which covers 75% of wages for salaried employees and 90% of wages for
hourly employees, up to DKK 30,000. In Sweden, employees will receive 90% of their wages.
The chômage partiel (partial unemployment) program in France, reimburses 84% of net
earnings for employees of companies who reduce or stop operations due to exceptional
circumstances. As of April 1, 2020, the Labour Minister in France said that 1 of every 5
employees is on chômage partiel due to the COVID-19 crisis.
Despite increased usage of short-time work schemes, features vary, including eligible reductions
in work hours, percent coverage of lost wages, and duration. Many programs protect employees
from dismissal, requiring employers to retain the employees while receiving the benefit and for a
set period after.
If the SURE proposal is approved, Member States will be able to request financial assistance
from the European Commission to support short-time work schemes and assistance for the self-
employed.

Unemployment Insurance and Short-Time Compensation in the US and
abroad
Original post here.

To address the COVID-19 pandemic, governments around the world recently placed restrictions
on business activities, in many cases ordering non-essential businesses to close and workers to
stay at home. In many countries this led to a rapid decline in labor demand. In the US the
Bureau of Labor Statistics (BLS) reported the highest unemployment rate since the Great
Depression in April with a national rate of 14.7, an 11 percentage point increase from the
historical low of 3.5 percent reported two months before. Nevada reported the highest rate in
the country at 28.2 percent, up from 6.3 percent in March, while the lowest rate was reported in
Connecticut at 7.9 percent, still more than a twofold increase from 3.7 percent reported in
March. In May, the labor market began to show the first signs of recovery as some states
reopened their economies; the unemployment rate dropped to 13.3 percent.
Initial jobless claims across the nation peaked at 6.8 million during the week ending March 28,
ten times higher than the numbers reported at the height of the 2007-2009 global financial
crisis (GFC). Between March 1 and April 30, a total of 28.5 million new claims for
unemployment insurance payments were filed. Unemployment insurance provides workers who
involuntarily lose their jobs with replacement income based on previous earnings; amounts and
terms of benefits vary across states, which fund the benefit. In many states, mass layoffs due to
the lockdown resulted in overwhelmed unemployment systems and significant delays in
payments. The CARES Act sought to address some of these shortcomings by expanding state
unemployment benefits and adding a weekly payment of $600.
At the same time, many European countries did not experience a similar surge in
unemployment as a result of their lockdown. In May, Germany’s unemployment rate stood at
just 6.1 percent, up from 5.1 percent one month earlier, a stark contrast to the US numbers as
shown in the chart below. The country has avoided mass layoffs by relying on its Kurzarbeit or
short-time work scheme to maintain workers employed through the downturn. Kurzarbeit
allows employers to reduce employees’ hours and compensation while maintaining them on
payroll; employees then receive government benefits to compensate for the wage reduction.
Since March, the German federal labor agency has received applications to participate in the
program from over 750,000 employers, potentially covering 10 million workers. Similar work-
share programs exist in other European countries and are also being heavily used during the
current downturn.

Note: The unemployment rate in Germany is reported by the Federal Labor Agency
(Bundesagentur für Arbeit). The agency does not follow international guidelines defined by the
International Labor Organization (ILO) and typically produces estimates above ILO levels. The
most recent estimate available rate using ILO standards is 3.1 percent, reported in December
2019.
Short-time compensation (STC) programs that operate similar to Germany’s Kurzarbeit are in
place in 26 states and the District of Columbia in the US. However, these programs have not
encountered nearly as much utilization as abroad, with American employers resorting to layoffs
and furloughs instead. This post discusses different unemployment systems and their use during
economic downturns. The discussion is structured in 4 parts:
1. An overview of STC policies implemented in the US and abroad
2. A discussion of the benefits of STC during economic downturns
3. An overview of STC in recent legislation in the US
4. A discussion of the use of STC in the US
1. STC policies in Germany and the US
STC allows employers to keep their employees on payroll in times of low demand. Under the
program employers decrease an employee’s hours by a certain percentage and provide wages in
proportion to the hours worked; employees then receive government benefits to offset a portion
of lost wages. Different programs can be distinguished by the application process for employers,
the calculation of benefits to be paid, restrictions placed on minimum and maximum
adjustments to hours worked, and the maximum duration of the program.

German employers are required to document the cause of a decline in labor demand and submit
a justification to the local employment agency; over 163,000 employers did so in March,
587,000 in April. Once the reduction has been approved, companies can apply for STC benefits
that replace 60 percent of lost wages for employees working fewer hours, employees with
children collect 67 percent of lost income. To be eligible, at least one third of a company’s
workforce needs to face a decrease of at least 10 percent of hours worked. However, there is no
upper bound on the reduction, employers can decrease hours by up to 100 percent.
In response to the COVID-19 pandemic German authorities have expanded the program. In
particular, the minimum reduction to be eligible for STC has been lowered to a 10 percent
reduction for one tenth of the workforce, instead of one third. Additionally, the replacement rate
for hours lost has been increased to 70 percent after employees received STC for three
consecutive months and 80 percent after six months (77 and 87 percent for workers with
children). Introduced almost a century ago, the German policy served as a model for many STC
programs introduced in other European countries.
US states were first authorized to implement similar STC programs under the Tax Equity and
Fiscal Responsibility Act of 1982. Currently 26 states and WDC have a STC program in place.
Essentially these programs are designed to fulfill the same purpose of maintaining workers on
payroll through a downturn. Employers submit an application to the state’s Department of
Labor including a breakdown of the hours to be worked by each employee. If the application is
approved, workers collect wages in proportion to hours worked and weekly unemployment
benefits in proportion to hours lost. An employee whose hours have been decreased by 20
percent will thus collect 80 percent of his full-time wages and 20 percent of the unemployment
benefit he would have been entitled to had he been laid off.
All programs impose a minimum decrease in hours worked to be eligible for the program. Most
states require hours to be decreased by at least 10 percent, although some require a 20 percent
decrease. Moreover, in most states, hours cannot be decreased by more than 40 percent; a
few states allow decreases of up to 50 or 60 percent. In response to the COVID-19 pandemic,
some states have loosened these requirements. Arizona and Michigan both recently extended
the upper bound on reduced hours to 60 percent.
In the US, usage of STC programs has historically been limited. The dominant system is the
unemployment insurance system under which eligibility for benefits is contingent on the loss of
employment. The amount and duration of payments vary widely across the 50 states and WDC,
with many maximum benefits capped at a level that would be below 100 percent of lost income
for many workers.
2. STC during economic downturns
By protecting workers from layoffs STC programs can prevent an increase in unemployment in
the immediate aftermath of an economic shock, as reflected in the recent unemployment data
discussed above.
If successful, STC programs can alleviate many of the costs of unemployment and offer
advantages to both employers and employees. The policy can prevent skill erosion for workers as
they maintain part-time employment. Maintaining ties with an employer can also protect
workers from psychological costs related to unemployment and prevent discouragement by
eliminating the need to engage in a costly job search process following the downturn. Finally, in

countries like the US, where many benefits including healthcare are tied to employment,
maintaining these benefits can prove crucial for workers and their families. For employers, the
policy eliminates search and training costs during recovery. STC also allows employers to
flexibly increase their workforce to meet demand as the economy recovers. STC programs in
most states allow employers to adjust each worker’s hours on a weekly basis.
However, the critical question policymakers must answer is whether STC can prevent job
destruction in the long run, rather than just postpone layoffs. Empirical evidence collected from
programs used in Switzerland, Italy and France during the GFC indicates that the answer
depends on the type of shock firms are facing. STC systems implemented in these countries are
similar to the German Kurzarbeit, providing employees with a certain percentage of wages lost.
Switzerland entered the GFC with strong employment and GDP growth, before facing a short V-
shaped recession in the final quarter of 2008 and the first half of 2009. The downturn mostly
affected exporting firms faced with a decrease in global demand, the recession was milder in
domestic sectors. Under these conditions, evidence suggests that the wage subsidies paid under
the STC program contributed to preventing permanent layoffs by allowing firms to maintain
workers on payroll until global demand recovered.
The conclusions are different for the STC program implemented during the same period in Italy.
Evidence from Italian firms indicates that the policy had a large short-term effect on
employment but did not prevent layoffs in the long run because firms with low levels of
productivity prior to the recession were significantly more likely to select into the program. The
authors of the study also measure the policy’s effect on reallocation in the labor market. Since
participating firms have the ability to hold on to workers through a downturn, the policy can
limit non-participating firms’ ability to hire, preventing the correction of imbalances and
potentially leading to labor market inefficiencies.
In France, researchers conclude that the policy preserved employment during the recession.
However, only about 1 percent of French firms participated in the program at the height of the
GFC, limiting the program to a small segment of the economy and preventing a larger effect on
labor market reallocation.
Overall, the literature suggests that STC is an appropriate tool for firms forced to lay off workers
due to a temporary deterioration in conditions. The policy can prevent costly layoffs for firms
experiencing a temporary decrease in demand or credit and liquidity constraints. In cases where
an activity is not viable in the long run, STC can only postpone layoffs and may have the harmful
effect of limiting or delaying workers’ transition to more productive sectors of the economy.
The current global downturn is a result of various lockdown policies implemented by
governments to prevent the spread of COVID-19. As such, it provides a textbook example of a
temporary downturn resulting from an exogenous shock, rather than an internal imbalance
requiring some form of market correction. Currently European economies with a tradition of
providing STC to their workers during downturns boast unemployment rates vastly below the
rates reported in the US. Although these are still short-term effects, given the nature of the
crisis, we can expect these policies to produce a stable labor market as countries exit the
lockdown and re-open their economies.
3. STC in recent US legislation

STC has recently received renewed attention from policymakers in the US. Under the expanded
unemployment protection in the CARES Act, the federal government covers all payments made
to workers under an STC program until December 31, 2020. This offered a strong incentive for
states to promote the use of STC over conventional unemployment insurance as these benefits
are not covered under the Act. However, as the discussion below shows, this incentive had no
sizable effect on participation in the program. In addition to the benefits distributed under their
state’s STC program, workers are also eligible for the full $600 per week payment provided
under the Federal Pandemic Unemployment Compensation (FPUC) while on STC. Under these
conditions a worker’s income under STC will almost certainly be higher than their full-time
compensation. The expanded benefits under the Act thus would provide more than a
replacement of lost wages. In the context of STC, the FPUC can be seen as a measure to
stimulate economic activity by temporarily increasing the purchasing power of individuals who
receive it, similar to the $1200 direct payment made to all individuals.
The HEROES Act passed in the House and recently introduced to the Senate would extend full
federal funding for STC benefits until January 31, 2020. The CARES Act also provides incentives
for states without STC to roll out a program. Per the Act the Treasury will fund half of the
benefits distributed under a newly implemented STC program until December 31, 2020. The
HEROES Act proposes to extend this date to January 31, 2021 as well.
The Paycheck Protection Program (PPP) of the CARES Act is another program intended to
replicate some of the benefits of STC for workers employed by small and medium enterprises
(SMEs). Although the program excludes large firms with 500 or more employees and/or
revenue above $1mn, the program has the potential to affect employment outcomes for a large
sector of the economy as 49.2 percent of private-sector jobs are provided by SMEs. The
program, operated by the Small Business Administration (SBA), allows SMEs to obtain loans to
cover payroll and other expenses. Initially loans would be forgiven by the federal government
contingent on 75 percent of the funds being spent on payroll within eight weeks of the funds
being received. A recent amendment to the program updated these requirements to allow small
businesses with large fixed costs beyond payroll to be eligible for loan forgiveness. Under the
amendment loans are forgiven if 60 percent of the total is spent on payroll, the timeframe within
which funds have to be used was extended to 24 weeks. If not forgiven, loans have a maturity of
two years at 1 percent interest.
The program has been criticized for its generous terms and inability to allocate funds to the
firms that needed it the most. Given the lack of restrictions to participate, the program became
widely popular and exhausted its initial funding of $350 billion less than a month after it was
launched on April 3. To allow the program to continue the Senate approved an additional $310
billion for the program.
As of May 30, the program has given out more than 4 million individual loans totaling over $510
billion. While the program prevented layoffs at a large number of SMEs, it did so at a high cost
for the taxpayer - compared to a program that could have allocated funds to firms most likely
unable to meet payroll without support. In order to be eligible, applicants had to certify in good
faith that “current economic uncertainty makes [the] loan request necessary to support the
ongoing operations of the Applicant.” In guidelines issued on May 13, the SBA announced that
all loan applications with principal amounts below $2 million will be deemed to have been made
in good faith, covering almost 80% of the outstanding balance as of May 30 or more than $400
billion. With eligibility not being contingent on declines in cash-flows or operating profit, the

program provided funds to many businesses with the understanding that a large share of the
total will not be paid back, the rest was provided loans under extremely generous terms.
4. STC use in the US
Data on STC claims in the US suggests that participation is more pro-cyclical than conventional
unemployment claims with large increases in participation during downturns. Note also that
there are strong seasonal fluctuations in unemployment claims while STC claims appear to be
less tied to seasonal variations. With over 98,000 first claims in April 2020, STC programs
experienced the largest participation in the programs’ history. In absolute terms, however, STC
participation remains negligible relative to the size of the labor force. Initial unemployment
claims reached 16.7mn over the same period. Given the low participation rate, there are no
differences in unemployment rates in states with STC programs, compared to states that don’t
have a program.
In the wake of the GFC, Congress passed the Middle Class Tax Relief and Job Creation Act of
2012. The Act was intended to promote adoption of STC programs across the country by
providing states with various financial incentives to implement and expand their programs. As
required under the act, the Labor Department produced a report in 2016 and identified various
factors that explain low participation. Factors included in the report are:
1. “antiquated IT systems that cannot support STC automation efforts
2. lack of preparation to efficiently manage the spike in STC activity during the recession
3. need for process improvements to make STC work better for employers and workers
4. lack of a common and recognizable “brand” for the STC program
5. the need for greater flexibility to meet employers’ changing business needs.”
The findings suggest that both operational and communication issues prevent more
participation in STC programs. Since STC claims require a weekly review of employee-level data
on hours worked, programs can’t reach an appropriate scale if processes are not automated. As
of 2016, some states still relied on paper systems to review claims. Combined with a shortage of
staff in charge of STC claims, these shortcomings constitute obvious barriers to reaching a scale
sufficient to provide the benefits European countries are currently experiencing under their
programs.
Beyond operational issues, STC programs suffer from the fact that many employers are not
familiar with the program. This is accentuated by the fact that STC programs do not have a
nationally recognized brand as states use different names for their programs such as Shared
Work or Workshare. A survey among employers in four states with STC programs shows that
while around 95 percent of non-STC employers are familiar with unemployment benefits, most
are not aware of their state’s STC program. In the four states surveyed, between 28 and 54
percent of employers were aware of the STC program in their state.
In May, the BLS reported a national unemployment rate of 13.3, indicating that, as restrictions
on business activity are lifted, the labor market is on the road to recovery. Meanwhile European
countries that made extensive use of STC over the past months appear to weather the downturn
without significant layoffs, paving the way for a swift recovery. The early evidence from many
countries suggests that STC policies were able to reduce the effects of the pandemic on labor

Source: BLS
Source: BLS

market outcomes. However, further analysis of STC programs during the downturn will be
necessary to provide a definitive answer. In the US, the experience of the last months could
encourage policymakers to renew the effort started in the wake of the GFC, to promote STC
programs as an alternative to conventional unemployment benefits during economic downturns.
In May, the BLS reported a national unemployment rate of 13.3, indicating that, as restrictions
on business activity are lifted, the labor market is on the road to recovery. Meanwhile European
countries that made extensive use of STC over the past months appear to weather the downturn
without significant layoffs, paving the way for a swift recovery. The early evidence from many
countries suggests that STC policies were able to reduce the effects of the pandemic on labor
market outcomes. However, further analysis of STC programs during the downturn will be
necessary to provide a definitive answer. In the US, the experience of the last months could
encourage policymakers to renew the effort started in the wake of the GFC, to promote STC
programs as an alternative to conventional unemployment benefits during economic downturns.
References:
Cahuc, Kramarz, Nevoux, “When Short-Time Work Works” Sciences Po Economics Discussion
Paper. July 2018
Guipponi, Landais, “Building effective short-time work schemes for the COVID-19 crisis” Vox
EU. April 2020
Guipponi, Landais, “Subsidizing Labor Hoarding in Recessions: The Employment & Welfare
Effects of Short Time Work” CEP Discussion Paper. December 2018
Greenwald, “Here’s Why Adding Billions More to the Second Round of PPP Won’t Fix It”
Medium. April 2020
Kopp, Siegenthaler, “Short-Time Work and Unemployment in and after the Great Recession”
KOF Working Papers. July 2019

Swaps
To ensure that international trade continues during periods of financial stress, central banks
establish short-term liquidity swap lines. While many states participate in swap lines, the
prominence of the US dollar in global markets makes Federal Reserve swaps particularly useful.
These work the same as any swap line: a foreign central bank uses their currency to purchase
dollars at the market exchange rate, and agrees to use dollars to purchase back their currency at
the original exchange rate, plus interest. The foreign central bank may then freely lend dollars to
its domestic institutions. Because the exchange rate does not change, swaps are riskless
transactions that effectively support foreign exchange liquidity.

Analysis
Central Banks Use Swap Lines to Maintain the Flow of US Dollar

By Rosalind Z. Wiggins with Research Support from Pascal Ungersboeck
Original post here.

The Yale Program on Financial Stability has produced and will continue to
update a spreadsheet to assist those contemplating swap line agreements. The
spreadsheet catalogs past and current examples of crisis-focused swap line
agreements, identifies interesting program features, summarizes existing
evaluations of programs, and shares general resources on the topic. This
spreadsheet can be accessed here. (Current version as of 3/26/2020 for those
unable to access Google Sheets)
As the world responds to the COVID-19 pandemic, the US dollar funding markets have come
under stress. To address this issue, the US Federal Reserve (Fed) and other major central banks
have taken a series of coordinated actions to provide more global US dollar liquidity. Swap lines
are a powerful and flexible tool when central bank reserves are inadequate or when normal
currency markets become distressed. We discuss here: (i) the recent actions regarding the US
dollar, (ii) actions relating to prior crises, and (iii) significant features that countries might
consider when contemplating entering a swap line.
Under a currency swap agreement, the lending central bank, for example, the Bank of England
(BoE), requests US dollars from the Fed. In exchange, the Fed receives an equivalent value of
pounds calculated at the market exchange rate. The BoE then lends the dollars to banks in the
UK, charging interest. For the life of the swap, the BoE has a dollar liability, which takes the
form of an account at the Fed, and the Fed has a pound liability, which is an account at the BoE.
When the swap is over, the BoE returns the dollars to the Fed and the Fed returns the pounds to
the BoE. The BoE also pays to the Fed the interest earned on the funds lent.
The Fed bears no exchange risk on these transactions. Also, because the receiving central bank
determines the banks in its country to which it lends dollars, the Fed has no contractual
relationship with those institutions and therefore does not bear any credit risk related to the
downstream borrowers. (See 2020 Swap Line FAQs).
The recently established Fed swap lines appear to operate similarly to the standing swaps and
those used in the GFC. (See Frequently asked questions: US Dollar and Foreign Currency
Liquidity Swaps, which describes earlier programs.)
2020 Actions
On March 15, the Fed and five central banks with which it has unlimited standing swap lines
agreed to: (i) lower the interest rate by 25 basis points; the rate is now the overnight index swap
rate (OIS) rate plus 25 basis points; and (ii) offer loans with 84-day maturity in addition to their
ongoing weekly operations, beginning on March 16. The five central banks are the Bank of
Canada, Bank of England (BoE), European Central Bank (ECB), Bank of Japan (BoJ), and Swiss
National Bank (SNB). (Fed webpage discussing swaps). The Fed calls these the “key banks.” The

changes are to remain in place as long as appropriate to smooth the functioning of the US dollar
funding markets
On March 20, the Fed and four of the five key banks also announced that, beginning March 23,
they would increase the frequency of their 7-day maturity operations from weekly to daily,
continuing at least through the end of April.
The Bank of Canada does not currently conduct offerings of US dollars, but agreed to the rate
provisions of the March 15 announcement and also announced on March 20 that it would
initiate a USD Term Repo Facility (at the new rate), should one become necessary. See the
Canadian announcement here.
March 19, the Fed announced swap lines with nine more countries, bringing the total to 14.
Maximum amounts currently authorized under the swaps are shown in Table 1.
Table 1. Federal Reserve US Dollar liquidity swap provisions
Maximum amount available Country/Region
Unlimited standing facility Canada, United Kingdom, European Union, Japan, Switzerland
$60 billion Australia, Brazil, South Korea, Mexico, Singapore,

Sweden
$30 billion Denmark, Norway, New Zealand

Source: Central Bank Swap Arrangements, Federal Reserve Bank of New York website
The US dollar is by far the most widely held and transacted international currency. Strains in
dollar funding markets outside the US can disrupt financial conditions inside the US as well. If
foreign entities were to experience difficulties accessing dollars to settle their transactions
denominated in US dollars, the strain could further destabilize the flow of international
commerce and roil US financial markets, potentially impacting businesses and households.
Lessons from the GFC and other Crises
The latest actions match the number and country distribution of swap lines that the Fed
deployed during the Global Financial Crisis (GFC). Moreover, the scope of the lines established
so far closely approximates those the Fed had in place at the peak of the GFC—it did not offer
uncapped capacity to the key banks until October 2008, after the failure of Lehman Brothers.
(In recognition of changes to the economic situation, some lines are larger than during the
GFC.) During the GFC, the Fed swaps were heavily used; by December 10, 2008, swaps
outstanding had risen to more than $580 billion. (Fleming and Klaage, 2010). A BIS study
considered the Fed swap lines “to be very effective in relieving stresses in US dollar liquidity
stresses and stresses in foreign currency markets.” (BIS, 2010).
The Fed terminated its GFC swap lines as market conditions improved. However, the lines with
the key banks were reestablished on a temporary basis in 2010 and converted to permanent
standing facilities in October 2013 to act as a “prudent liquidity backstop” to problems that

might arise in the availability of a currency. (Federal Reserve, Oct 2013). The standing
agreements allow the Fed to quickly provide US dollars to funding markets as needed.
The Federal Reserve operates swap lines under the authority of Section 14 of the Federal
Reserve Act and in compliance with authorizations, policies, and procedures established by the
Federal Open Market Committee (FOMC). Most central banks have a similar authority.
During the GFC, central banks also created swap lines to address shortages in currencies besides
the US dollar. The ECB entered into swaps with several countries to address strains in the
availability of Euros: Sweden, Hungary, Denmark, Latvia, Poland, and the United Kingdom.
(BIS, see page 30). The SNB entered into Swiss franc swaps with Poland, Hungary and the
United Kingdom. (BIS, page 31). The BOJ entered into Japanese yen swaps with Korea and
India. (BIS, page 32).
Central banks also introduced currency swaps after the 9/11 terrorist attacks in the US and in
response to the Asian Financial Crisis. After the Asian Financial Crisis, several Asian countries
entered into a multilateral swap agreement under the Chiang Mai Initiative, as well as many
bilateral agreements, generally to supply US dollars or yen. (BIS, page 32). These lines were
limited, in that only small amounts could be borrowed without IMF approval. These were
augmented to provide for more flexibility and to make them two-way. See the YPFS Swaps
Resource Guide for more information on these and other swaps.
Key Features of Swaps
Swap lines are an important monetary policy tool and have attributes that make them very
responsive to changing circumstances. Some of the features which countries contemplating
swaps consider are:
Cooperation and coordination
Swaps signal cooperation between the implementing central banks; different levels of
cooperation are possible and there can also be a coordinated effort to manage the flow of a
currency so as to avoid arbitrage or better meet market needs. The recent March 20
announcement from the Fed and five key banks recognizes a joint need to provide significantly
more availability of one-week funding. As another example, in 2008 the ECB and BOE timed
their auctions of US dollars (provided under the swaps) to coincide with the Fed’s auctions
under its Term Auction Facility. (ECB Press Release, 12/12/2007). After September 15, 2008,
however, the Fed negotiated terms of bilateral arrangements, such as interest rates and timing,
with other central banks individually.
Design Flexibility
Swaps usually can be implemented fairly rapidly. After the 9/11 terrorists attacks, the Fed and
ECB announced a US Dollar swap line on September 13. The next day a line with the BoE was
announced and augmentation of the standing line with Canada. Standing lines can be activated
or expanded very quickly as circumstances change.
Eligibility
In deciding which countries to enter into swaps with, a central bank considers the extent of
bilateral capital flows between the two countries and the risk the swap lines could pose. There

have been instances where requests for swap line have been denied. However, in such cases,
there may still be a way for a country to use a third-party swap to access the needed currency.
Most swaps are one-way or two-way bilateral agreements. One notable multilateral swap
agreement is the Chiang Mai Initiative (Multilateralization) (CMIM) among Asian VVV
countries to provide for US Dollar support. The CMIM replaced a prior multilateral agreement
and a network of bilateral agreements but did not prohibit additional bilateral agreements,
which have been maintained by several countries. Sussangkarn 2010. Chiang Mai FAQs.
Swaps enable a country to seek support for those foreign currencies in which its domestic banks
have exposure and in amounts that it perceives are needed. The standing swaps that the Fed
established in 2013 “constitute a network of bilateral swap lines among the six central banks”
and “allow for the provision of liquidity in each jurisdiction in any of the five currencies foreign
to that jurisdiction, should the two central banks in a particular bilateral swap arrangement
judge that market conditions warrant such action in one of their currencies.” (Federal
Reserve website). Thus far, the US Fed has not utilized its ability to request a foreign currency
under these arrangements.
Notably, because of their flexible design properties, swaps can provide increased access to a
third currency, such as US dollars, for countries that do not have a swap agreement with the
Fed. The bilateral swap agreements established under the Chiang Mai Initiative demonstrate the
range of types of agreements and their responsiveness. These agreements were established or
renewed after the Asian Financial Crisis (AFC), when a lack of foreign reserves was an issue.
They were a way for the countries to make their foreign currency reserves available to each
other. Several of these lines have since been extended to include local currency swaps, as well as
USD-for-local currency swaps.
Examples of these swaps that incorporate terms tailored to the countries’ particular situation
include:
• The (one-way) swap line that Japan has established with Indonesia permits Indonesia to
swap its local currency for US dollars as well as Japanese Yen.
• The (two- way) agreement between Japan and Singapore which permitted each country
to swap its local currency for US dollars from the other was amended in 2018 to also
permit Singapore to access Japanese Yen.
• The (two-way) agreement between Japan and Thailand permits both countries to swap
their local currencies (i.e., the Japanese Yen and the Thai Baht, respectively) for US
Dollars from the other. Thailand may also swap the Baht against the Japanese Yen.
There is also discussion of extending the basic CMIM multilateral agreement to include Yen and
Yuan. (Kyodo 2019).
During the GFC, the ECB set up Euro swap lines with Sweden and Denmark. But it used a
different arrangement with the central banks of Poland and Hungary because it did not want to
accept their local currencies. Instead, the ECB entered into repo agreements under which the
Poland and Hungary central banks exchanged high-quality Euro-denominated securities as
collateral for the Euros they received. These central banks would then on-lend the Euros in a
similar manner and received their securities back once they returned the Euros. Other countries
such as Iceland received access to Euros not through swaps with the ECB, which the ECB

denied, but (in a fashion similar to the Asian experience) indirectly through swaps with
countries that had such swaps, such as Sweden and Denmark. (BIS, page 27, 30). Although
much smaller than the Fed’s dollar lines during the GFC, the ECB believed that their Euro
provisions to local banks “helped to achieve the key objectives of the swap lines and calmed
markets and funding concerns during the crisis while taking into account moral hazard
considerations.” (ECB, 2014). Based on this assessment, the ECB converted some swaps to
standing facilities.
While swap lines are established in response to currency strains, they can also serve other
objectives. During the GFC, China established swap lines with six countries, which were also
thought to have promoted the Chinese central bank’s policy objective of promoting non-dollar
currencies as trading and investment currency. (BIS, page 33).
Credit Risk
The receiving central bank determines which of its domestic banks are creditworthy and on
what terms (collateral, interest, maturity). Given this, central banks contemplating being on the
receiving end of a swap should consider how they would adequately protect themselves through
the eligibility, collateral, and other criteria that they establish.
Lending Eligibility and Flexibility
Lending of funds to the domestic banks can be done through various modalities and terms as
established by the receiving central bank, although sometimes the loan rate is agreed to with the
lending counterparty. Features that can be customized include:
• Setting rates through various methods, e.g., variable-rate tenders, fixed-rate tenders,
bilateral transactions;
• Lending against various types of collateral, including both foreign currency and
securities denominated in foreign currency;
• Varying and/or changing the maturities of lending;
• Limiting the amount of lending to any one participant or providing full allotment;
• Setting the terms of the program which may be extended.
As demonstrated above, terms can be easily altered to meet situations as they develop. Recent
programs have been revised to: (i) lower the cost of funds, (ii) offer longer-term maturities, (iii)
provide more frequent offerings, and (iv) expand the flow to additional countries. In the wake of
the 9/11 terrorist attacks, funding was lent on an overnight basis. In October 2008, the major
European banks (ECB, BoE, and SNB) agreed to lend on a longer term basis (at 7-day, 28-day,
and 84-day maturities) to meet market needs.
Preservation of Reserves
Currency swap lines between central banks enable the receiving central bank to obtain foreign
currency and redistribute it locally to its domestic banks without having to use its foreign
reserves. This can be very valuable, since it allows the central bank to maintain its reserves for
its own purposes. Swaps also can augment reserves that are inadequate to respond to an
increase in demand.

Scalability
Once in place, swaps are easily scalable to meet changing conditions. Agreements can provide
for a maximum amount, which need not be the same for each counterparty. For example, the
agreement between Japan and Singapore permits Singapore to swap Singapore dollars for up to
US$3 billion or its equivalent in Japanese yen from Japan, but permits Japan to swap Japanese
yen for only US$1 billion from Singapore.
The amount of funds provided can be increased as the need arises and scaled back as conditions
improve. On October 13, 2008, for example, the Fed announced that it would increase the size of
its swap line to four central banks (BoE, ECB, SNB, Bank of Canada) so that the respective banks
could provide more US dollar funding. The same arrangement was extended to Japan the next
day. The original lines had been established at much smaller levels. For example, the swaps with
the SNB and the ECB, as established in December 2007, were originally limited to $4 billion and
$20 billion, respectively. By October 2008, the Fed had repeatedly enlarged the caps to $60
billion and $240 billion, respectively, before removing them entirely. Therefore, countries
looking to establish a currency swap need not consider the initial limit binding should
circumstances change.
Key announcements discussed herein:
• March 15, 2020 joint announcement
• March 19, 2020 announcement with Swap Lines FAQs
• March 20, 2020 joint announcement.

Fed Creates Dollar Repo Facility for Central Banks, Extending Liquidity to
Central Banks that Don’t Have Fed Swap Lines
By Greg Feldberg
Original post here.

On March 31, the Federal Reserve announced a dollar repo facility that will allow it to lend
dollars to foreign central banks in exchange for US Treasury securities.
The temporary repurchase agreement facility for foreign and international monetary authorities,
or “FIMA Repo Facility,” will allow foreign central banks to exchange US Treasuries for US
dollars through overnight repurchase agreements (repos). They can then make those dollars
available to companies in their own jurisdictions.
The unprecedented global COVID-19 crisis has intensified demand across the world for US
dollars. Earlier, the Fed announced that it was revising and expanding dollar swap lines with
foreign central banks. But the swap lines are now available to just 14 central banks (see the
YPFS blog). The new FIMA Repo Facility, available from April 6, will allow the Fed to get dollars
to central banks that are not participating in those swap lines. Also, unlike the swap lines, it is
not an updated version of a tool used in the global financial crisis in 2007-09.
In FAQs, the Fed said the new facility will help prevent financial stress abroad from elevating
risks in US markets: “The facility reduces the need for central banks to sell their Treasury
securities outright and into illiquid markets, which will help to avoid disruptions to the Treasury
market and upward pressure on yields.”
FIMA account holders are central banks and other foreign monetary authorities with accounts at
the Federal Reserve Bank of New York (FRBNY). The Fed must approve applications to use the
facility.
While transactions would be on an overnight basis, they could be rolled over. They will be
conducted at an interest rate of 25 basis points over the Fed’s rate on Interest on Excess
Reserves, which typically exceeds market rates in normal times.
The transactions will pose no foreign exchange risk or credit risk to the Fed. They will occur
entirely in dollars and are fully collateralized by US Treasuries. Margins will reflect margins on
similar collateral posted to the Fed’s discount window.
The Fed will disclose the amount of activity under the facility in its weekly H.4.1 release.
The Fed has unlimited standing swap lines with five central banks: the Bank of Canada, Bank of
England, European Central Bank, Bank of Japan, and Swiss National Bank. On March 20, the
Fed and four of these central banks (excluding the Bank of Canada) announced that, beginning
March 23, they would temporarily increase the frequency of their 7-day maturity operations
from weekly to daily. As of March 25, the Fed had $206 billion outstanding in swaps with those
four central banks. On March 19, the Fed announced swap lines with nine more countries,
bringing the total to 14.

Miscellaneous Topics

The FHLBs May Not be the Lenders-of-Next-to-Last Resort during the
Coronavirus Crisis
By Chase P. Ross
Original post here.

During the global financial crisis, the Federal Home Loan Banks (FHLBs) were the lenders of
“next-to-last” resort, as banks and other FHLB members preferred to use their funding rather
than the Federal Reserve’s discount window, the traditional lender of last resort (LOLR). Banks
felt using the discount window might stigmatize their image with other market participants.
But it’s unclear whether the FHLBs will play that role this time. Market data suggest that banks
are turning to the Fed—partly because the stigma of using the Fed is reduced, partly because of
pricing.
The FHLB system is a government-sponsored enterprise operating with an implicit guarantee
from the government. The FHLB system provides advances to its members—mostly depository
institutions, but also insurance companies—to help finance housing-related assets. The system
has a simple leverage multiple of 19.5 and has roughly $1 trillion in assets as of Q4 2019, of
which $650 billion are advances.
In 2008, the FHLB system financed its LOLR activities by ramping up debt issuance. Auctioned
discount notes grew from $120 billion pre-crisis to almost $300 billion in May 2008. Money-
market mutual funds were important buyers of that debt. However, after the near-failure and
government takeover of the other two prominent GSEs—Fannie and Freddie— money funds
were less willing to buy FHLB debt. The FHLBs were “guilty by association.” The systems’ debt
outstanding shrunk rapidly, and only eventually recovered after the crisis (Figure 1).
In the aftermath of the Reserve Primary Fund breaking the buck in September 2008 and
Treasury’s subsequent money fund guarantee, regulators sought to limit the systemic risk of
money-market mutual funds. In 2016, the SEC implemented reforms that required funds to
report floating net asset values (NAV) unless the fund imposed gates and fees or invested only in
government securities. The gate structure allows the fund to temporarily prevent investors’
redemptions to cash in times of stress and would, in principle, limit a run from the money fund.
The effect of the reform has been a marked shift from prime funds, which invest primarily in
commercial paper, toward government funds since government funds have a fixed $1 NAV
without gates or fees. Money fund investors clearly prefer the fixed value and the option to run
in bad times over the comparatively higher yield offered by prime funds.
In my recent working paper, I show that these post-crisis reforms made FHLBs new crucial safe
asset producers. Government money funds can buy FHLB debt—as of late 2017, almost 40% of
government money fund assets were FHLB debt. The FHLBs use the proceeds from the debt to
make advances to banks, and banks prefer funding via FHLB advances (rather than issuing
commercial paper) because post-crisis liquidity regulations are friendlier to FHLB advances.
During the rapidly unfolding coronavirus pandemic, preliminary and incomplete evidence—
based on the public data available so far—suggests the FHLBs provided substantial liquidity in
the initial stages of the recent funding market pressures. But it ceded that role when the Federal
Reserve boosted its lending operations.

From February 26 to March 12, government money funds saw about $150 billion of inflows—a
5% increase in assets under management in just a week. They used a good chunk of these
inflows to purchase FHLB debt. From January 1 to March 11, FHLB auctioned debt outstanding
(with maturity less than one year, excluding overnight debt) increased about 12%, or $22 billion
(Figure 2, Panel A). Government funds likely bought up the incremental issuance.
For that period, it appears the FHLBs were once again acting as a next-to-last LOLR. They used
the proceeds from their increased debt issuance to help banks handle increased financing
demands from the real economy. One estimate puts the magnitude of unfunded commitments of
the largest banks to COVID-exposed industries via revolving credit facilities at $125 billion.
Compare that to the $850 billion in cash and $2 trillion in securities at those same banks. Fed
data shows that over the same time period commercial and industrial loans increased $16
billion, and loans to nondepository financial institutions also increased $16 billion.
However, beginning March 12, the Federal Reserve increased its provision of financing to the
banking system via repurchase operations, and on March 16 it “encourage[d] banks to use [the]
Federal Reserve discount window” after cutting the primary credit rate on March 15. Both
actions had significant uptake: from March 4 to March 18, repo lending by the Fed increased
from $200 billion to $450 billion, and discount window lending increased from $0 to $28
billion (Figure 2, Panels B and C).

Beginning March 17, short-term auctioned FHLB debt outstanding began falling quickly. FHLB
debt spreads flipped from roughly -20 basis points to 30 basis points, and they’ve stopped
regularly auctioning debt at the 4-week maturity.
Why? In part, the Fed’s actions siphoned some flows from the FHLBs. On March 16—after the
Fed cut the discount window rate—the all-in cost to finance a highly rated MBS was 26 basis
points with the discount window and 65 basis points with an FHLB advance. This is unusual;
advances are typically cheaper than the discount window, as shown in (Figure 2, Panel D).
FHLBs cannot provide a large amount of liquidity now without increasing their debt issuances.
In its latest quarterly filing, the system reported $5 billion in cash holdings, and it seems
unlikely they’d pull back their repo lending ($50 billion in Q3 2019) to make space for more
advances. The FHLBs could scale back their fed funds lending—$55 billion—to finance
advances, but the action would have distributional effects. The FHLB system cannot earn
interest on its account at the Federal Reserve; it instead lends in the fed funds market to foreign
banks, which arbitrage the difference between interest on excess reserves and the fed funds rate.
That is, if the FHLBs shifted from providing liquidity via fed funds to advances, they would be
moving liquidity from foreign banks to domestic banks, despite evidence that foreign banks have
stronger demand for dollar funding during the coronavirus crisis.
Are the FHLBs a systemic risk right now? Unlike Fannie and Freddie, they do not have risky
investment portfolios, and their statutory super-senior lien means they are unlikely to face
significant credit losses. The more worrisome problem is the amount of maturity transformation
they’re doing—half of their advances are longer maturity than one year—and the average
maturity of FHLB debt held by money funds is 40 days as of 2018.

The FHLBs provided a valuable lender of next-to-last resort channel in 2008—and although the
Fed has worked to destigmatize the discount window in the past weeks, the FHLBs will remain
important intermediators between banks and money-market mutual funds in the coming weeks.
Keep an eye on the FHLBs.

Flight from Maturity during the Coronavirus Crisis
By Chase P. Ross, Sharon Y. Ross, Gary B. Gorton, and Andrew Metrick
Original post here.

The coronavirus crisis has caused significant turmoil in funding markets in recent weeks.
Although the Fed unveiled an alphabet soup of aggressive lending programs across many
markets, a flight from maturity continues across many money markets, including interbank
Eurodollar funding and commercial paper (CP).
Unlike a flight to quality—in which lenders entirely shift to the highest quality safe assets like
Treasurys—a flight from maturity occurs when lenders preserve the option to exit quickly by
lending at shorter maturities. Risk builds and funding structures grow precarious as lenders
place a larger and larger premium on the exit option.
We build on the work of Gorton, Metrick, and Xie (2015) to show the flight from maturity during
the coronavirus crisis. We measure maturity shortening using the steepness of money markets’
term structures. In normal times, the spread between 3-month and overnight rates are low and
flat since the money market instruments are similarly nearly riskless. But in times of stress
money markets’ term structures steepen, as was the case during the global financial crisis. The
steepening reflects the diverse preferences of lenders and borrowers in a crisis. Lenders want to
lend at a short maturity so they can quickly exit if borrowers approach insolvency, while
borrowers—often banks—want to borrow long to lock in funding and are willing to pay higher
term rates.
We look at publicly available high-frequency data on money markets: Libor and US CP. Both
measures show flight from maturity at levels approaching the peaks last seen during the
financial crisis.
CP spreads remained relatively low as the initial news of COVID-19 arrived in February and
early March. Beginning March 16, however, spreads increased very quickly for all flavors of
CP as concerns about cash liquidity for corporate borrowers grew. Coincident headlines
highlighted large fund outflows from corporate bond funds, discounts of bond ETF to net asset
value, and several businesses drawing down credit lines. From 2010 to 2019, the average spread
of nonfinancial CP, financial CP, and asset-backed (ABCP) 3-month rates to target fed funds
ranged from 8 to 22 basis points. The week of March 16 spreads increased to 185 bps
(nonfinancial), 220 bps (financial), and 240 bps (ABCP),—exceeding the peak spreads in the
financial crisis of 2008 for financial and nonfinancial CP (ABCP spreads peaked at 310 bps in
the financial crisis).
Figure 1 shows the term structure of CP and Libor spreads, calculated as the money market rate
less the fed funds target rate. We show this term structure at three points in time: at the start of
the year during “normal times;” on March 16, following the Federal Reserve’s 100 bps rate cut
on March 15; and on March 24, the latest day of available data for ABCP.
At the start of 2020, the term structure was fairly flat: overnight ABCP and Libor rates were
close to the fed funds target rate, and the 90-day ABCP and 3-month Libor spreads at less than
50 bps above that. But the term structure for both money markets steepened during March. On
Sunday, March 15, the Federal Reserve announced a set of macroprudential policies, including

enhancing US dollar swap lines with other central banks and asset purchases of $500 billion in
Treasuries and $200 billion in MBS. The Federal Reserve also decreased the interest rate target,
and the March 16 spreads of ABCP and Libor increased to reflect this change.
These actions did not stop the flight from maturity, which accelerated the following week. On
March 16, Libor’s spread steepened over the term structure, with 3-month Libor spread at
nearly 80 bps and the overnight rate at 11 bps. As coronavirus cases increased and markets
continued to remain volatile, the term structure of CP—across all types of issuers— steepened,
too. By March 24, the 3m/overnight spread for ABCP was 150 bps. Financial CP had an even
steeper curve of almost 240 bps.
To get a sense of how the funding curves compared to the global financial crisis, Figure 2 shows
the slope of the yield curve for CP and Libor by plotting the time series spread between the 3-
month and overnight rates. The steepness of these curves is approaching levels last seen during
the financial crisis (Table 1).

High-frequency CP issuance data makes the freeze in term CP markets clear: the shortest
maturity CP, less than 4 days, doubled from $45 billion to $90 from March 11 to March 24
(Figure 3). At the same time, term issuance—defined as CP issuance with greater than 4 days
maturity—fell. Issuance data obscures the composition of issuers as comparatively riskier
issuers pre-coronavirus crisis have likely left the market.
At first glance, it might be surprising the Federal Reserve’s CP funding facility

(CPFF, announced March 17) had little impact on CP rates. This is partly because the CPFF
focuses only on 3-month CP. Although the facility is very similar to the 2008-era program, the
pricing is different relative to market conditions. In 2008, the spread was 3m OIS+100 bps plus

a 100 bps credit surcharge, whereas the COVID19 facility is 3m OIS+200 bps. But there was
minimal initial takeup during the current crisis because financial, nonfinancial, and asset-
backed CP 3-months rates were well below OIS+200bps at announcement. Moreover, there is so
little issuance of lower-rated A2/P2 the Fed has not stopped consistently reporting term rates,
and the initial CPFF design excluded A2/P2 paper.
On March 23, the Fed expanded the CPFF: reducing pricing to OIS+110bps and expanding the
facility to lower-rated A2/P2 CP issuers at OIS+200 bps. At the time of writing on March 25,
financial and ABCP issuers will likely soon use the program as rates have continued increasing.
The progression of the term structure echoes a similar pattern to that of 2008 with maturity
shortening as lenders aim to maintain the ability to make a quick exit. This is concerning given a
flight from maturity creates a more fragile financial system. In the current coronavirus crisis, the
trend may be particularly problematic: the yield curve for many money markets have steepened
even after aggressive action by the Federal Reserve. Although the current crisis is a pandemic—
not yet a financial crisis like 2008—short-term debt holders are ready to run, should something
appear to threaten issuers’ ability to pay. Work remains for central banks to bend the funding
curves down.

CARES Act $454 billion Emergency Fund Could add up to Much More for
Businesses, States and Municipalities
Original post here.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that President Trump
signed into law on March 27th provides $454 billion (the Emergency Fund) for the Secretary of
the Treasury to make direct loans or to guarantee loans made by the Federal Reserve to assist
business, states, and municipalities dealing with the pandemic. The Fed may do this throorough
(i) purchasing obligations or other interests directly from issuers or other interests; (ii)
purchasing obligations or other interests in secondary markets or otherwise; or (ii) making
loans, including loans or other advances secured by collateral.
By providing the ability for the Treasury to guarantee or backstop Fed loans, the provisions
create the possibility that the impact of the fund can be leveraged up significantly as stated by
Secretary Mnuchin—“We can lever up to $4 trillion to help everything from small businesses to
big businesses.” Fed Chairman Powell has echoed the Secretary—"Effectively, $1 of loss-
absorption is worth $10 worth of loans." Therefore the Emergency Fund could result in trillions
of dollars being made available to the public. See this YPFS blog post for further discussion on
the Treasury backstop.
The legislation creates great possibilities but also raises questions about limitations on the Fed’s
authority. Section 4003(C)(3)(B)) of the CARES Act explicitly provides “for the avoidance of
doubt” that the requirements of Section13(3) of the Federal Reserve Act would apply to any Fed
program or facility relying on such funds “including requirements relating to loan
collateralization, taxpayer protection, and borrower solvency.” We discuss herein the
intersection of the Emergency Fund with Section 13(3).
Federal Reserve Act Section 13(3)
Section 13(3) of the Federal Reserve Act, often called the Fed’s emergency lending provision,
provides the central bank with authority in “unusual and exigent” situations to broaden its
permitted borrowers to include “any individual, partnership, or corporations.” The section was
enacted during the 1930s and has been called a “broad and extraordinary authority.” (Alvarez
05/26/2010). The provision was used several times during the Depression, and although use
was authorized twice during the 1960s, funds had not been lent under the provision in the 70
years prior to the 2007-09 global financial crisis (GFC). (Alvarez 05/26/2010).
Section 13(3) during the GFC
During the GFC, Section 13(3) authorized the Fed to extend credit to any individual, partnership
or corporation if certain criteria were met:
• At least five members of the Board members determined that “unusual and exigent”
circumstances exist
• The lending must be “indorsed or otherwise secured to the satisfaction of the [lending]
Reserve Bank.”

• The borrower was “unable to secure adequate credit accommodations from other
banking institutions”
• The credit complied with any limitations, restrictions and regulations prescribed by the
Board. (FRA Sec 13(3), 2008).
During the GFC the Fed found that “unusual and exigent circumstances” existed and extensively
used the provision, which became one of its most important tools to provide numerous broad-
based programs aimed at providing liquidity to markets. The Fed has recently reintroduced
versions of several of these programs to address the COVID-19 pandemic: the Term Asset-
Backed Securities Loan Facility (TSLF), the Commercial Paper Funding Facility (CPFF),
the Primary Dealer Credit Facility, the Money Market Mutual Fund Liquidity Facility (MMIF).
Most recently, on March 23, the Fed and the Treasury reintroduced a modified version of
another GFC-era program the Term Asset-Backed Loan Facility (TALF) to support credit flows
to households and businesses by maintaining the flow of asset-backed securities markets.
Pursuant to the TALF the Federal Reserve Bank of New York (FRBNY) will make loans to a SPV
that will in turn make a total of $100 billion three-year nonrecourse loans to U.S. companies
that own eligible ABS. The SPV will be funded by a recourse loan from the FRBNY and an initial
$10 billion equity investment by the Treasury. The Fed again relies on the Section 13(3)
authority and the Treasury uses the Exchange Stabilization Fund (ESF) to backstop the
program. The TALF is thought to be a good candidate for use of the Emergency Fund to support
lending by the Fed because of its demonstrated flexibility. See a YPFS blog on the 2020 TALF
and Federal backstop here.
During the GFC, the Fed also relied on its Section 13(3) authority to stabilize systemically
important firms such as Bear Stearns and AIG, and to design ring-fencing programs like it did
for Citigroup and Bank of America. The extensive use of Section 13(3) programs provided
trillions of dollars of liquidity to the financial system and contributed greatly to the effort to
quell the GFC. There has generally been little criticism of the Fed’s use and interpretation except
for its Maiden Lane facilities in support of Bear Stearns and AIG.
Dodd-Frank Amendments
Following the GFC, in which some of the Fed lending was criticized, particularly assistance to
individual companies, Congress enacted changes to Section 13(3) through the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which added several significant provisions
including:
• the Fed can now only conduct emergency lending through a “program or facility with
broad-based eligibility,”
• the purpose of the program must be “providing liquidity to the financial system, and not
to aid a failing financial company”
• that the security for emergency loans is sufficient to protect taxpayers from losses
• that for any loan, a Federal Reserve bank must assign, consistent with sound risk
management practices and to ensure protection for the taxpayer, a lendable value to all
collateral for a loan under Section 13(3) in determining whether the loan is secured
satisfactorily.

• That credit may not be given to any company that is insolvent.
Prior to introduction of the COVID-19 era programs, Section 13(3) had not been used since the
GFC and thus, the Dodd-Frank amendments are untested.
Broad-based Eligibility. The amended provision seeks to prohibit the Fed from customizing
assistance to individual firms and focuses on assisting the broad market and financial system. A
program or facility has “broad-based eligibility” if it is (i) designed to provide liquidity to an
identifiable market or sector of the financial system, not designed to aid one or more specific
companies, and (ii) at least five companies would be eligible to participate in. (FRA Reg. Sec.
201.3(b). Excluded from this definition is any program “structured to remove assets from the
balance sheet of a single and specific company, or that is established for the purpose of assisting
a single and specific company avoid bankruptcy” or some other insolvency proceeding. (Fed
Website-Sec.13) (Fed Register vol 80, no. 243, 12/18/15).
Collateral/Security and Protecting Taxpayers. Other Dodd-Frank amendments relate to the
section’s requirement that any loan be indorsed or secured to the satisfaction of the lending
reserve bank (the “indorsed or secured requirement”) which address issues of collateral/security
and with the new amendments, protection of taxpayers’ interest. The Fed was required to
establish regulations designed to ensure that (i) the “the security for emergency loans is
sufficient to protect taxpayers from losses” and (ii) that require a reserve bank to “assign,
consistent with sound risk management practices and to ensure protection for the taxpayer, a
lendable value to all collateral for a loan.” (Fed Register vol 80, no. 243, 12/18/15). The
regulation adopted by the Fed provides that in determining whether an extension of credit
under any program or facility established under Section 13(3) is secured to its satisfaction, a
Federal Reserve bank must, “prior to or at the time the credit is initially extended, assign a
lendable value to all collateral for the program or facility… to ensure protection for the
taxpayer.” (Fed Register vol 80, no. 243, 12/18/15).
Thus, it appears that through its new regulation the Fed retained much of its traditional
discretion. Other than the new requirement to value collateral, it remains committed to its prior
position and seems to have conflated the new valuation requirement into the traditional
indorsed or secured requirement. By meeting this standard, it will presumably ensure “that the
security for emergency loans is sufficient to protect taxpayers from losses.” This is consistent
with the Fed’s long-held interpretation of its authority.
Administratively, the Dodd-Frank changes also require that:
• any such program must be established with the approval of the Secretary of the Treasury
• additional initial notification and ongoing reporting must be made to Congress
• any such program is terminated in a timely and orderly fashion. (Fed Website-Sec13).
How does Section 13(3) apply to the Emergency Fund?
Broad-based Eligibilitys. Under the amended Section 13(3), the individual assistance given to
Bear Stearns and AIG, including their Maiden Lane facilities would not be permitted. However,
it appears that the Dodd-Frank amendments leave intact many of the broad-based plans that the
Fed employed in the GFC under Section 13(3) and which it has also chosen to redeploy to
address the COVID-19 pandemic.

Collateral/Security and Protecting Taxpayers. It should be noted that the provisions of the
original statute, nor the amendments provide guidance as to what constitutes sufficient
satisfaction as to endorsement or collateral/security. The matter of what type and how much
collateral, or what type of endorsement is sufficient is left to the Fed’s broad discretion. (Alvarez
2009) (Mehra 2010). Courts generally have afforded great deference to the Fed’s actions and its
interpretations of its authority. (Alvarez, Baxter, Hoyt 2018).
Traditionally, as expressed by former Chairman Bernanke, the Fed has interpreted its Section
13(3) authority as only permitting it to make loans secured by collateral sufficient to
provide reasonable assurance that they will be repaid. This position was thrust into the spotlight
during the GFC when the Fed did not lend to Lehman Brother because it concluded that Lehman
did not have sufficient collateral to secure a loan of the size that it would need to save itself. The
lack of a loan resulted in the investment bank’s filing for bankruptcy. Under the amended
section the Fed could reach the same conclusion but would have to assign values to the potential
collateral and report on its decision to Congress.
One Fed legal memo from the GFC discussing the 2008 CPFF and sheds light on how the Fed
interprets Section 13(3), and in particular the indorsed or secured requirement. The CPFF,
which the Fed reintroduced on March 18th, is a broad-based program under which the FRBNY
provides loans to a SPV that purchases eligible secured and unsecured commercial paper from
eligible issuers. In discussing the CPFF, the Fed legal staff considered not only if the loan to the
SPV would satisfy the indorsed or secured requirement, but also considered whether the
requirement would be met if each purchase of commercial paper was considered an extension of
credit to the issuer. The staff concluded that in both cases, the standard would be met in several
ways:
1. by a third-party endorsement or guaranty (which did not apply to the CPFF)
2. by the commercial paper held by the borrower SPV,
3. by the pools of assets underlying ABCP held by the SPV, and
4. by paying a fee for an insurance premium, which applied to unsecured commercial paper
under the CPFF (Alvarez 2009).
Thus, stated another way, the requirement can be met by a loan being secured by:
1. collateral with legal recourse to the borrower or a third-party guarantor,
2. an endorsement by a third-party guarantor without collateral, or
3. recourse to collateral without an endorsement. (Alvarez 2009).
In another context, Fed counsel have also considered whether the central bank could extend a
loan not expecting to be fully repaid and concluded that it could not—"To be consistent with the
purpose of the statute, the security required to satisfy the lending Reserve Bank needed to be at
a level sufficient for the bank to reasonably believe it would be fully repaid.” (Alvarez, Baxter,
Hoyt 2018.)
But there is a not an absolute prohibition on the Fed incurring losses. In providing assistance to
Bear Stearns in March 2008 the Fed agreed to purchase a portfolio of Bear’s assets to facilitate
the merger of the troubled investment bank with JPMorgan Chase (JPMC), an

extraordinary transaction for the Fed that became known as Maiden Lane, the name of the
special purchase vehicle created to hold the mortgage securities. The loan to the SPV was to be
fully collateralized by the Bear portfolio (whose value had been determined to be able to support
the loan) and would be non-recourse to JPMC. The lending Federal Reserve Bank of New York
(FRBNY) determined that the indorsed and secured standard was met, yet, it also sought an
indemnification from Treasury Secretary Paulson for any losses that might be incurred. Legally
unable to grant an indemnification, Paulson issued the FRBNY a letter recognizing that there
might be losses that would reduce the net earnings transferred by the FRBNY to the Treasury
general fund. (Paulson 3/2008). Paulson issued a similar letter with respect to the Fed’s
assistance to AIG with respect to securities lending (Paulson 10/2008). These actions are
consistent with the views of then FRBNY President Geithner that “a central bank should be
prepared to take losses” and that it is “highly likely … that the appropriate use of the lender of
last resort authority might well result in some losses.” (Geithner 2019).
Thus, a reasonable interpretation would conclude that as long as at the time of lending the Fed
had a reasonable expectation of being repaid, either by the borrower, through access to
collateral or insurance, or to a third-party guarantor, in this case the Treasury, the indorse or
secured requirement would be satisfied. Further, satisfaction of this standard appears consistent
with the current requirement under Section 13(3) to protect taxpayers from losses. In the event
there was a loss that had to be absorbed by the Treasury’s equity contribution or guarantee,
these funds in effect had already been appropriated by Congress.
However, it would be prudent for the Fed to consider not only whether an individual default
under a program would be covered by the Treasury backstop but also the likelihood that the
total potential losses under a program could realistically be absorbed by the Treasury’s
guarantee. If they could, then it appears that Section 13(3) would have been complied with. The
Fed recently reached a similar conclusion in its letter to Congress regarding the 2020 TALF—
"the Board does not expect at this time that the TALF will result in losses in excess of the
Department of the Treasury’s equity investment. Accordingly, the TALF is not expected to result
in losses to the Federal Reserve or the taxpayer (emphasis added).” (TALF Report.)
Insolvency. The Dodd Frank amendments prohibit the Fed from directly or indirectly lending to
any firm that is insolvent. Insolvent has been defined to mean (i) in bankruptcy, in a Dodd-
Frank resolution proceeding, or in another insolvency proceeding, (ii) generally not paying its
undisputed debts as they become due during the 90 days preceding the borrowing under the
program or facility, or (iii) as otherwise determined by the Board or Federal Reserve Bank. (Fed
Register vol 80, no. 243, 12/18/15).
Under the second definition above, a company that is generally not paying its undisputed debts
as they become due during the 90 days preceding borrowing is considered insolvent and
ineligible for a loan. (Fed Register vol 80, no. 243, 12/18/15). However, government COVID-19
assistance may provide forbearance relief to companies effected by the pandemic. One question
in this situation is whether these missed payments, which may be legally excused, could be
disregarded by the Fed for purposes of determining insolvency under Section 13(3). If they
cannot be then a quirk in the law will constrain potential borrowers to choose which form of
relief may be more valuable, a result which was perhaps unintended.

What macroprudential policies are countries using to help their economies
through the Covid-19 crisis?
By Sigridur Beneditksdottir, Greg Feldberg, and Nellie Liang
Original post here.

Countries around the world are reeling from the health threat and economic and financial
fallout from COVID-19. Legislatures are responding with massive relief programs. Central banks
have lowered interest rates and opened lender-of-last-resort spigots to support the flow of credit
and maintain financial market functioning.
Authorities are also deploying macroprudential policies, many of them developed or improved
since the global financial crisis of a decade ago. In this blog, we describe the
main macroprudential measures that countries have taken recently. We summarize specific
actions and factors considered when relaxing bank capital, loan forbearance, and liquidity
requirements. Since late January, about 50 countries have made more than 230
announcements, with up to 500 separate actions, based on current entries in the new Yale
Program on Financial Stability 2020 Financial-Intervention Tracker. Macroprudential
announcements represent 40 percent of the announcements in the tracker, which also includes
those for fiscal, monetary, and emergency liquidity (see figures).

The temporary relaxation of financial requirements with clear guidance should mitigate the
immediate economic harm from the pandemic. Banks can absorb more losses and support
lending, can help borrowers harmed by COVID-19 by modifying loans, and can work to
distribute quickly any funds from fiscal, monetary and emergency liquidity programs to support
households, businesses, and market liquidity. Acting swiftly now can lead to better outcomes in
the long run.
1. Using capital buffers
Easing bank capital requirements is the most common macroprudential policy that national
authorities are using. The Basel III international capital framework included a countercyclical
capital buffer (CCyB) that banks can build in good times and draw down to absorb higher losses
in bad times to ensure that credit is extended during a crisis. Most countries that had activated
their CCyB have released some or all of it during the current crisis. As of March 24, 13 of the 15
countries identified in a recent Brookings paper as having a positive CCyB before year-end 2019
had cut it. Canada also lowered its domestic stability buffer, which is similar to the CCyB.
Some countries have reduced requirements or given guidance that banks can operate below
other capital buffers. The European Central Bank (ECB) told banks it supervises directly that
they can operate temporarily below their tailored (Pillar II) supervisory buffers. The ECB also
supported banks partially meeting core capital requirements with non-core capital instruments.
The U.S. has encouraged banks to draw on capital buffers during the current crisis; although
U.S. regulators had not raised the CCyB, some of the largest banks were operating with capital
above levels required by regulations and previous stress tests. The Federal Reserve also recently
allowed the largest bank holding companies to temporarily exclude reserves and Treasury
securities from their calculation of total assets for determining the supplementary leverage ratio.
In reducing the CCyB or similar buffers, the UK and others, such as Sweden and Norway, have
explicitly advised banks to use the additional space created by releasing the buffer to meet
increases in expected losses and support credit, rather than to increase dividends or employee
bonuses. In addition, some countries are asking banks to consider cutting dividends to conserve
capital to absorb future losses. The ECB asked banks to suspend dividends until at least October.
UK regulators asked banks to scrap dividends and review bonuses this year. While Basel III
requires automatic reductions in payouts if a bank falls into its capital conservation buffer,

regulators are asking banks with capital above the buffers to consider cutting payouts now, given
the steep falloff in activity and highly uncertain economic outlook.
U.S. regulators have not imposed a freeze on shareholder distributions. Former Fed Governor
Jeremy Stein, at a recent Brookings forum, argued that is a significant policy mistake. While the
eight U.S. globally systemically important banks have voluntarily suspended share repurchases
through the second quarter, the Fed is currently assessing capital positions in its annual stress
tests. The Fed explicitly asked banks, in the proposed rule that eases the leverage ratio, that they
not increase shareholder distributions.
2. Easing the approach to nonperforming loans
Many countries are encouraging banks and other financial firms to work with borrowers
temporarily affected by the crisis. Some authorities have provided guidance on loan forbearance.
It is standard practice for banks to increase loan-loss revenues for borrowers who miss
payments. But actions that require banks to increase loan-loss provisions for a system-wide and
transitory shock would put a large strain on their capital and not be consistent with
macroprudential objectives.
Some authorities have provided clear guidance that banks should not automatically downgrade
borrowers if they cannot make payments for reasons related to COVID-19. U.S. banking
regulators will not require banks that defer payments or extend maturities to automatically
categorize these loan modifications as troubled debt restructurings.
Authorities also have asked banks to take government assistance into account when evaluating a
borrower’s ability to repay a loan. For example, the Bank of England said it would not be
reasonable or supportable to reevaluate a borrower’s idiosyncratic risk at this time; if banks do
reevaluate a borrower’s risk, they should take into account government relief measures,
including repayment holidays, in calculating expected losses. The ECB said that it would
“exercise flexibility” regarding the classification of borrowers as unlikely to pay when banks call
on new COVID-related public guarantees, and when borrowers are covered by legally-imposed
payment moratoria.
3. Using liquidity buffers
Authorities in many countries also are easing banks’ required liquidity buffers. Some have
argued that the new liquidity rules for large banks put in place after the GFC are
“microprudential” policies, because the focus is to keep individual banks liquid. However, if all
banks were to try to maintain their buffers in a systemic event, it could starve the broader
financial system of liquidity. Thus, in the current situation, the motivation for encouraging
banks to use their liquidity buffers is macroprudential.
Most authorities have told banks they may operate below Basel III liquidity coverage ratios
(LCRs), the ratio of high-quality liquid assets to short-term obligations. The European Banking
Authority issued guidance to national authorities that the LCR “is also designed to be used by
banks under stress. Supervisors should avoid any measures that may lead to the fragmentation
of funding markets.” The ECB will allow banks it supervises to “operate temporarily below” the
LCR. The Swedish regulator expanded this to different currencies by allowing banks to
temporarily “fall below the liquidity coverage ratio (LCR) for individual currencies and total
currencies.” The Fed said it would support firms that choose to use their liquidity buffers to
“lend and undertake other supportive actions in a safe and sound manner.”

South Africa’s central bank specifically lowered its LCR to 80% from 100%. But most authorities
have not specified precisely how much banks can draw down their buffers. The lack of guidance
could potentially limit their usefulness as a macroprudential safeguard, as argued in a
recent Brookings blog. Indeed, the use of liquidity buffers during the current crisis should be
relatively aggressive, considering the encouragement by many central banks for banks to access
the discount window and other central bank funding.
Several central banks have eased foreign exchange LCR requirements. These regulations are
similar to the LCR but are focused on foreign exchange liquidity. Similarly, most did not say how
much banks could draw down. The Bank of Korea was an exception, lowering its foreign
exchange LCR from 80% to 70%.
Some central banks have also lowered the reserve requirement for depository institutions. While
reserve requirements are traditionally a monetary policy tool, the purpose this time has been
almost entirely to support banks’ liquidity and lending through the crisis. The Federal Reserve
lowered its reserve requirement to zero, stating that this will action “will help to support lending
to households and businesses.” The Reserve Bank of India lowered its cash reserve ratio from
4% to 3%, giving forward guidance that the liquidity released would be available for at least one
year. The central banks of the Philippines, Malaysia, and Iceland also lowered reserve
requirements to ensure sufficient domestic liquidity.
4. Other measures
Authorities can use other tools to help banks help borrowers. For example, the CARES Act in the
U.S. allows homeowners with a government-backed mortgage to request forbearance for up to a
year. Other examples: The Philippine central bank raised single-borrower limits and the
Swedish financial regulator relaxed temporarily a macroprudential rule that required high-loan-
to-value borrowers to amortize their mortgage loans.
Banking authorities also are easing the costs of compliance so that financial institutions can
focus their limited resources on lending and working with troubled borrowers; such measures
can be considered macroprudential. The Bank of England’s and ECB’s decisions to delay 2020
stress tests are in this category. The Basel Committee delayed implementation of Basel III to
“provide additional operational capacity for banks and supervisors to respond to the immediate
financial stability priorities resulting from the impact of the coronavirus disease (COVID-19) on
the global banking system.” Canada’s regulator suspended consultations on regulatory
matters until conditions stabilize. The Fed temporarily reduced exam activities and delayed
some reporting deadlines. U.S. regulators will allow banks to delay implementation of the new
accounting rule for current expected credit losses and to complete the transition over five years
instead of three.
Conclusion
Macroprudential policies are an important complement to the unprecedented fiscal, monetary,
and emergency liquidity actions taken to offset the painful economic effects of COVID-19. One
lesson is that countries with stronger financial systems can respond in many more ways. That
scope for action may greatly improve the ability of national authorities to limit damage to their
economies. This is dramatically different from the global financial crisis, when a weak financial
system was the primary cause and itself needed government support. A second lesson is the
critical role of macroprudential policies in promoting financial and macroeconomic stability, by

building buffers when the economy is strengthening so that they can be used to offset
contractions in credit when the economy weakens.

The FHLBs During the Coronavirus Crisis, Part II
By Chase P. Ross
Original post here.

In my last note, I raised the question of whether the Federal Home Loan Banks (FHLBs) would
be the lender of “next-to-last resort” during the coronavirus crisis, as they were in 2007 and
2008. Data released since my last note provides an updated picture of the FHLBs’ actions in the
first months of the current crisis.
Total FHLB debt outstanding increased by about $180 billion from February to March 2020.
The increase in debt outstanding came from an increase of discount notes issued through their
window rather than via auctioned discount notes. Total discount note debt outstanding
increased from $377 billion to $577 billion over the same period—roughly a 50% increase
(Figure 1). The weighted average maturity (WAM) of the FHLBs’ discount notes increased
substantially. From February 2020 to March 2020, the WAM of their discount note debt rose
from 51 days to 80 days (Figure 2), the highest value in the sample back to 2008.
This increased debt outstanding very likely flowed through to increased FHLB advance loans to
members. The data available so far suggests the FHLBs have indeed provided lender of “next-to-
last” resort-type liquidity to its members in the first month of the coronavirus crisis. After more
data comes out over the coming months, including balance sheet data on FHLB advances, we’ll
be able to directly compare the amount of liquidity provided by the FHLBs and the Federal
Reserve.

Communicating in a Crisis: Lessons Learned from the Last One
Original post here.

It has become a common sight during the current COVID-19 crisis to see Federal Reserve (Fed)
Chairman Powell standing at the podium, calmly explaining that the Fed is using the full range
of its tools, including its emergency lending powers, to counter the severe economic effects of
the actions taken to combat the virus. Powell further commits that the Fed will “continue to use
these powers forcefully, proactively and aggressively” until the virus is under control and the
economy is on the road to recovery.
We are witnessing a new, heightened level of communications from the government during this
economic crisis when compared to the global financial crisis of 2007-09 (GFC). Former
Treasury Secretary Hank Paulson has said that his one regret was that he and his peers "were
never able to convince the American people that what they did wasn't for Wall Street, but was
for them."
Arguably, better communications may have headed off the widespread disapproval of
government actions during the crisis, and the anti-government populist movements that
emerged in its wake. This time, government officials seem more focused on avoiding such a
legacy.
While the government cannot program the public’s response to a crisis, it can and, some would
argue, has a duty to communicate about its actions and words in a manner that is open, honest,
and consistent. Doing so will at least maximize the availability of information regarding actions
taken and the intent behind them, thereby increasing the likelihood that responses will be based
on facts, whatever their nature. The government may not be able to totally avoid errors,
missteps, charges of favoritism, or a lack of transparency; however, it can counter these with
credibility, accountability, and transparency.
As Former Chairman Yellen stated in 2012, “[The] challenges facing our economy in the wake of
the financial crisis have made clear communication more important than ever before.” This
statement is as true today as it was then. Here are some lessons learned from the last crisis that
can help:
• Communicate clearly and often
• Be consistent and credible
• Clarify roles
• Foster accountability: Admit mistakes and address them when they arise
• Do not underestimate the public: Speak to all Americans.
Communicate Clearly and Often
Fed and Treasury officials have specialized knowledge about the economy, and when the
economy is distressed the markets and public want to hear from them. As early as September

2007, Fed officials began to signal that the distress in the housing market might spill over to the
broader economy. Yet, for months the Fed’s plan of attack remained unclear.
If government officials do not communicate, an information gap develops, and uncertainty
arises. Other parties will rush to fill in an information vacuum. Once that happens, it may be
impossible to regain control of the narrative. In the face of uncertainty, financial institutions and
markets will retreat into defensive modes, further aggravating underlying systemic weaknesses.
We saw this in the GFC and again in March of this year, when bond markets began to freeze.
But the Fed is now demonstrating that it has learned from the last crisis. At a January 29 press
conference, Chairman Powell began speaking publicly about the virus and possible impacts:
“There is likely to be some disruption to activity in China, and possibly globally, based on the
spread of the virus to date and the travel restrictions and business closures that have already
been imposed.” Roughly a month later, as the threat reached the U.S., the Fed said that “the
coronavirus poses evolving risks to economic activity” and “ will weigh on economic activity in
the near term and pose risks to the economic outlook.” The Fed also announced that it was
“prepared to use its full range of tools to support the flow of credit to households and businesses
(emphasis added).”
The Fed moved quickly to add additional liquidity to the banking system, buying Treasuries and
agency mortgage-backed securities to stabilize these markets, and on March 17, it activated its
emergency lending authorities under Section 13(3) of the Federal Reserve Act. Powell assured
the country that, “When it comes to lending, we are not going to run out of ammunition... That
just doesn't happen." The swift and aggressive response exceeded, in speed and scope, the
extraordinary response levels reached in combating the GFC. The markets reacted with
confidence and trust.
The Fed’s communications have, at least for the time being, also carved a new normal
characterized by frequent and clear communications. The Fed is not only speaking about the
programs it is implementing, but also about the expected prognosis1 and its overall policy stance
and plan for supporting the economy.2
One of the many reasons for this change is an evolution of the Fed’s communications
practices. Writing in 2013, Mark Wynne of the Dallas Fed found that: “Over the past two
decades, the FOMC has gone from being quite secretive in its deliberations to very transparent.”
When the television news show 60 Minutes called the Fed for an interview with then Chairman
Ben Bernanke, the Fed’s representative laughed out loud and replied, “the Chairman never does
an interview.” To Bernanke’s credit, in March 2009, he did sit down with 60 Minutes; it was the
first that he had done in his three-year tenure. By contrast, Chairman Powell first sat down with
the popular news show just 13 months after he was appointed Chairman.
During his tenure, Powell has implemented live press conferences after every FOMC meeting
rather than just half of them. He has also committed the Fed to a “plain-English initiative.” The
increased visibility at live press conferences and other appearances allows the Chairman to
answer questions and add nuance to his explanations. Plain English potentially increases the
likelihood that greater numbers of Americans will come to understand the Fed’s mission and
actions.
With respect to the current crisis, such developments seem to be paying off. Michael Feroli, chief
U.S. economist at JPMorgan Chase, recently said: “The Fed is playing a confidence game and its

communications should continue to repeat the message that it will do whatever it takes to nurse
the economy back to health.”
Be Consistent and Credible
Frequency of communication is important, but so is content. It is not enough for government
officials to appear to communicate; in order to be perceived as credible, they must speak clearly
and consistently about the government’s plan, how it will be applied, and under what
circumstances it will be modified. Such forward guidance is a powerful tool of monetary policy
and crisis fighting. When officials speak with one voice and do not contradict each other,
credibility is increased.
During the GFC, Secretary Paulson stated that there would be “No more bailouts,” and the
government did not make a loan to Lehman Brothers. However, just days later, the Fed loaned
AIG $85 billion, and markets dipped precipitously. Some commentators believe that these
actions looked inconsistent and ad hoc.
By contrast, since January, Chairman Powell has repeated versions of the same message,
especially since the President declared a national emergency on March 13: “The Federal Reserve
is committed to using its full range of tools to support households, businesses, and the U.S.
economy overall in this challenging time.” (March 23, 2020).
Those tools include the Fed’s emergency authority under Section 13(3) of the Federal Reserve
Act, pursuant to which the Fed has announced nine programs implemented with the consent of
Treasury Secretary Mnuchin, as required by law, and providing potentially up to $2.3 trillion3 in
liquidity. With one exception, these programs are backstopped by Treasury investments
totalling $185 billion from a $454 billion funding pool provided by the CARES Act.4
During an interview on April 9, Powell said: “We do these [programs] with the consent of
the…Treasury Secretary and with fiscal backing from the Congress through the Treasury.” He
also said: “We’re using that fiscal backstop to absorb any losses that we have.” (Powell at
Brookings, 11:45-12:45).
In early statements Mnuchin seemed to agree with Powell, describing the Fed programs
as providing trillions of dollars to the economy with the Treasury “putting up money to support
the credit for the Fed.” However, he later seemed to retreat from initial statements, calling into
question whether he was willing to let the Treasury’s investments absorb losses from the
programs: “We are looking at it in a base case scenario that we recover our money.”
The lack of clarity added to the debate of whether the programs’ terms were liberal enough to
ensure that aid reached the broad array of intended participants. It wasn’t until May 19 that
Mnuchin put the discussion to rest and provided clarity. “The answer is absolutely yes,”
Mnuchin said in response to questions from legislators in a virtual hearing of the Senate
Banking Committee. “By definition that capital is at risk, and we are fully prepared to take
losses, in certain scenarios, on that capital.” See a related YPFS Blog here.
The Fed has made available trillions of dollars in liquidity using its traditional monetary
policy tools and emergency Section 13(3) powers. Chairman Powell has been clear about the
plan for use of these emergency tools, which, prior to the GFC, had not been used for 70 years:
“The Fed will use these tools for as long as is necessary until the virus is overcome and when the

emergency is over, those tools will be put away.” Secretary Mnuchin has said that he will commit
additional funds to the Fed programs if needed.
Market commentary and a recent Gallup poll indicate that confidence in the Chairman and the
Fed is strong. Fifty eight percent (58%) of respondents stated that they had a “great deal or fair
amount” of confidence in the Chairman to do what was right for the economy. Secretary
Mnuchin garnered a similar confidence rating of 51%. The ratings received by Powell and
Mnuchin were higher than those for the President, and the Congress. The current ratings are
significantly above the 30% rating (excellent/good job) that the Fed received in July 2009, while
still taming the GFC. It was rated the lowest of nine different agencies at the time, including the
Internal Revenue Service.
Clarify roles
During the GFC, the Fed had a long lead during which it was the sole authority with the
resources to address market distress. It was criticized for consulting with the Treasury when
exercising its authority; this was before Dodd-Frank essentially codified this practice. Fed
officials have explained this by citing the benefits of governmental coordination, presenting a
united front to the public, and a premonition that in a worst-case scenario the Fed’s lending
authority might be insufficient to quell a full-scale crisis. Fiscal authority ultimately was
required, most notably, the $700 billion Troubled Asset Recovery Plan (TARP) passed by
Congress in October 2008.
In the current crisis, given the compressed nature of its onset, the fiscal authority has been
engaged almost from the beginning. Congress passed the CARES Act on March 27, which
provided for direct payments and some loans to individuals and businesses, such as the Small
Business Administration’s Payroll Protection Program, assistance to airlines, and direct
payments to individuals. Secretary Mnuchin has been the main spokesperson regarding these
supports.
The CARES Act also provided $454 billion that the Secretary could use in coordination with the
Fed to establish programs under its Section 13(3) authority. Under Section 13(3), as amended by
the Dodd-Frank Act, when the Fed triggers its emergency authorities the Chairman is required
to consult with and get approval from the Secretary for any proposed program. Mnuchin has
approved the nine programs proposed by the Fed and has backed several of them with credit
support ($20 billion) and equity investments ($195 billion).
Chairman Powell has consistently explained the complementarity between the Fed’s role
(monetary policy) and that of the Treasury (fiscal)5 and the shared responsibility for financial
stability. Powell has also stressed that the Fed’s emergency Section 13(3) tools were activated
with the “approval and support of the Congress and Treasury,” that they are “lending tools,” and
that “it fully expects its loans to be repaid.” (Brookings 2020). Chairman Powell has also
emphasized that as powerful as they are, the Fed’s emergency authorities may not be able to
help everyone. Other lending assistance, and non-lending assistance such as grants and direct
payments, come from the fiscal authority of the Congress and Treasury.
At different times we have heard the Chairman toss the ball back over to the Treasury as he did
on May 13, 2020, suggesting that more fiscal support might be needed if the economic effects
are prolonged: “Additional fiscal support could be costly but worth it if it helps avoid long-term
economic damage and leaves us with a stronger recovery.” Ultimately, delineating clear roles

can create areas of accountability so that each entity is judged on its responsibilities and what it
can do.
Foster Accountability. Admit mistakes and fix them when they occur.
During the GFC the government implemented several programs designed to provide relief to
homeowners, by incentivizing mortgage servicers to work with homeowners to refinance
mortgages to avoid foreclosure. The administration and results of some of these programs were
debated and may have added to an unbalanced view of the government’s actions.
Fast forward to the COVID-19 crisis; some programs have likewise been questioned. When it
was exposed that numerous large, publicly traded companies had received (forgivable) loans
under the Small Business Administration’s Payroll Protection Program (PPP), which had been
announced as a key resource to keep small and medium-sized businesses afloat, Secretary
Mnuchin said that was not what was intended. He actively sought to have several corporations
publicly return the funds, supported set-asides for smaller financial institutions in the new PPP
tranche of $310 billion, and threatened to investigate any borrower who abused the program.
(See a YPFS blog on the recent changes to the PPP.)
The government has set high expectations for fighting this crisis. The Fed and Treasury have
deployed programs of unprecedented number and scope in record speed; there are bound to be
missteps and errors. It is not sufficient, however, for the government to lessen diligence once
programs are implemented, or hand off the administration of, and responsibility for, programs
involving trillions of dollars of taxpayer funds to banks or other third parties who pick the
winners and losers according to their interpretation of the government’s criteria or
administrative ease, at the risk of possibly distorting the intended outcomes.
The clearer such rules are, and the more effort expended by the government to ensure that they
are followed as intended, or amended if advisable, the more credible the government and the
programs are likely to be perceived.
There are likely to be other areas that may require such attention, for example, the friction
between the terms of the PPP and the enhanced unemployment benefits, and the potential
fallout from broad based rental and eviction forbearance. The longer shelter-in-place orders and
high unemployment persists, it may be impossible for millions of individuals to pay months of
back rent once the moratoria expire. How the government addresses such issues has the
potential to become a broken promise or a last-minute save; either result could have a long-
lasting impact on our socio-economic and political future.
Do not underestimate the public. Speak to all Americans.
Because the current crisis originated from a pandemic requiring government-imposed economic
shutdowns to mitigate the health crisis, interventions to support the economy and lessen the
economic fallout from those efforts have also been broad-based. For two months, businesses,
schools, retail establishments, and entertainment venues have been shuttered and tens of
millions have lost their jobs. The government’s response has been robust, making trillions of
dollars available to businesses, communities, and individuals in record speed. Still, the shut-
down has the potential to impact almost every citizen, and many are vulnerable and worried.
A Fed survey recently reported that “[a]mong people who were working in February, almost 40
percent of those in households making less than $40,000 a year had lost a job in March.” A
recent Pew survey found that 77% of Americans believe the coronavirus will be a threat to their

personal financial situations, while a Gallup poll showed that 48% are worried about
experiencing severe financial problems.
The government faces a significant challenge to mitigate the impact of its shut-down order and
maintain credibility, while continuing to fight the virus. However, success does not require
perfection. Criticisms of the government’s actions during the GFC did not focus on errors per se
but were aimed at programs (like the bank recapitalization and AIG restructuring) that were
perceived as having taken too much risk with taxpayers' money, lacking a general sense of
fairness, and failing to provide an appropriate level of transparency. Many felt that they had
been betrayed when their government bailed out Wall Street banks while ordinary Americans
lost their jobs and homes on Main Street. Had the government been able to convince the
American people that the bank rescues were necessary to protect their pensions and maintain
their school arts programs, perceptions about government, big business and trust might have
been different.
The GFC involved complicated financial issues that were challenging for even Congress and the
media to understand and with which most Americans were unfamiliar: mortgage securitization,
collateralized debt obligations, shadow banking, and derivatives. Since most of the programs
implemented by the Fed were directed at the financial industry, government officials and their
press releases used financial industry language. In the heat of the battle, only limited efforts
were made to explain to the average citizen the connection among the collapsing financial
system, the massive rescue actions, and the basic credit cycle underpinning car buying,
vacations, pensions, and life insurance.
One exception is the government’s assistance to General Motors and Chrysler and other industry
entities, which involved government commitments of $80 billion and assistance negotiating
concessions from unions, pension plans, and investors. The Obama administration
communicated the rescue of the auto companies in a more detailed and straightforward manner
than it did some of the rescues of large financial organizations; at one point a video was even
made. Even though the auto rescue is the only part of the GFC rescues in which the government
lost money ($9.3 billion), it has come to be perceived far more favorably than the bank
recapitalizations, which remain highly disfavored.
The government’s current efforts to prop up the economy and citizenry until economic activity
can safely resume are very broad-based and recognize that many stakeholders are impacted. To
be optimally effective, the government’s communications must do the same. One of the
country’s foremost experts on crisis communication, Timothy Coombs, writes:
“The goal of crisis communication is to reduce the damage a crisis inflicts on an organization
and its stakeholders …too often there is too much focus on the organization. Crisis teams must
ensure the physical safety and psychological well-being to stakeholders affected by the crisis.”
(Coombs, p. 136)
If we think of the government as the “organization” and the economy, industry, communities,
and individuals as the “stakeholders,” a rubric evolves where one of the guiding principles in
managing and communicating crisis-fighting efforts is to minimize harm to the stakeholders.
This can be done by adhering to the lessons set forth above and by keeping all stakeholders and
the big picture always in mind.

Americans have been asked by their government to make significant sacrifices to defeat the
pandemic. The government should do everything in its power to honor those sacrifices and
minimize negative impacts on the economy, communities and households in as effective and fair
a manner as possible. If it does, it will prove that its current positive Gallup Poll ratings are
deserved, and those ratings may even improve. If it does not, it risks criticisms, negative market
reactions, and claims of betrayal that may have lasting impact.
1. “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the
economic outlook.” (FOMC PR March 15, 2020)
2. “The Federal Reserve is carefully monitoring credit markets and is prepared to use its full range of tools to
support the flow of credit to households and businesses and thereby promote its maximum employment and
price stability goals.” (Fed PR March 15, 2020).
3. One of the nine programs is the Payroll Protection Plan Liquidity Facility, which provides loans to financial
institutions to fund Small Business Administration-guaranteed Payroll Protection Plan (PPP) loans to small
and medium-sized businesses. The Fed accepts the PPP loans as collateral for the PPPLF loans, which are
non-recourse. The first round of PPP funding was depleted and Congress authorized a $310 billion second
round of funding to restart the program increasing the potential under the nine programs to $2.6 billion
from the original $2.3 billion.
4. The Term Asset-Backed Securities Loan Facility, which was established by the Federal Reserve on May 12th
prior to the passage of the CARES Act is supported by a $10 billion Treasury equity investment from the
Exchange Stabilization Fund.
5. For example, “The Fed lowered interest rates, provided liquidity to banks and foreign central banks to keep
the credit markets open and the flow of dollars steady, and it buys massive amounts of debt.” (Brookings
2020).

First Report of the Congressional Oversight Commission on the Use of
CARES Act Funds
By Pascal Ungersboeck and Rosalind Z. Wiggins
Original post here.

In response to the Covid-19 crisis, Congress has passed four economic stabilization and health
funding bills. The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on
March 27 contains the most substantial relief measures, with $2.2 trillion to be allocated.
Among other programs, Title IV, Subtitle 4 of the Act (subtitled the Coronavirus Economic
Stabilization Act (CESA)) provides the Treasury with $500 billion for direct lending to specified
businesses in the aviation industry and businesses critical to national security (up to $46 billion)
and for supporting Federal Reserve emergency lending programs to be established under
section 13(3) of the Federal Reserve Act ($454 billion).
The CESA provides for the establishment of a Congressional Oversight Commission to publish
regular reports on the use of these funds. Per the Act, the commission includes five members,
four members appointed by the leaders of the House and Senate and a chairman jointly
appointed by the speaker of the House and the Senate majority leader, after consultation with
minority leaders. As of the publication of the first report on May 18, the chairman position has
not been filled; even so, the commission provided guidance on how it intended to conduct its
role and reported on the status of the programs for which it had responsibility, most of which
were not yet operational.
Oversight Role
The commision was established to provide oversight regarding the use of the $500 billion
allocated under CESA. It is also charged with overseeing the implementation of related
programs by the Treasury and Fed. It is required to report to the Congress every 30 days on the
following points:
• The use by the Fed of authority under Subtitle A, including with respect to the use of
contracting authority and administration of the provisions of Subtitle A.
• The impact of loans, loan guarantees, and investments made under Subtitle A on the
financial well-being of the people of the United States and the United States economy,
financial markets, and financial institutions.
• The extent to which the information made available on transactions under Subtitle A has
contributed to market transparency.
• The effectiveness of loans, loan guarantees, and investments made under Subtitle A of
minimizing long-term costs to the taxpayers and maximizing the benefits for taxpayers.
(p.5).
In its first report the commision sets out questions that provide insight into the areas that it will
seek to explore in undertaking its duty. These questions include inquiry into a number of areas
that have seen much discussion since the bill passed and some new areas including: the amount
of risk the government is willing to undertake, ensuring the funds reach the intended parties,
maximizing the impact of funds on markets and the economy, the effectiveness of direct vs.

indirect distribution channels, and accountability for compliance with the terms of the Act.
Questions include:
• How will the Treasury and Fed (the “agencies”) assess the success or failure of this
program?
• How can the agencies best determine how much of the Treasury’s $454 billion to allocate
among Fed lending facilities and when to allocate such funds in order to help support
and stabilize the economy?
• How can the agencies best estimate the risk of loss to taxpayer funds in each Fed lending
facility?
• How will the Fed ensure it complies with all restrictions to emergency lending under
Section 13(3) of the Federal Reserve Act, including those prohibiting lending to insolvent
borrowers?
• Are the agencies prepared to lose taxpayer dollars in an effort to facilitate more lending
and support to a broader set of entities?
The full list of questions can be accessed at page 14 of the report, which also includes specific
questions regarding the individual programs.
Status of Programs
The commission noted that as of May 18, the Treasury has not disbursed any of the $46 billion
reserved for direct lending; it further noted that the Treasury had published application
procedures and requirements for these funds in March and April and that it was processing
applications for loans received from airlines and other businesses critical to national security.
The commision also noted that the Treasury had disbursed grant funds to airlines under the
Payroll Support Program, a program authorized under a different provision of the CARES Act
and not under their jurisdiction.
On April 9, the Treasury announced its intention to use available funds under CESA to make
equity investments into special purpose vehicles established under Fed lending programs. The
commission noted that so far the Treasury has pledged $185 billion of the $454 billion available
to be invested in these facilities. This includes $75 billion intended for the Main Street Lending
Programs, $35 billion for the Municipal Liquidity Facility (MLF), $50 billion for the Primary
Market Corporate Credit Facility (PMCCF), and $25 billion for the Secondary Market Corporate
Credit Facility (SMCCF).
The commission noted that on May 11, the Treasury invested $37.5 billion of the $75 billion
equity investment committed for the Corporate Credit Facility LLC, the SPV established by the
Fed for the PMCCF and SMCCF. No other of the committed amounts have yet been invested. It
also noted that the size of these investments can grow as a large share of the appropriated funds
remains unused.
Other Fed facilities, including the Term Asset-Backed Securities Loan Facility (TALF), the
Commercial Paper Funding Facility (CPFF), the Money Market Mutual Fund Liquidity Facility
(MMLF), and the Primary Dealer Credit Facility (PDCF), do not fall under the commission’s
jurisdiction according to its report. All but the last of these programs also have the benefit of $10

billion in Treasury credit support through Emergency Stabilization Act funds that the Treasury
agreed to provide prior to passage of the CARES Act.
The commission noted that although the Fed has not started lending through the CARES Act
Fed Facilities, with the exception of the SMCCF which was operational by May 12, the
announcement of the programs in general has had a positive impact on market conditions,
citing recovering equity prices and decreased bond spreads.

A Long Way to Go for Emerging Markets
By Ahyan Panjwani and Chase P. Ross
Original post here.

The developing world will soon become the frontlines in the battle against the coronavirus, and
markets are bracing for the resulting fallout. The Covid-19 crisis has already had an
unprecedented effect on emerging markets—more than 100 of the IMF’s member countries have
already asked for aid: Simultaneous health and financial crises add fuel to the linkages
between sovereign debt crises, banking crises, and growth and competitiveness crises. In this
note, we discuss financial markets’ responses in the first months of the current crisis, the unique
challenges EMs face compared to wealthier nations, and reasons for cautious optimism at the
present moment.
Emerging and developing economies’ reported cases remained low in the initial stages of the
pandemic as the virus migrated from China. However, in the past three weeks, confirmed cases
in EMs have tripled to 630,000 cases compared to 1.9 million cases in developed economies
(Figure 1, panel A). Looking across several measures—health care expenditures; the number of
hospital beds, doctors and nurses; or GDP per capita—it’s clear EM’s health infrastructure is less
equipped to manage the virus.
Despite these looming initial conditions, data from the Oxford COVID-19 Government Response
Tracker show EM governments have moved as quickly as developed economies to impose social
distancing policies, like school closures, and travel bans (Figure 1, panel B).
Emerging markets have unsurprisingly taken a financial shellacking. With risk off and hot
money running for the exits, equities fell, credit spreads widened across the quality spectrum,
and FX weakened. From peak to trough, equities have fallen by 20% and spreads for EM
sovereign spreads have increased by more than 400 bps (Table 1).

The EM CDX, an index of about 20 emerging market sovereign issuers’ CDS spreads, increased
almost 300 bps (Figure 2). Compare that to the 10 bps increase in US CDS spreads, despite the
US’s discretionary fiscal expansion of 7% of GDP compared to EMs’ of 3.5%, as estimated by
Goldman Sachs.
We calculate market expectations by imputing sovereign debt default probabilities from CDS
spreads. Across our sample of 17 countries, the average market-implied default probability was
6.7% on January 1, increasing to 16.0% on April 22. On the country-level, each country’s default
probability has increased. However, there is considerable variation across countries: Turkey
increased from 18% to 35%, Pakistan from 26% to 42%, South Africa from 11% to 26%, while
default probabilities increased by less than 5% for China, the Philippines, and Chile (Figure 3).
This spike in perceived risk can have dire consequences for public finances in individual
countries. Since the financial crisis of 2008, investors from advanced economies have searched
farther and farther afield for attractive yields. This Marco Polo-esque search for yield has
cushioned the public finances for many emerging markets (Figure 4). On the flip side,
international reserves for many emerging economies have increased noticeably; on average,

reserves have tripled in the last two decades. As a by-product, exchange rates have stabilized
despite a slow walk towards a floating or quasi-floating mechanism (Bianchi, Hatchondo, and
Martinez, 2018). Now, the public-debt binge is over, and unceremoniously so.
Central banks in emerging markets are in a peculiar position due to these headwinds. On the
one hand, there is an incentive to increase interest rates to compensate for the increase in risk
premia. However, the deflationary nature of the crisis and possible political economy factors call
for a loosening of monetary policy. While EM central banks have heeded the latter with 113 rate
cuts globally this year, the flight to safety is a potent threat to EM public finances, especially
with government budgets due soon in many countries.

Another cause of concern for some emerging economies is the possibility that their citizens
working in other countries have to return home. This scenario compounds the problem due to
the financial shock as it may reduce remittances and increase domestic labor supply, a double
whammy. Countries like Pakistan and India with patchy social safety nets would have to grapple
with significant unemployment and wage pressure while another source of dollars—
remittances—deals a blow to national accounts (Figure 5).
To complete the nightmarish prospect, a slump in global demand means economies reliant on
commodities are in for a rude awakening. Although oil has grabbed worldwide attention prices
for zinc, scrap steel, copper, and tin have declined precipitously since January 2020—dropping
by 18%, 17%, 16%, and 13%, respectively. While mine closures in South Africa and the DRC have
steadied prices for some metals, the net pressure on public coffers will be significant, feeding
into investor concerns mirrored by the CDS spreads.
There is reason for hope yet. The exposure of emerging markets to a Covid-19 outbreak—very
roughly proxied by Goldman Sachs’ economists using the countries’ age distributions,
prevalence of smoking, access to sanitation and clean water—is no worse than that of advanced
economies. Markets have yet to plumb the lows seen during the global financial crisis (Table 1).
Although EM credit spreads have widened, especially for high yield corporates, sovereign and
high-quality issuers are still trading well below 2008 peaks.
In recent days, the G20 announced a repayment freeze for bilateral loans through 2020. This
development is significant, despite an initial outlay of only $20 billion, as it has set the trend for
further easing the debt burden for the most vulnerable societies. However, bringing private
creditors on board will be a thorny issue and may blunt the G20 efforts. Moreover, the IIF
estimates the same countries receiving G20 assistance owe about $140 billion in external debt
service payments in 2020, so the relief program is only a first step.
The spike in CDS spreads may prove to be a canary in the coalmine vis-à-vis possible credit
events on sovereign debt. Such an event could prove to be regionally disastrous and may prolong

the health crisis itself if a government has to direct resources towards litigation instead of public
health.
In 2017, the World Bank set up the Pandemic Emergency Funding Facility wherein a bond
would provide funding if a pandemic occurred in certain member countries deemed most
vulnerable. After initial hiccups determining whether the criteria were met or not, the securities
were adjudged as in the money. While the payoff is less than $200 million, it is only part of the
institution’s response to the ongoing crisis. More importantly, this development highlights the
importance of financial innovation: state-contingent assets can prove to be an invaluable lifeline
for at-risk communities.
Recent decades have marked a comeback of official lending relative to private lending. A wide
range of region-specific development banks, bilateral, and multilateral lending agreements are
available and ready to act. Horn, Reinhart, and Trebesch (2020) argue today’s “global financial
safety net is large and diverse.” We will find out soon enough.

Mnuchin Clarifies that Treasury is Prepared to Lose Money on Fed Programs
By Rosalind Z. Wiggins and Greg Feldberg
Original post here.

U.S. Treasury Secretary Steven Mnuchin clarified Tuesday that the Treasury is prepared to take
losses as it provides unprecedented credit support to the Federal Reserve’s COVID-19 lending
programs.
“The answer is absolutely yes,” Mnuchin said in response to questions from legislators in a
virtual hearing of the Senate Banking Committee. “By definition that capital is at risk, and we
are fully prepared to take losses, in certain scenarios, on that capital.”
In March, Congress made a $500 billion funding pool available to the Treasury Department,
part of the $2 trillion CARES Act. The legislation directed the Treasury to allocate up to $46
billion of that amount for airlines and other distressed companies. It directed the Treasury to
use the balance of at least $454 billion to support Fed lending programs.
Mnuchin and Fed Chairman Jerome Powell appeared before the Senate Tuesday to present their
first quarterly report to Congress on their use of these funds.
On April 9, the Fed announced four joint Fed-Treasury programs under the CARES Act. These
included facilities for corporate credit; loans to municipalities; loans to small and medium-sized
companies (the “Main Street Lending Program”); and asset-backed securities. In total, these
programs would commit $195 billion of the $454 billion in taxpayer funds available to the
Treasury. Those funds would back up to $1.95 trillion in Fed lending.
Senators in Tuesday’s hearing questioned why so little of the $454 billion has been used to date.
Only one program has launched: On May 11, the Treasury provided $37.5 billion to the Fed to
cover half of the promised equity for the Corporate Credit Facility. The Fed had lent the facility
only $305 million as of May 13, to buy exchange-traded funds.
Powell said Tuesday he expects all of the new programs to be “stood up and ready to go by the
end of this month.” The Fed has released term sheets for each new program, and made revisions
in some cases in response to thousands of public comments. The facilities are complex and delve
into risk areas that are new to the Fed in its lending operations. “People are working literally
around the clock and have been for weeks,” Powell said.
Treasury to take losses?
In earlier posts, we considered how the Treasury’s use of the funding pool authorized by
the CARES Act to backstop Fed programs might leverage the funds into trillions of liquidity for
the economy. In earlier comments, Powell has said the Fed could leverage the whole of the
Treasury’s $454 billion to lend as much as $4 trillion.
The Fed’s emergency-lending authority, under Section 13(3) of the Federal Reserve Act, requires
the central bank to make sure emergency loans are adequately secured and protect taxpayers. A
lingering question has been whether the Treasury’s potential absorption of losses was consistent
with Section 13(3). Although there seemed to be a common consensus developing between
Powell and Mnuchin that this was indeed the case, later statements by Mnuchin raised
uncertainty.

During an interview on April 9, Powell said: “We do these [programs] with the consent of
the…Treasury Secretary and with fiscal backing from the Congress through the Treasury.” He
also said: “We’re using that fiscal backstop to absorb any losses that we have.” (Powell at
Brookings, 11:45-12:45).
However, before Mnuchin’s statements Tuesday, it wasn’t clear whether the Treasury shared
this view.
In March, Mnuchin initially echoed Powell’s position, describing the program as providing
trillions of dollars to the economy with the Treasury’s assistance by “putting up money to
support the credit for the Fed.”
But on April 29, Mnuchin seemed to indicate that he might be retreating from his earlier stance.
He said he was “looking at it in a base case scenario that we recover our money.” At that time, he
contrasted the Fed lending programs with spending programs also included in the CARES Act.
“If Congress wanted me to lose all the money, that money would have been designed as
subsidies and grants as opposed to credit support.”
Uncertainty regarding how the Treasury’s backstop will operate goes directly to the amount of
risk that the Fed might undertake in designing its lending programs. The Treasury’s willingness
to bear losses might result in less stringent, but still prudent, participation standards that could
potentially reach a broader number of participants. Commenters and prospective borrowers
have questioned whether some of the Fed programs were initially drawn too narrowly to provide
the intended assistance.
At the hearing Tuesday, Mnuchin sought to put the discussion to rest and provide clarity. “For
any facility that the Fed believes puts them at risk, I do put up capital, so by definition that
capital is at risk, and we are fully prepared to take losses, in certain scenarios, on that capital.”
While his response was emphatic, the allusion to “certain scenarios” suggests some ambiguity.
Mnuchin’s prepared testimony is here.
Fed’s language evolves
The Fed has consistently said in its required reports to Congress on the emergency lending
programs that it is comfortable that it won’t lose money in part because the Treasury has agreed
to take losses first. Powell repeated that in his prepared testimony Tuesday. But the language
has evolved.
In its March 29 report on the Term Asset-Backed Securities Loan Facility (TALF), the Fed wrote:
“As TALF credit is non-recourse to the borrower, the Federal Reserve and the Department of the
Treasury, through its equity investment, will bear the risk of loss on the collateral… The Board
does not expect at this time that the TALF will result in losses in excess of the Department of the
Treasury’s equity investment. Accordingly, the TALF is not expected to result in losses to the
Federal Reserve or the taxpayer.” It used similar language in other 13(3) reports in March.
In April, though, the Fed has used slightly different wording in its reports to Congress. It
deemphasizes the loss-bearing nature of the Treasury’s equity investments. But it has also
dropped the expectation that programs will not result in losses to the taxpayer. For example,
the April 28 report said, “As described in the Board’s initial report to Congress regarding the
TALF, the TALF includes features that are intended to mitigate risk to the Federal Reserve. The

Board continues to expect that the TALF will not result in losses to the Federal Reserve” (italics
added).
Fed has lent $120 billion through other facilities in the COVID-19 crisis
The Fed launched its first COVID-19 emergency lending facilities for financial markets in March
in the weeks before Congress passed the CARES Act. These facilities mirrored facilities the Fed
created during the global financial crisis of 2007-09.
As of May 13, the Fed had roughly $120 billion outstanding in loans through its discount
window and a half-dozen emergency facilities. Two of these facilities – the Money Market
Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility – are each backed by
$10 billion in loss-bearing equity that the Treasury agreed to provide prior to the passage of the
CARES Act (see the YPFS blog).
The Fed also has roughly $450 billion outstanding in swaps with foreign central banks to
provide liquidity in dollar-denominated assets.
The video and transcript of the entire hearing can be accessed here.

Usage of the Defense Production Act throughout history and to combat
COVID-19
By Aidan Lawson and June Rhee
Original post here.

As the Federal Reserve and the Treasury launch programs to provide relief to individuals and
businesses affected by the COVID-19 crisis, President Donald Trump has been using a tool that
gives him considerable discretionary authority over private corporations: the Defense
Production Act (DPA).
The DPA gives the president the authority to compel the private sector to work with the
government to provide essential material goods needed for the national defense. The Act
currently includes the following powers:
• Title I: Prioritization and Allocation. This allows the president to designate specific
goods as “critical and strategic” and require the private businesses to accept and
prioritize government contracts for these goods. Thus far, the government has used this
to enhance production of key medical supplies and personal protective equipment (PPE),
including $2.9 billion to purchase over 187,000 ventilators by the end of the year.
• Title III: Expansion of Productive Capacity and Supply: This allows the president to
make loans and provide guarantees to businesses, directly purchase critical and strategic
goods, and repurpose production facilities in order to increase production capacity. So
far, the administration has spent $208 million under the direct purchase authority in
Title III to increase capacity for nasal swabs and respirators in limited amounts. The
other powers have not been used.
• Title VII: General Provisions. This allows the president to enter into voluntary
agreements with private businesses to coordinate the production of critical and strategic
goods. These are subject to some antitrust protection and have yet to be used.
In addition, the CARES Act provided some Title III reporting relief and appropriated $1 billion
to the DPA Fund. However, comprehensive usage is hard to capture; DPA contract awards are
kept confidential, since the Act has traditionally been used for military technology.
This post provides background for better understanding of available authorities under the
DPA and a full picture of their usage in response to COVID-19 crisis. Additionally, it highlights
some criticisms around the current usage of authorities.
Background and Origination of the DPA
While the original DPA was signed into law in 1950 by President Harry Truman, the president’s
authority for industrial reorganization and prioritization can be traced back to World War I. The
official declaration of war, signed on April 6, 1917, stated that the president could “employ...the
resources of the Government to carry on war against the Imperial German Government”
(see here). President Woodrow Wilson used this authority to create two temporary federal
agencies: the National War Labor Board and the War Industries Board. The former was
primarily used to mediate labor disputes and the latter allowed the government to settle labor-

management disputes, set quotas, and allocate and prioritize the production of critical wartime
goods.
The advent of World War II saw the creation of even more expansive emergency authority: The
War Powers Act. The first War Powers Act was passed on December 18, 1941, and gave the
president broad powers to reorganize the functions of any executive agency for the purpose of
fighting the war. President Franklin Delano Roosevelt issued a total of 75 executive orders under
this act (see here, pp. 5710, 5729). The second War Powers Act, signed into law on March 27,
1942, allowed the president to allocate resources, acquire land and property, and compel
businesses to take on government contracts for national defense. The second Act also permitted
the Federal Reserve to purchase up to $5 billion in Treasury bonds directly from the U.S.
government. Both of the acts expired either during World War II (the second Act), or shortly
after (the first Act). While the basis for its authority was sewn in World War I, the two War
Powers Acts are the predecessors to the DPA.
Dramatic defense budget cuts followed World War II due to a lack of need and an increased
reliance on atomic weaponry. Additionally, demand for housing and consumer products shot up
as wartime controls lapsed, culminating in a series of labor strikes in 1946. The onset of the
Korean War amplified the need for dramatic industrial reorganization, and President Harry
Truman quickly pushed for authority similar to what his predecessor had used. As such, the
Defense Production Act ultimately was signed into law on September 8, 1950.
What powers does the DPA grant the government over private industry?
The DPA allows the president to “shape national defense preparedness programs and to take
appropriate steps to maintain and enhance the domestic industrial base” (see here, pp. 2).
The Act’s three tools are allocation and prioritization of contracts for critical and strategic goods
(Title I), expansion of productive capacity through financial incentives (Title III), and voluntary
agreements with private industry (Title VII). The original act included four other titles that
Congress allowed to expire. These authorities allowed the president to requisition private
property (Title II), fix wages, prices and ration goods (Title IV), forcibly settle labor disputes
(Title V), and control various aspects of consumer credit (Title VI).
The Act also includes a sunset provision that requires it to be reauthorized every few years,
which allows changes to be made to ensure the law can account for new developments. When
reauthorizing, Congress has occasionally amended the definition of “national defense.” It now
extends beyond military application to homeland security and national emergencies, such as
those invoked by a terrorist attack or pandemic.
Four major amendments to the definition have been made since the DPA’s inception. In 1975,
the definition was expanded to include space activity. The 1980 reauthorization of the Act
designated energy as an essential material good. In 1994, the scope of the DPA was significantly
broadened to incorporate emergency preparedness during natural disasters or other events that
caused national emergencies under Title VI of the Stafford Act (see pp. 71 - 85). The fourth
amendment in 2003 added “critical infrastructure protection and restoration” to the definition
of national defense.
Title I of the DPA gives the president the authority to compel businesses to prioritize and accept
contracts for goods that are designated as “critical and strategic” for the national defense, much
like in the second War Powers Act. These goods are designated as such by the president, who

can allocate, distribute, and restrict their supply as needed. Any contracting decisions made
under this must be made with a “strong preference” for small businesses, especially those in
economically depressed areas. Title I also includes provisions to prevent the hoarding of
materials.
Title III complements Title I’s allocation and prioritization authority by providing tools to
expand domestic industrial capacity. It allows the president to incentivize private business to
expand their production capacity of critical goods if more are needed. These incentives can
include loans, loan guarantees, direct purchases and purchase commitments, as well as the
ability to outright produce and install equipment in private facilities (see here, pp. 13 - 16). The
president can also designate Federal Reserve banks as fiscal agents to administer guarantees
(see here, pp. 9).
Generally, the incentives must be:
1. For goods designated as critical and strategic only
2. For institutions that cannot obtain credit elsewhere to produce critical and strategic
goods
3. For businesses with sufficient creditworthiness and earning power
4. The most “cost-effective, expedient, and practical alternative”
There are additional requirements based on the form of the incentive. Both loans and
guarantees are priced at rates that are commensurate to Treasury yields of similar maturities,
while direct purchases of goods will be made at the ceiling price, or domestic market price if no
ceiling price has been established. If the aggregate amount of any potential assistance exceeds
$50 million the president must notify Congress and wait 30 days before disbursing any funds.
Additionally, an Executive Order passed in 2012 requires an act of Congress for all Title III
projects exceeding $50 million. Historically, very few of these projects were expected to exceed
$50 million (see here, pp. 11).
However, the DPA gives the president a considerable amount of reporting flexibility. The $50
million congressional reporting threshold can be waived if the actions are taking place during a
national emergency or if the president determines that doing so would “severely impair”
capability. This discretion can also be exercised when providing assistance that would prevent a
company from becoming insolvent or undergoing bankruptcy proceedings, which is generally
not permitted. The president can even set maximum amounts, interest rates, guarantee and
commitment fees, and other charges.
The primary difference between Title I and Title III is that the former allows the government to
direct industry to prioritize existing resources, while the latter allows the government to direct
industry to expand these resources.
The Department of Defense (DoD) is the most frequent user of both Title I and Title III
authority. It prioritizes about 300,000 orders each year under Title I and is the only federal
agency with a standing Title III program (see here, pp. 8). It has primarily used Title III to
“mitigate critical shortfalls in domestic defense industries;” most recently, it used Title III in
July 2019 to expand production capacity for rare earth elements, which are essential
components of key military technologies (see here).

Title VII includes a number of general provisions that grant the president additional
reorganization capacity. The most noteworthy of these have to do with the power to create
“voluntary agreements” between the government and private industry. During periods of severe
stress, the president can consult and create renewable, five-year “voluntary agreements and
plans of action” to coordinate the production of goods.
As originally written, Title VII also gave complete antitrust immunity to businesses engaged in
these agreements. However, the DPA now provides them special legal defense if their actions
violate antitrust laws instead of complete immunity. The government had used similar authority
under the 1942 Small Business Mobilization Act, which mobilized small business production
capacity for World War II and created a Smaller War Plants Corporation that would make loans
to these businesses (see here, pp. 6 - 11).
Title VII also includes the authority of the President, generally through the Committee on
Foreign Investment in the U.S., to unilaterally review any merger, acquisition, or takeover to
assess its impact on national security (see here, pp. 39 - 40, pp. 45 - 46). If the review finds that
the transaction could be harmful to national security or is foreign-government controlled, the
president can suspend or outright prohibit a transaction from taking place. Title VIII also
authorizes the president to establish a National Defense Executive Reserve to train members of
private industry to be placed in higher-level government positions during periods of national
emergency, though none currently are active (see here, pp 35).
Much of the allocation and spending under the DPA is done through the Defense Production Act
Fund, which receives and manages appropriated money for the purposes outlined above. Up to
$750 million may be kept there indefinitely, with any excess amounts from repayments, fees, or
premiums being returned to the Treasury at the end of each fiscal year. Other government
agencies are allowed to appropriate money to the Fund, with the Departments of Defense and
Energy being two recent examples (see here, pp. 16). Executive Order 13603, the most recent
DPA amendment, assigned the Secretary of Defense as the manager of the DPA fund.
The DPA’s authority has often been delegated to the heads of government agencies and
departments. President Truman was the first to do this through Executive Order 10161, issued a
day after the DPA was signed into law (see here). Under this order the heads of government
agencies were given Title I, III, and VII authority for national defense matters that fell within the
scope of their respective agencies. The Secretary of Agriculture, for instance, was given
prioritization authority over food resources and related facilities. Over the years, the authority
given under Executive Order 10161 has been amended as the definition of national defense has
developed and the U.S. industrial base has changed.
DPA Usage during the COVID-19 crisis
The Trump administration alluded to using the DPA on February 28 but did not officially invoke
it until March 18, five days after the national emergency was declared. Shortly after, the
administration issued Executive Orders 13909 and 13910, which gave the Secretary of Health
and Human Services (HHS) Title I prioritization authority, as well as the ability to introduce
hoarding restrictions for PPE and critical medical equipment. Management and coordination of
all DPA programs were delegated to a White House trade advisor, Peter Navarro.

Executive Order 13911 (EO 13911) delegated Title III authority to the Secretaries of HHS and
Homeland Security (DHS) to respond to the COVID-19 crisis. EO 13911 also granted the DHS
Secretary Title I and anti-hoarding authority given to HHS in the previous executive orders.
Additionally, the president waived many of the Title III reporting requirements to provide loans
and guarantees, or purchase items during the national emergency. Aid packages exceeding $50
million do not have to be reported to Congress and sales prices for direct purchases were made
more flexible. Even goods that are not critical and strategic are eligible for Title III assistance.
EO 13911 also delegated the right to form voluntary agreements under Title VII to both
Secretaries with the approval of the president. This may raise some antitrust concerns, but the
DPA provides for some antitrust protection and federal regulators stated that the exceptional
circumstances surrounding the crisis may necessitate joint ventures between businesses, and
that they would take these into account when enforcing antitrust laws.
Executive Order 13922, issued on May 14, gave Title III authority to the CEO of the U.S.
International Development Finance Corporation (DFC). The DFC, formed in October 2018,
provides up to $60 billion annually in investment financing for developing countries across the
world (see here). EO 13922 requires the CEO of the DFC to work with the HHS and DHS
Secretaries to make loans that enhance the domestic COVID-19 response or that support “the
resiliency of any relevant domestic supply chains.”
Section 4017 of the CARES Act provided additional Title III relief:
• Two-year exemption from the requirement that Congress approve loans and guarantees
exceeding $50 million.
• Two-year exemption that allows the balance of the DPA Fund to exceed $750 million.
• One-year reporting relief of requirement to notify Congress and wait 30 days after
notification to provide Title III assistance exceeding $50 million for one year.
On March 31, the Secretary of HHS used Title I authority to designate a number of health and
medical resources, such as respirators with an N-95 effectiveness level, portable ventilators,
disinfecting devices, and PPE, as “scarce or threatened” (see here). This designation lasts until
the end of July.
The White House has issued a number of presidential memoranda to complement its executive
orders. One memorandum, issued on March 27, required the Secretary of HHS to use Title I
authority in compelling General Motors (GM) to prioritize contracts for a potentially unlimited
number of ventilators. Another banned the export of scarce or threatened PPE.
Two months after the DPA was invoked, HHS finalized a number of contracts to provide over
187,000 ventilators by the end of the year. See Table 1 for a list of DPA ventilator contracts.
While DPA authority had been delegated to the Secretary of DHS, existing regulations meant
that this responsibility had been delegated to Federal Emergency Management Agency (FEMA),
which is the primary federal disaster relief agency in the U.S. (see here). Under this regulation,
FEMA has the role of brokering sales to third parties to obtain critical health and medical
supplies and directly prioritizing which businesses receive supplies (see here, pp. 28502,
28504). Additionally, HHS has worked out an arrangement under the DPA with The 3M
Company to produce a total of 166.5 million masks over the next few months.

Table 1: Title I COVID-19 Ventilator contracts ($millions)
Company Contract Amount Ventilators Produced (end of 2020)
Phillips $646.7 43,000
Hamilton $552 14,115
General Motors $489.4 30,000
Vyaire $407.9 22,000
Zoll $350.1 18,900
General Electric, Ford $336 50,000
GE Healthcare $64.1 2,410
ResMed $31.98 2,550
Hillrom $20.1 3,400
Medtronic $9.1 1,056

Source: Department of Health and Human Services press releases
The DPA Fund, according to the government’s most recent budget, had an estimated $228
million available (see here, pp. 276). The CARES Act has augmented this by providing an
additional $1 billion for DPA activities out of $50 billion that was released for the COVID-19
crisis when the Trump administration declared a national emergency in March (see here).
Government agencies, such as HHS, have only used Title I authority thus far, but the lack of
funding in the DPA Fund may prove to be a limitation if U.S. industrial capacity as a whole
needs to be expanded through Title III, rather than repurposed.
Title III has only been used twice by the DoD since the DPA was invoked over two months ago.
The DoD used Section 303 to scale up production of both nasal swabs and N-95 masks,
investing an estimated total of $208 million. However, the loan and guarantee authority in
Sections 301 and 302 of Title III has not been used in decades. The projects done under Title III
are done each year under Section 303, which allows the government to make direct purchases of
goods and repurpose production facilities for national defense matters (see here, pp. 14).
Criticism of the DPA during COVID-19
While the Trump administration has used the DPA to some extent, many have professed that its
approach has been too little, too late. Shortly after the national emergency was declared, 57
members of the House of Representatives wrote a letter to the president imploring him to use
the DPA, citing insufficient testing and widespread shortages of critical supplies. Even after
activating it, the administration characterized the DPA as a break-the-glass authority, likening it
to nationalization and as unnecessary since they argued businesses were voluntarily increasing
production.
On March 30, the U.S. Conference of Mayors, which represents over 1,400 mayors in large and
medium-sized cities, sent a letter to the president requesting full usage of Title III to increase

the production of critical medical supplies that cities are having difficulty obtaining. These
concerns have even prompted a legislative proposal to federalize the entire medical supply
chain. The proposal would have the Secretary of Defense appoint an Executive Officer for
Critical Medical Equipment and Supplies, who would use DPA authority to “oversee all
acquisition and logistics functions related to the [COVID-19] response.” All requests for
equipment would be directed to the Executive Officer, who would report weekly on the
production capacity and supply needs of the U.S. and make recommendations based on these.
Concerns about the lack of medical supplies have persisted for years. A 2015 study by
government researchers estimated the number of N-95 respirators that would be needed for a
hypothetical flu outbreak. In the more conservative “base” scenario, the researchers found that
respirator demand ranged from 1.7 billion to 3.5 billion over the course of the outbreak. A
second study, conducted in 2017, evaluated the responsiveness of the U.S. medical supply chain
based on previous experiences, such as the 2009 H1N1 and 2014 Ebola outbreaks. The
researchers found that reliance on imported medical goods, a lack of “surge capacity”, and
unclear government guidance and monitoring of these goods leaves the U.S. vulnerable. HHS
estimated at the beginning of March that the U.S. would need about 3.5 billion N-95 respirators
over the next year if COVID-19 developed into a “full-blown” pandemic. At the time, the
government had a stockpile of about 35 million (see here).
The most notable example of the DPA’s usage has been to increase the production of ventilators
through Title I authority. Usage of Title III authority, however, has been “totally inadequate”,
according to a letter written by nine prominent U.S. Senators on May 6. There is still
approximately $1 billion that could be used for Title III projects. Lack of fiscal capacity could
pose a problem for Title III usage, but several members of Congress stated that they would be
willing to advocate for additional funding (see here). Theoretically, delegating Title III authority
to the HHS and DHS Secretaries should promote expediency, but that has not happened so far.
Lawmakers have been critical of Title III delegation to the CEO of the DFC, citing its lack of
experience in the medical supply chain, domestic markets and relevant industrial reorganization
expertise (see here).
Another concern has been the lack of transparency around DPA contract awards, as there is no
requirement for these to be reported. Secrecy is often necessary when discussing and developing
military technology during wartime but some COVID-19 contracts have been given to companies
that are in questionable financial status or have little-to-no background in medical supplies.
The U.S. medical supply chain is built to maximize efficiency and leave little room for excess
supply, which slows manufacturers’ ability to scale up production in times of crisis. COVID-19
export restrictions have received some backlash, warning that these could lead to retaliation
from trading partners and exacerbate shortages of other medical goods. In one case, a company
contracted with the U.S. government decried the “significant humanitarian implications”
associated with the administration’s export restrictions. The U.S. is a net importer of medical
goods, and retaliatory trade policy, combined with existing production issues, could exacerbate
already-known and serious flaws in the domestic medical supply chain. As the country begins to
re-open, it is unclear how much more the administration plans to use the DPA.

Forecasting the Economy During COVID-19
By Chase P. Ross and Sharon Y. Ross
Original post here.

The coronavirus crisis has left economists scrambling to rejigger their forecasts. In this note, we
briefly describe how forecasters have updated their outlook for the US economy, what sort of
data they use in their projections, and how economists link the public health outlook to the
economic outlook.
Even in normal times, forecasters have a tough job but do it well on average. For
example, analysis of a large data set on forecasts—the Survey of Professional Forecasters—shows
that forecasters are most accurate looking one quarter ahead, and beat simple model forecasts
like no-change forecasts or autoregressive models. Over a longer time horizon, the accuracy of
projections declines.
At the beginning of 2020, the Bloomberg consensus saw Q2 real GDP growing at 1.7%, and the
unemployment rate at 3.6% (following convention, the quarterly growth numbers we reference
are the annualized quarter-over-quarter growth rate). Before the crisis hit, the economy was
cooling slowly: growth in 2018, 2019, and 2020 (expected) was 2.9%, 2.3%, and 1.7%,
respectively. In a typical recession, the economy gradually adjusts to lower output and higher
unemployment via financial channels. But the virus, and especially the government response to
the virus, have accelerated the normal process as workers are laid off because they physically
cannot work safely.
Accordingly, consensus growth estimates quickly fell, as shown in Figure 1. From March 12 to
April 12, consensus Q2 growth fell 24 percentage points (pp) from 1.8% to -22%. The consensus
unemployment forecast in Q2 grew from 3.6% to 12% over the same period. As forecasters
downgraded Q2, they upgraded Q3—implying a sort of “V” shaped recovery. From March 12 to
April 12, Q3 estimated GDP growth grew roughly 8pp to 9.8%. News over the following month
revised Q2 forecasts even lower to -33.5% and an unemployment rate exceeding 16.5%. Putting
it together, expected growth for the full year fell from 1.7% to -5.8%.
Hidden in these point estimates is a tremendous amount of uncertainty, as shown in Figure 2.
The spread between the low and high forecast for 2020 full year growth was 2.9pp on January 1
and rose to 13pp by May. This level of dispersion in forecasts is unprecedented. Even in the
worst year (in terms of growth) of the global financial crisis, 2009, the maximum dispersion in
forecasts was 7pp.
Several high-frequency data points have become particularly important in recent weeks. A non-
exhaustive list of commonly used high-frequency indicators includes: Google Mobility Reports,
movie attendance, electricity utility generation, Redbook same-store retail sales, initial
unemployment insurance claims, fuel sales to end-users, the Rasmussen Consumer Index,
American Staffing Index, raw steel production, TSA traveler numbers, bankruptcy statistics, San
Francisco Fed’s news sentiment, and the list goes on. Google Mobility data is particularly novel,
as it provides granular location data, giving some sense of how strict lockdowns are and what
share of the labor force is staying at home. The Federal Reserve Bank of New York now releases
a Weekly Economic Index, which aggregates several high-frequency indicators to GDP units.

While each forecaster’s process varies, many use models like the IHS Markit’s Macroeconomics
Advisors’ MA/US model, or the Federal Reserve FRB/US model. Both models are large-scale
structural econometric models and produce estimates for all major categories in the US national
accounts. Reasonably, the models do not explicitly account for pandemics, nor do they expressly
embed epidemiological assumptions into their forecasts in normal times.
A common approach to producing forecasts during the COVID-19 crisis involves three steps.
First, the forecasters use high-frequency data to forecast granular industry-level effects—e.g.,
hospitals, outpatient care, hotels, food services, and car rentals. The step also involves

overlaying the government’s classification of “essential critical infrastructure workforce,” the
ability for an industry to work from home, and state-by-state lockdowns. Google Mobility data is
especially useful in capacity utilization estimates.
Second, the forecaster aggregates these granular location-industry specific forecasts to produce
shocks to aggregate demand components, which themselves can be fed into a model like
MA/US. The forecasters also need to make assumptions about fiscal stimulus, global growth
(excluding the US), and financial conditions. Often, the latter category includes assumptions
about short- and long-term Treasury yields. At banks and broker/dealers—where many private-
sector forecasters work—economists often take interest rate forecasts from their “interest rate
strategy” team, and so there is a nontrivial effort to make sure the different teams’ estimates are
internally consistent.
Third, the forecasters plug their aggregated shocks into the model. Armed with the resultant
GDP forecasts, many forecasters will use rules of thumb like Okun’s Law to produce
unemployment forecasts. For example, if the GDP projection implies a 10pp output gap, then
unemployment would increase 5pp—but the forecaster has to make a subjective judgment about
how quickly job losses will occur.
Complicating the forecasting process, official data is subject to more uncertainty now. For
example, the net jobs created by births and deaths are roughly stable, and the BLS models
account for this typically-flat relationship. The COVID-19 crisis breaks the validity of that
assumption, and so the BLS updated its model specifically in response to the challenges of the
crisis. Moreover, whether or not the BLS would impute zero employment for non-responding
companies was a first-order question for forecasters. Forecasting with considerable uncertainty
about the official data estimates’ methodology is not new, as experienced in the aftermath of
Hurricane Katrina and the October 2013 government shutdown. During the 2013 shutdown, the
BLS did not release payroll employment (ultimately releasing the report two weeks later), and
the Commerce Department suspended publishing construction spending and factory orders.
As the public health crisis continues and states contemplate relieving lockdown restrictions, we
look into what matters for macro forecasts—is it realized deaths, lockdown, or both?
The Goldman Sachs Effective Lockdown Index measures the intensity of virus control measures.
The daily lockdown index equal-weights two measures: a government policy measure and a
policy effect measure which are constructed using data from Oxford University’s Blavatnik
School of Government dataset on government virus policy measures and data from Google on
personal smartphone behavior, respectively.
In Figure 3, we plot the time series and weekly change in the lockdown index and actual deaths
in the United States, which is compiled by The New York Times and begins on January 21.
The lockdown index increased rapidly in early March as markets teetered, liquidity became
constrained, and the Federal Reserve announced rate cuts and other interventions. The increase
in the lockdown index occurred ahead of actual deaths, but since the peak weekly increase in
deaths, the weekly differences have been positively correlated: as new deaths decrease, the
lockdown index has declined.
Many epidemiology models forecast COVID-19 deaths. As economists, we are not experts in
assessing the best model, so we look to the COVID-19 Forecast Hub’s ensemble forecast, which
takes the average estimate across many models. This data includes forecasts for deaths 1- to 4-

weeks ahead: Figure 3 shows the ensemble 1-week forecasted deaths. The forecasts are plotted
by the target date, meaning that the forecast was made one week prior. The ensemble forecast
appears to move closely with actual deaths both in level terms and one-week changes. If the
ensemble forecast were 100% correct, the red dots would line up on the blue line
exactly. Importantly, the ensemble forecast is weekly and only begins in April, but as more data
comes out, market participants may look toward how forecasted deaths fluctuate with the
Lockdown Index and macro forecasts.
Empirically, both deaths and the degree of lockdown are correlated with macro forecasts. We
regress daily changes in consensus GDP and unemployment forecasts on daily changes in
deaths, lagged by one day, and we regress daily changes in the macro forecasts on daily changes
in the Lockdown Index, lagged by one day. We plot the regression coefficients in Figure 4.
Broadly the results highlight that as deaths and the lockdown increased, the consensus GDP
forecasts declined, and the unemployment forecasts notched higher.
The regression results coefficient says that for an increase of 1,000 new deaths is correlated with
a decline in Q2 GDP consensus forecast of 0.25pp, and a 10 unit increase in the lockdown index
is associated with a 0.44pp drop in the Q2 GDP forecast. Meanwhile, the Q2 unemployment
forecast increases by 0.14pp when deaths increase by 1,000 and by 0.16pp for a 10 unit increase
in the lockdown index.
Over a longer horizon, an increase of 1,000 new deaths is associated with a 0.05pp decline in the
2020 GDP forecast and a 0.08pp increase in 2020 unemployment rate. Unsurprisingly, the
coefficients show that lockdown and deaths hurt Q2 macro variables more than growth and
employment for the full year.
Of course, this back of the envelope analysis does not suggest that the key to boosting growth
and lowering unemployment is simply relaxing lockdowns. Economic outcomes follow the

public health crisis; lockdowns may have curbed deaths from ramping even higher. The virus
will continue to hamper growth and employment until the general public has confidence in the
ability to resume normal life. Thoughtful policy remains critical for both health and growth
outcomes.
Pandemics are thankfully rare enough that we have limited data to study the effects of a virus on
the economy. Data available from the Jordà-Schularick-Taylor Macrohistory Database give a
sense of the impact of the most notorious pandemic, the 1918 Spanish Flu, on the US economy.
It’s not possible, of course, to isolate the effect of the pandemic on the economy as many other
important events were simultaneously occurring: namely, the end of the Great War and
considerable inflation in the late 1910s.

We plot real GDP per capita and real consumption per capita relative to their pre-1918 trends in
Figure 5, panels A and B. Real GDP fell to a low of 11pp below trend. Consumption dropped
considerably from 1917 to 1921, amounting to a fall of about 20pp below trend. We also show the
real cumulative return for safe assets, including bonds and bills, and risky assets, including
housing and equities. In real terms, safe assets lost 35pp and risky assets 9pp, owing in part to
high levels of inflation. It’s not possible to ascribe these fluctuations to the 1918 Spanish flu
alone, but the exercise provides a useful historical benchmark.
The past 60 days of economic data have been historic in the worst way. An annual growth rate of
-6% means there has been, and will continue to be, tremendous human misery at levels unseen
in our lifetimes. Last week, Chair Powell noted:
John Kenneth Galbraith famously said that economic forecasting exists to make
astrology look respectable. We are now experiencing a whole new level of uncertainty, as
questions only the virus can answer complicate the outlook.
Consensus, however, is optimistic and forecasts a quick rebound in Q3—the “V” shaped
recovery. Let’s hope.

Lender beware: Emergency relief efforts are inherently risky
By Greg Feldberg and Sabeth Siddique
Original post here.

The coronavirus response puts American bankers in a tight spot.
More so than most developed countries, the government has put bankers in charge of life-or-
death decisions about private businesses. Banks and nonbank lenders have been allocating what
are essentially government grants through the nearly $660 billion Paycheck Protection
Program.
They will soon be expected to allocate hundreds of billions more through Fed and Treasury
programs that will require them to take more risk.
But banker-as-government-agent is not an enviable role. Lend too conservatively, and the
banker will be (or has been)criticized for putting shareholders, or favored clients, ahead of the
common good. Lend too freely, and losses may be higher than expected, leading to a need for
capital from the government before the end of the year.
To solve this dilemma, bankers and nonbank lenders can rely on the principles of risk
management and governance that they relearned the hard way during the last financial crisis.
To protect their institutions, bankers need to, first, provide clear guidance on risk appetite. Even
today, bank boards have an important role to play in reconfirming a bank’s strategy and risk
appetite — the level of losses that board members can endure and justify to stakeholders — and
making sure management prudently follows policies and procedures.
To be sure, risk appetite remains relevant. A bank can do its part to support the real economy
even if its board decides it will only extend credit through lending programs in which the
government has committed to take much of the risk. Or if it decides not to extend new credit at
all, but to focus on helping existing borrowers.
Bank risk managers aren’t epidemiologists. They don’t have special insights into how long the
health crisis will last.
However, their expertise should allow them to differentiate between borrowers with persistent
foundational issues and borrowers with only temporary issues. Authorities have acknowledged
this with clear guidance that banks should not automatically downgrade borrowers who miss
payments.
Lending or restructuring decisions should be based on sound underwriting criteria, with a clear
understanding of the board’s risk appetite while paying attention to the current environment
and the mitigating effects of government assistance.
Management can expect elevated losses and depletion of capital buffers. The challenge is to not
allow those losses to put the safety and soundness of the institution at risk. Specifically,
operating at or near the institution’s post-stress capital target should be consistent with the
board’s risk tolerance in this environment. Some banks have already warned that capital ratios
are likely to decline from recent high levels.

The depth and length of this recession are very uncertain, depending on public-health variables
that no one can predict. Banks should be vigilant in identifying, assessing and reporting risks
commensurate with the speed and magnitude of the changing-risk environment.
Banks need these ongoing assessments to translate risk appetite into tangible metrics such as
exposure limits and underwriting criteria. Risk managers should scrutinize the reliability of
model outputs, mitigating model risks with qualitative factors when applicable.
Data on historical loan losses and backward-looking statistical scoring models won’t be very
helpful. Judgment will likely play a greater role.
Bankers should also carefully balance “micro” and “macro” pressures. Supervisors have focused
increasingly on banks’ responsibilities to the public since the financial crisis.
In its annual stress test, for example, the Federal Reserve says it expects every bank’s
management to “establish post-stress capital goals that are aligned with its risk appetite and risk
profile, its ability to act as a financial intermediary in times of stress, and the expectations of
internal and external stakeholders.”
Governments today are striking a delicate balance between their “microprudential” role (to keep
banks solvent), and their “macroprudential” role (to support the real sector). In a crisis, the
macroprudential role must take center stage. But bankers, backed by good governance, should
know best how to strike the balance.
In the early stages of this crisis, no decision of each bank’s board has been more sensitive than
the question whether to suspend the payments of dividends to shareholders. In the U.S.,
supervisors have so far hesitated to tell banks to suspend. And, so far, banks have not done so.
In contrast, there was a diversity of responses to supervisors’ guidance on the allowance for loan
losses. Some banks took advantage of the forbearance to conserve capital by delaying their
application of the new “lifetime loss” standard.
Others held to the standard, conservatively reserving for the worst. Both answers may be
appropriate, based on each bank’s unique business profile.
Finally, don’t forget reputational risk. Of course, bankers entered this crisis with more goodwill
than last time. But, like the liquidity and capital buffers they have built since the 2008 financial
crisis, that goodwill can be quickly spent if not managed.
Already, it is clear that the public will be very sensitive to credit allocation decisions that appear
unfair or prejudicial, especially when bankers are allocating taxpayer funds. There are also the
matters of compensation, bonuses and shareholder dividends while so many are suffering.
In summary, banks have the tools to determine their fate this year. Their public-service role —
the justification for both the benefits and the costs of their unique regulatory framework — is
never more clear than in the depth of a crisis like this.
Following risk-management principles and knowing when to say “no,” bankers may be able to
get through this early phase of the coronavirus-triggered recession intact.
It won’t be easy. It will require hard-headed analysis of risks amidst extreme uncertainty and
constant reevaluation of the conflicts and complements between stakeholder and public

interests. It will also require the fortitude to make decisions backed by sound judgment and
leadership, consistent with each bank’s risk appetite.

Use of Federal Reserve Programs - 05/28/2020
Original post here.

Below we report on operational Fed programs, based on the Fed’s weekly H.4.1
release. Since last week the Municipal Lending Facility has started operations;
however, no funds have been extended so far. Treasury has contributed $66.5
billion in CARES Act funds to four Fed lending facilities to date.
Note on Treasury contributions to Fed facilities
The Treasury announced on April 9 that it intended to use funds available under the CARES Act
to purchase equity in special purpose vehicles established under Fed lending programs. As of
May 28, the Treasury invested a total of $66.5 billion in four facilities: equity investments of $10
billion into Commercial Paper Funding Facility LLC II, $37.5 billion into Corporate Credit
Facilities LLC, and $17.5 billion into Municipal Liquidity Facility LLC; and $1.5 billion in credit
protection for the Money Market Mutual Fund Liquidity Facility.
Per the facility agreements, 85% of the equity contributions to the CCF and CPFF have been
invested in nonmarketable Treasury securities; $31.9 billion for the CCF and $8.5 billion for the
CPFF. These investments are reflected in the balance of the CCF and CPFF. This week’s
increases in the outstanding amounts for the CCF and CPFF thus largely reflect investments in
Treasury securities, rather than in corporate bond or commercial paper holdings. The equity
contributed to the MLF on May 26 has not been invested yet.

Liquidity Swap Lines
The USD swap lines are bilateral agreements between the Fed and foreign central banks. They
allow foreign central banks to exchange domestic currency for US dollars. The Fed currently
maintains swap line agreements with 14 central banks.
Money Market Mutual Fund Liquidity Facility
The MMLF allows the Fed to fund the purchase of money market mutual fund assets. The
program is established under section 13(3) of the Federal Reserve Act. The Fed reported that the
U.S. Treasury, to date, has provided credit protection of $1.5 billion to the Money Market
Mutual Fund Liquidity Facility.
Discount Window
The DW is a standing facility that allows the Fed to provide collateralized loans to depository
institutions.
Primary Dealer Credit Facility
The PDCF allows the Fed to extend collateralized loans to primary dealers. The facility was
established under section 13(3).
Paycheck Protection Program Liquidity Facility
The PPPLF allows the Fed to provide financial institutions with liquidity backed by loans to
small and medium businesses extended under the federal government’s Paycheck Protection
Program and guaranteed by the Small Business Administration. The Program was established
under section 13(3).

Commercial Paper Funding Facility
The CPFF provides a liquidity backstop to issuers of commercial paper and was also established
under section 13(3). It is operated by the FRBNY through a special purpose vehicle, the
Commercial Paper Funding Facility II LLC (CPFF LLC). The Treasury has made an equity
investment of $10 billion in CPFF LLC.

Primary and Secondary Market Corporate Credit Facilities
The PMCCF and SMCCF were set up under section 13(3) to support credit to employers through
purchases of newly issued bonds and support market liquidity for outstanding corporate bonds.
These facilities operate through a special purpose vehicle, the Corporate Credit Facilities LLC
(CCF LLC). The Treasury has made an equity investment of $37.5 billion in CCF LLC.
Municipal Liquidity Facility
The MLF provides liquidity to states, counties and cities. The facility was set up to purchase up
to $500 billion of short-term notes and was established under section 13(3). The Treasury has
made an equity investment of $17.5 billion in MLF LLC.

HEROES Act would provide $3 trillion in additional benefits but unlikely to
progress
By Priya Sankar
Original post here.

The $3 trillion Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act ,
which the House of Representatives passed on May 15, is the fourth and largest legislative rescue
package proposed by the US Congress in response to the COVID-19 pandemic. It would help to
mitigate the economic impact of continued shelter-in-place orders and soaring unemployment
rates.
Some key allocations of the HEROES Act include:
• $915 billion to state, local, tribal and territorial governments
• $650 billion for additional Economic Impact Payments to individuals
• A $200 billion fund for hazard pay to essential workers
• $100 billion in grants to low-income renters
• $100 billion in support to state education programs
The HEROES Act allocates $500 billion in direct, flexible aid to state governments, $375 billion
to local governments, $20 billion to tribal governments and $20 billion to US territories.
The HEROES Act calls for a second round of Economic Impact Payments (EIP) to individuals,
and would provide $1,200 for each dependent without regard to age, up to three dependents per
family. The bill retains the $1,200 payment per individual for a potential maximum of $6,000
per two-parent family. The CARES Act limited dependent benefits to $500 per child under 18.
Both the CARES Act and the HEROES Act reduce the amount of the payment above certain
income thresholds. Because its benefits to those with dependents are greater, the HEROES Act
would provide a reduced benefit to some persons who would not receive a payment under the
CARES Act. The Act appropriates $650 billion for EIP payments as compared to the $292
billion estimated cost of similar payments under the CARES Act.
The HEROES Act also supports families with $10.1 billion for child care and other services like
support for utilities for low-income families. Emergency family medical leave would be extended
from December 2020 to December 2021. This is a marked increase from the CARES
Act allocation of $3.5 billion for the child care development block grant to states.
The bill would establish a $200 billion “Heroes’ Fund” to provide hazard pay to essential
workers. Employers could apply for grants to provide their employees with a $13 per hour
premium in addition to their regular wages, up to a total of $10,000 per employee, or $5,000 for
highly compensated essential workers. The bill also would appropriate $850 million so states
can provide child care for essential workers; other provisions would increase the production and
availability of personal protective equipment.
Supplemental unemployment benefits of $600 per week, which the CARES Act provided
through the end of July, would be extended until January 2021.

The HEROES Act would set aside over $14 billion in food aid, including $10 billion to support
increased use of SNAP benefits, $3 billion for child nutrition programs, and $1.1 in food
assistance for women, infants, and children.
The HEROES Act also would set aside funds for renters and homeowners. The CARES Act had
provided that individuals could take advantage of forbearance for their rent and mortgage
payments for up to one year for properties financed with federal government guarantees. Title II
of the HEROES Act would allocate $100 billion in grants for low-income renters at risk of
eviction once that forbearance ends. It also would provide $75 billion for states, territories, and
tribes to distribute to homeowners for mortgage assistance and other housing costs.
The bill also would provide $10 billion in grants to small businesses that have suffered losses
due to the pandemic. It would ease many of the requirements for small business loans,
providing flexibility in payment deferrals, waiving fees, and increasing the guarantee provision.
It also would increase the employee retention tax credit from 50% to 80% of applicable wages.
The bill also calls for extending the CARES Act student loan payment plans to those who
borrowed from private lenders, providing up to $10,000 in relief to be applied to such loans,
paid monthly until September 2021. In addition, $100 billion would go to states to support
education programs.
The HEROES Act would support the United States Postal Service with $25 billion, as it would
otherwise run out of money this autumn. This money is available until September 2022, and
would also support providing personal protective equipment for postal workers.
The bill calls for over $30 billion to support transportation, both for highways and for support to
transit agencies to maintain basic services.
The bill sets aside $75 billion for additional COVID-19 testing, contact tracing, and treatment
efforts, aiming to ensure that all Americans could receive COVID-19 treatment for free. It also
supports the National Institutes of Health with $4.7 billion, the Center for Disease Control with
$2.1 billion, underserved populations with $7.6 billion, and the Indian Health Service with $2.1
billion.
The bill proposes $16.5 billion be set aside for direct grants to agricultural producers.
The bill would allocate $3.6 billion in grants to states to support election security efforts.
The bill is viewed as partisan, as it passed the House with mainly Democratic support. It is not
expected to become law. "Instead of going big, it seems you went crazy. This is a political
messaging bill that has no chance of becoming law," House Minority Leader Kevin McCarthy, R-
Calif. said on the floor. The Trump Administration does not support the bill. The White House
issued a statement saying: “This proposed legislation, however, is more concerned with
delivering on longstanding partisan and ideological wishlists than with enhancing the ability of
our Nation to deal with the public health and economic challenges we face.” While Senate
Majority Leader Mitch McConnell has refused to consider the bill, he stated on May 30 that the
Senate would likely consider a “4th and final” stimulus bill “in about a month” and that the focus
would be on jobs and schools and possibly additional assistance to small businesses.

Allocation Purpose
$915 billion Aid to state, local, territorial, and tribal governments
$650 billion Direct payments to individuals and dependents
$200 billion Heroes’ Fund - Hazard pay to essential workers
$14 billion Food aid - including SNAP benefits and child food aid
$100 billion Grants for low-income renters
$10 billion Grants to small businesses
$100 billion Support to state education programs
$25 billion Support to US Postal Service
$30 billion Support for transportation including highways and transit agencies
$75 billion COVID-19 testing, contact tracing, and treatment
$4.7 billion National Institutes of Health
$2.1 billion Center for Disease Control
$2.1 billion Indian Health Service
$16.5 billion Direct grants to agricultural producers
$3.6 billion Grants to states for election security efforts

Countries Propose Catastrophe Insurance Through Public-Private
Partnerships
By Vaasavi Unnava
Original post here.

On May 26, Congresswoman Caroyln Maloney introduced the Pandemic Risk Insurance Act of
2020 (PRIA). The PRIA would provide a framework for insurers to supply business interruption
insurance to businesses affected by the COVID-19 pandemic. Insurance companies that choose
to participate would offer pandemic coverage to businesses and, should aggregate insurance
industry losses exceed $250 million, the federal government would cover most of the losses.
Business interruption insurance provides insurance for losses caused by natural disasters or
catastrophes. In the context of the PRIA, insurers would provide business interruption
insurance for pandemic-related losses. In addition to pandemic-related losses, the bill would
also cover event cancellations, including awards shows, film and TV productions, and sporting
events.
The structure of the PRIA would closely follow the Terrorism Risk Insurance Act of 2002
(TRIA), which was passed to make terrorism insurance available to businesses in the U.S.
economy while protecting insurers’ solvency. Like the TRIA, the PRIA federal backstop has an
annual cap, though the PRIA’s $750 billion cap far exceeds the TRIA’s $100 billion.
Under the PRIA, insurers would pay a 5% deductible (measured as 5% of direct earned
premiums from the previous year) before the federal government provides any aid for losses
incurred from business interruption insurance policies. The TRIA has a 20% deductible. After
the deductible is reached, the government would pay 95% of additional costs and the insurer
would be responsible for a 5% copay; under the TRIA, the copay increased stepwise from 10% in
the first year to 15% until ultimately setting a copay of 20%.
Participation in the PRIA would be voluntary. The TRIA required insurance companies to
include terrorism insurance in all commerical policies for two years after the legislation passed.
The PRIA complements other proposals in the United States. Congressman Mike Thompson
proposed the Business Interruption Insurance Coverage Act of 2020, which would require
insurers to make business interruption insurance broadly available to businesses, though the bill
has not progressed since its introduction in April. Industry groups have proposed the Business
Continuity Protection Program (BCPP). The BCPP would allow businesses to purchase revenue
replacement insurance from state-regulated insurance entities. The insurers would participate
on a voluntary basis and funding would come from FEMA as a direct subsidy. Viral emergency
declarations would automatically trigger payments. While some industry groups have put forth
their own plan, others have endorsed the PRIA..
Similar to the PRIA, other legislative proposals around the world seek to revitalize or revamp
frameworks used for catastrophe insurance funding. In the United Kingdom, the insurance
industry is working with Pool Re, an insurance pool established in 1993 to act as a terrorism
reinsurance fund. The British government established Pool Re to provide policy-level
reinsurance to terrorism insurance policies through a government guaranteed reinsurance pool.

The program has faced criticism for its slow administration, its vulnerability to system-wide
shocks, and tendency to crowd out private actors.
The Federation of European Risk Management proposed a similar public-private partnership for
insurance companies in the European Union, which would specifically tailor contracts to cover
events categorized as “non damage denial of access” events--where businesses have lost
revenues due to denial of access to services rather than physical damage--similar to events
covered under business interruption insurance in the United States. France is currently
developing a series of proposals for a federal insurance backstop, which includes repurposing
the structure of its existing public-private partnership for natural disasters called the Caisse
Centrale de Reassurance (CCR). It has provided terrorism insurance since the terrorist attacks
of 2001.
In April, economists Samuel Hanson, Jeremy Stein, Adi Sunderam, and Eric Zwick published
a proposal suggesting the provision of “business continuity insurance” targeted to companies in
the greatest need. The authors propose to evaluate need by utilizing income reporting from the
previous year’s tax documents to examine firm capital stock as well as industry-level shortfalls.
Another proposal of theirs suggests providing low-cost junior subordinated loans to firms based
on the same targeting metrics.
These proposals contrast with the World Bank Pandemic Emergency Financing Facility’s
catastrophe bonds, issued in July 2017. Catastrophe bonds are high-interest financial
instruments that stop making payments to investors the moment a catastrophe happens. The
World Bank’s catastrophe bonds have faced criticism for their relatively low payout and high
financing costs. In addition to other criteria like rolling case totals (rolling daily averages) and
number of deaths, only an exponential growth rate of a coronavirus would trigger the bonds’
payout; this year, global statistics met conditions to trigger halting interest payments for the
bonds only on April 19, nearly 40 days after the WHO officially characterized COVID-19 as a
pandemic.
Other attempts to hedge the systemic risk of a system-wide catastrophe include the creation
of insurance-linked securities, such as sidecars. Sidecars cede premiums to investors with
enough capital to ensure that claims are paid should they arise.

Understanding Parametric Triggers in Catastrophe Insurance
By Vaasavi Unnava
Original post here.

In the midst of a global pandemic, many businesses are finding that their property and casualty
insurance policies do not provide protection against business losses resulting from the
pandemic.
Some property and casualty policies do include business interruption insurance, which provides
supplementary coverage against interruptions to revenue flows due to external disruptions.
However, business interruption insurance typically excludes coverage for viral perils--that is,
threats to revenues due to viral outbreaks that force businesses to close in the interest of public
safety.
A small niche has emerged for epidemic insurance in recent years, in the wake of the SARS,
MERS and Ebola outbreaks. However, few businesses purchased it. Moreover, even under such
policies, businesses may face lengthy litigation attempting to prove coverage or the amount of
benefits owed from insurance companies.
Not every catastrophe results in the delays and challenges that characterize a claim
under business insurance policies due to COVID-19. For years, insurers have utilized
parametric triggers--explicit conditions that, once met, automatically trigger coverage--to
provide catastrophe insurance in the event of flooding, hurricanes, or earthquakes. Insurance
companies have also used parametric triggers for pandemic and epidemic policies written
during the Ebola and zika outbreaks.
Such triggers are especially useful for quick deployment of payments; traditional
indemnification claims can take several weeks to process compared to the near immediate
payments issued through parametric policies. Additionally, as a bulk of parametric insurance
policies payout an already agreed-upon sum, policyholders spend less time attempting to
determine the extent to which their policies cover their losses. In the context of pandemics, the
quick payments to businesses may provide the necessary capital for businesses to install safety
equipment or purchase necessary safety supplies. Quick payments may also keep businesses
with high fixed cost commitments afloat during quarantine or social distancing measures.
This blog discusses two types of parametric triggers utilized in business interruption insurance:
statistical parameters and civil authority orders. Many proposals for business interruption
insurance in a pandemic landscape rely on parametric triggers that begin payouts by the status
of civil authority orders. Other proposals rely on externally generated statistics through
statistical parameters to determine when payouts should begin. Both of these triggers may
provide a useful framework for building business insurance policies for pandemics.
Statistical Parameters
Statistical parameters require measures to meet or exceed a specific statistical threshold before
coverage payouts begin. These triggers often rely on third-party consultants to determine
whether the trigger has been satisfied.

These triggers are typically utilized in catastrophe bonds and insurance-linked securities,
instruments connected to insurance-related risks that provide issuers funding for specific
events, such as tornadoes or hurricanes, as a type of reinsurance. There are several metrics
which insurance companies may use.
Catastrophe bonds, bonds issued with the stipulation that the issuer no longer pays principle or
interest to investors if certain conditions are met, may halt payouts based on the strength of the
covered catastrophe, such as an earthquake’s magnitude or a hurricane’s wind speed and
barometric pressure.
Insurance-linked securities include mortality swaps, investment products where cash flows
depend on a mortality index. Other insurers use parametric triggers for business interruption
insurance, such as the rate of hotel bookings in comparison to year-on-year averages or the
measures of footfall in pedestrian areas.
For pandemic and epidemic insurance, the epidemic data analytics firm Metabiota developed a
pathogen sentiment index to measure the effects of fear on drops in consumption. While some
parametric triggers rely on one datapoint, others are based on an index of available data to
determine when the policy payouts can begin.
Parametric triggers often utilize externally determined statistics for triggers. For example,
the World Bank Pandemic Emergency Financing Facility’s (PEFF’s) catastrophe bonds relied on
publicly available data to determine how much money the facility would release. According to
the World Bank, “[the] triggers are based on outbreak size (the number of cases of infections
and fatalities), outbreak growth (over a defined time period), and outbreak spread (with two or
more IBRD/IDA countries affected by the outbreak.” Payout occured after all three conditions
were met.
Similarly, Springboard, an independent firm, generates the footfall metric utilized by Aon,
which measures changes in pedestrian traffic. The footfall metric could be particularly helpful in
determining unexpected business losses due to drops in consumer sentiment; for example, it
could have been used in 2018, when a fake terrorist report caused £3 million in losses to London
retailers.
However, though parametric triggers are unambiguous, they may not necessarily result in timely
payouts. The World Bank’s pandemic catastrophe bonds, issued in July 2017, utilized a series of
parametric triggers to determine when payments would begin. Once trigger conditions were
met, funding from the bond issuance was made available to 77 countries through the PEFF’s
insurance window. Payouts required a slew of conditions: 1) a rolling daily average of at least
250 cases; 2) the virus to exist for at least 84 days; 3) total confirmed deaths to be greater than
250 cases (for class B issuances) or 2,500 cases (for class A issuances); 4) an exponential growth
rate; and 5) geographic spread of the virus.
The World Bank’s pandemic bonds have faced criticism for their relatively late payout. With the
number of elements making up the parametric triggers, global statistics met conditions to
trigger halting interest payments for the bonds only on April 17, nearly 40 days after the
WHO officially characterized COVID-19 as a pandemic.
Used thoughtfully, these triggers hold promise as a means of efficiently triggering payouts to
business interruption insurance policyholders in the case of a global pandemic by providing a
means of speedy coverage determination.

Civil Authority Parameters
Within pandemic and epidemic insurance, insurers may rely on local decrees to determine
payouts. During viral breakouts, cities and municipalities may institute lockdown or social
distancing orders. In 2014, during the Ebola outbreak, NAS Insurance, an American
insurer, provided business interruption insurance that would automatically pay out if there was
a mandatory shutdown ordered for the area specified in the policy. To account for mobility, the
Insurance Services Office (ISO), an insurance advisory organization, proposed a new policy
endorsement in response to COVID-19 that also triggers coverage if civil authorities suspend
travel services in the area where the business is located.
The Caisse Centrale de Réassurance (CCR), a French publicly administered reinsurance
company, demonstrates an interesting implementation of local decree triggers through a public-
private reinsurance program. Like the insurance policies outlined above, insurers (reinsured by
CCR) automatically begin payouts to policyholders once a local government declares an
emergency and the policyholder meets a deductible. However, the size of the deductible changes
based on the number of times the local government has declared an emergency for the same
catastrophe event in the previous five years. The standard deductible will apply for the first two
incidents and will rise with each succeeding incident to four times the standard deductible for
the fifth incident in a five year period.
Many proposals aimed to protect businesses from losses resulting from a possible second wave
of the virus incorporate civil authority response triggers to determine when funding should be
provided to businesses. An insurance industry proposal, entitled the Business Continuity
Protection Program, only pays out once a state or local government orders a shutdown. As
mentioned above, the ISO COVID policy endorsements trigger payment exclusively based on
civil authority decrees. Munich Re’s product, Pathogen RX, triggers if a government orders a
shutdown or travel ban.
Civil authority triggers provide a strategy to account for non-physical damages, which most
business insurance policies do not currently include in their coverage. Courts have repeatedly
held under common policy wording that the following types of incidents were not covered:
government action that negatively impacted the insured without physical damage to the insured
property or an adjacent property, government action predating any physical damage, physical
damage not resulting from a covered event, and when government orders did not actually
prohibit customers from entering the property. By instituting civil authority triggers, physical
damages would no longer be a necessity when responding to the economic consequences of a
pandemic.
While civil authority triggers can be indicative of the extent to which pandemics have affected
the local economy, some cities may lift quarantines and social distancing guidelines before
individuals feel safe enough to participate in the economy again. Cities in a rush to reopen may
still experience depressed sales and slow economic growth as consumers and employees are
cautious about returning to normal activities. Fear of the spread of COVID reduced
consumption even before government shutdown orders came into effect, indicating that
government shutdown triggers alone may not be enough to define periods of lost revenue due to
pandemic fears. Under traditional indemnification, losses due to lack of consumption may not
be completely captured if relying exclusively on civil authority triggers. However, automatic
payments of predetermined sums common to parametric insurance addresses some of the
difficulties in determining the scale of losses.

Debt Mounts for US Retail and Lodging Mortgagors
By Corey Runkle
Original post here.

Government-mandated shutdowns in response to the novel coronavirus have triggered
delinquencies among commercial mortgages as businesses struggle with revenue. The purpose
of this article is to characterize the risks to US commercial real estate posed by COVID-19
responses. Due to reporting incentives, data on mortgages packaged into commercial mortgage-
backed securities (CMBS) is more accessible and granular than data on the whole commercial
mortgage market. Even though CMBS-associated properties constitute just 20% of outstanding
multifamily and commercial debt, the data generated by such properties can indicate how the
whole commercial real estate sector may be affected. On June 4, commercial real estate research
firm Trepp reported its largest jump in delinquencies among mortgages involved in the $1.4
trillion CMBS market, with the rate spiking from 2.29% to 7.15%.
There is real stress on commercial landlords. But that stress sits narrowly within the commercial
market. The same Trepp report disaggregated delinquencies, noting nearly 20% of lodging, and
more than 10% of retail mortgages were delinquent in May. Less than 4% of multifamily, office,
and industrial mortgages were delinquent over the same period. Despite historically high
unemployment, government stimulus supports have perhaps helped sustain rental payments.
Publicly traded equity real estate investment trusts (REITs) invested in apartments collected at
least 93% of rents in April, with most trusts collecting 95% or more. Meanwhile, offices continue
to operate remotely, and warehousing has become more valuable as delivery services take on
new importance.
Retail shows signs of life
The speed at which consumers return to retail and lodging will factor importantly into the
viability of mortgages in those sectors. The same data on publicly traded equity REITs reports
rent collection figures for several owners of regional malls and shopping centers. Overall,
between 50% and 65% of April rents were collected in shopping centers, while regional malls
collected just 26% to 30% of rental payments.
As states re-open, rent payments may increase quite quickly. In Arizona, Florida, Georgia, and
Texas, as of June 2, retail foot traffic had already surged from its April nadir, but only to 38-52%
of 2019 levels. Retail nationwide grew 17.7% in May, beginning to make up for sales contractions
in March and April of 8.3% and 14.7% respectively. Further, the distribution of volume among
types of businesses is unknown. The lockdowns have already caused the bankruptcy of JC
Penney and Hertz, with AMC movie theaters currently being threatened. But stock data
indicates that investors believe retail real estate has already bottomed out. After crashing in late
February, prices of several large mall operators and REITs have stabilized and trended up.

The market’s gradual recovery may have been informed by other indicators than the overall
delinquency rate. Though 7.15% of securitized commercial mortgages were delinquent in May,
70% of those were only one month late. Trepp noted that a large number of mortgages remained
in their 30-day grace period or actually reverted to current on their payments, though
historically high delinquencies should still be expected.
Despite these expectations of recovery, the woes for commercial real estate may have just begun.
Financial Times pointed to June as a crucial test for businesses, since debt two months late often
triggers serious penalties. Moreover, data collected by the Federal Reserve Bank of St. Louis

since 1991 show commercial delinquencies spiking as recessions end (Fig 2). Moreover, bond
prices for CMBS exposed to lodging have tumbled. The same Financial Times article noted that
BBB-rated tranches exposed to lodging shed approximately 40% of their value since early
March. The asset specificity of hotels only lowers the value of real estate already faced with
structural devaluation by services such as Airbnb.
Support for commercial real estate must proceed carefully

Landlords and owners are navigating treacherous waters should commercial tenants require
serious rent assistance. While CMBS loans tend to be non-recourse, it is standard practice for
loans to feature “bad boy” covenants designed to guard against principal-agent risk. Such
covenants provide recourse in the event that borrowers commit actions that (in normal times)
are irresponsible. Real estate attorneys point to two such actions in particular: significant rent
renegotiation, and taking on senior indebtedness without investor consent.
US programs have thus far steered clear of these debt covenants, and offer viable channels
should further support be authorized. The Payroll Protection Program (PPP), offering forgivable
and unsecured loans to businesses, recently expanded the amount that could be used for non-
payroll expenses to 40%, opening the door to rent support. Borrowing terms for the three
programs under the Main Street Lending Program have also eased. The Priority and Extended
lending facilities (MSPLF and MSELF, respectively) require loans to be secured, and prohibit
subordination, but carve out exceptions for outstanding mortgage debts.
Given that these programs appear to avoid the dangers posed by “bad boy” covenants, it seems
likely that strained borrowers are equipped with the resources to secure credit lifelines to at
least prolong defaults for several more months. On the other hand, it seems unlikely that the
Federal Reserve (Fed) would engage private CMBS markets in a more direct fashion. Thus far
only two Fed actions support private CMBS. In March it included agency CMBS in its plan to
make Open Market Desk purchases of $200 billion of MBS, and in April it expanded the eligible
collateral for the Term-Asset Securities Lending Facility to include AAA tranches of CMBS. A
previous YPFS article found that the Fed’s purchasing announcement had a positive effect on
agency mortgage REITs (mREITs) while having only minimal effects on non-agency residential
mortgage REITs.
Equity REITs face different issues, principally those of eligibility and restrictions on usage.
While property management companies are eligible for both PPP and MSLF loans, it
is unclear as to whether equity REITs are eligible. They may violate the Small Business
Administration’s rules making ineligible for loans “developers and landlords that” generally “do
not actively use or occupy the assets acquired or improved with the loan proceeds.” However,
equity REITs have applied for, and received PPP loans, potentially pushing this issue to the
oversight bodies authorized by the CARES Act.
Additionally, the CARES Act prohibits the payment of dividends by corporations receiving
support. While several programs have received blanket waivers from the Treasury Department,
the Main Street Lending Facility has not. The legal structure of REITs requires the payment of
dividends, and many REITs have opted to pay mostly in stock. REIT trade associations
have already written to the Treasury Department requesting a waiver for this particular case,

while the Internal Revenue Service has reprised rules adopted during the Global Financial
Crisis, allowing REITs to hold (and therefore distribute) less cash.
The New York Times highlighted name-brand tenants--Gap, LVMH, Starbucks--that had
stopped paying rent and started renegotiating leases. The article noted that “the strongest
tenants — those most able to pay — are driving the hardest for a discount.” When renters know
that the options for landlords are either lease renegotiation or a total loss of income, those with
the ability to pay may augment the demands of those that cannot pay, further pressuring
landlords.
A Deloitte report noted that real estate development had flagged, with more than half of US
construction firms surveyed halting projects. Social distancing rules precipitated decreased
demand and disrupted construction sites. Commercial real estate’s sensitivity to economic
downturns compounded the effects of decreased demand. The Deloitte report suggested that
developers adapt rental properties to meet the needs of a changed society and strengthen
resilience to future pandemics. The shock to brick-and-mortar businesses is likely to accelerate
permanent transitions to online retail, work, and customer service across sectors. While several
large companies have started these transitions, they will likely take several years to complete.
Such a timeframe would flatten and spread the risks to commercial real estate finance.
In contrast, the greatest short-term risks posed by US commercial mortgages sit narrowly in
lodging and retail, though high-turnover coworking spaces have already seen slashed revenues.
CMBS-associated mortgages account for one fifth of outstanding commercial debt. While data
are more widely and finely available for properties underlying CMBS loans, concerns similar to
those discussed above exist with respect to non-securitized commercial mortgages. Where
investors are exposed to lodging, prices have slumped, and questions abound regarding the
sector's long-term viability as nearly 20% of the CMBS-associated mortgages were reported
delinquent in May. Retail activity is growing, but there is concern as to whether the recovery will
be fast enough to stave off default in a sector with more than 10% of securitized mortgages in
delinquency, which could hamper the real economy’s general pace of recovery.

Appendix

Coronavirus Financial Response Tracker Project Overview
Past - Where we’ve been

• Covid-19 Financial Response Tracker (CFRT)
o Created list of 50 countries/multilateral institutions to track economic
interventions with regard to financial stability, covering both emerging and
developed markets
 G20, EU, major economies in Asia and Africa, international financial
institutions (e.g. IMF, ADB)
o Located significant links to identify policies through press releases and primary
documents
o Produced a rough template to categorize interventions based on
policy characteristics and targets
o Designed a Qualtrics survey to migrate CFRT from Google Sheets for more
efficient data entry and backend processing
o Revised and expanded CFRT entry methodology to reflect comprehensive
understanding of each intervention
• CFRT-related projects
o Piped the CFRT Google Sheet to a visualizer
 Visualizer created through Microsoft PowerBI
 The file pulls data from the CFRT and refreshes daily
o Reached out and responded to institutions and other researchers doing similar
intervention-tracking work:
 Professor Allison Hartnett of the CoronaNet Project
• Pan-government, pan-policy initiative by researchers across the
world (notably Yale and NYU-Abu Dhabi) attempting to track all
Covid-related government policies around the world
• Shared materials and guidelines with YPFS (all of which are
available for free on their website)
 Yale’s Research, Clinical, and Data-Driven Response Project
• “As part of Yale’s research, clinical, and data-driven response to
the COVID-19 pandemic, researchers in medicine, nursing public
health, engineering, and the social sciences have teamed up to
create https://covid.yale.edu. This project includes geospatial
maps to visualize large data sets in unique and interesting
ways...”

• YPFS has made it past the initial screening
Present and Ongoing - Where we are now

• CFRT
o Recording daily updates for the live CFRT spreadsheet (currently two-way split)
o Finalizing taxonomy and stress-testing against backlog
o Integrating Qualtrics features to support new projects based on the updated
framework
o Figuring out a way to download all the links on the pool drive
o Checking the daily links email update for quality-control purposes
o Thinking through systemic overhaul of project management on the backend
o Corresponding with the Yale School of Medicine regarding our application for the
GIS mapping project
o Composing a standard operating procedure (SOP) for data entry that’s geared
toward incoming RAs and MBAs
Future - Where we’re going

• Generally
o Define the scope and timeline of the CFRT and related projects
o Set daily and long-term expectations against the project plan
o Delegate and rigorously define roles according to above expectations
o Conduct quality control checks along the way and at all levels
o Implement JIRA and Confluence in order to:
 Streamline backend communications
 Develop an effective shared filing system
 Manage Qualtrics updates and changes
 Compose a living SOP handbook for RAs and MBAs
• CFRT
o Workflow
 Create a training video on Qualtrics data entry to show the MBA students
prior to their start date

 Make the tracker entry process as efficient and sustainable as possible
 Code a daily pull from Qualtrics to email the team daily additions
o Function
 Decide how to provide the team with access to the Qualtrics data for case
writing purposes
 Decide how to display Qualtrics data on the YPFS COVID site
 Improve upon Adam’s ‘Cross-Reference’ spreadsheet for clarity and
scalability
o Standardization
 Add more sources for institutions that we may have missed
 Fill out the checklist
• China, Oman...others?
• Insurance companies and other important regulators
o Cross-reference
 Compare and contrast CFRT features and entries to other institution’s
existing trackers in order to improve our own comprehensiveness and
functionality
• See Tracker Tracker
o Re-work Power BI visualization in order to integrate newly added Qualtrics
survey data
• Ideally, we’d like to model our tracker on the robust database created over at CoronaNet

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COVID-19 Handbook

Yale Program on Financial Stability

As of June 23, 2020

COVID-19 FINANCIAL RESPONSE TRACKER ..................................................................................7

CRITICAL INDUSTRIES ......................................................................................... 9

LIQUIDITY AND MARKET LIQUIDITY .................................................................22

MACROPRUDENTIAL POLICY ............................................................................. 73

YALE PROGRAM ON FINANCIAL STABILITY | 2

MORTGAGE RELIEF ........................................................................................... 121

MULTINATIONAL ORGANIZATIONS ................................................................. 141

SMALL AND MEDIUM ENTERPRISES (SMES) ................................................... 179

ANALYSIS ................................................................................................................................. 180

YALE PROGRAM ON FINANCIAL STABILITY | 3

SUPPORT FOR INDIVIDUALS ............................................................................ 272

ANALYSIS ................................................................................................................................. 273

YALE PROGRAM ON FINANCIAL STABILITY | 4

ANALYSIS ................................................................................................................................. 306

MISCELLANEOUS TOPICS ................................................................................. 313

CORONAVIRUS FINANCIAL RESPONSE TRACKER PROJECT OVERVIEW ....................................... 384

YALE PROGRAM ON FINANCIAL STABILITY | 5

YALE PROGRAM ON FINANCIAL STABILITY | 6

• Bankruptcy Law and Macroprudential Policy

YALE PROGRAM ON FINANCIAL STABILITY | 7

• View Paycheck Protection Program (PPP) Timeline

2020 YPFS Preliminary Discussion Drafts

• Explore YPFS Preliminary Discussion Drafts in our Resource Library

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YALE PROGRAM ON FINANCIAL STABILITY | 9

Aid to Airlines and other Critical Industries During Crises

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US Begins Airline and Aviation Interventions

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Price per Related

Alaska Airlines*** $725 $267 -- $31.61 Common Form 8-K

Allegiant Air $86 $21.6 25,898 $83.33 Common Form 8-K

Spirit Airlines** $264.3 $70.4 143,541 $14.08 Common Form 8-K

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Central Banks Introduce Programs to Improve Liquidity in Key Markets

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Original post here.

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