Federal Reserve Unveils Emergency Lending Program During Coronavirus Pandemic

The struggle to raise cash has threatened to set off a chain reaction. Many companies, including Boeing, Kraft Heinz, and Hilton Worldwide, are now drawing on lines of credit. Money market funds — a major buyer of commercial paper — have stopped buying to keep cash on hand in case their investors want to withdraw their money.

“For the smallest and biggest investors, the playbook says build cash in an uncertain environment,” says Peter Crane, president of Crane Data, a company that tracks money market funds. “You stock up on that even before you get to the toilet paper.”

On Monday, those seeking commercial paper funding were being offered new loans with terms as short as a single day — a sign that investors are simply not willing to tie their cash up as the coronavirus stokes uncertainty and arrests cash flow, said one large commerical paper dealer, who spoke on the condition of anonymity to discuss client matters.

The cash clamor is in turn putting pressure on banks to keep their own money free to meet customer demand, potentially preventing them from serving as an intermediary in other crucial markets and hampering trading in everything from Treasurys to corporate debt.

The largest banks have agreed to make huge amounts of credit available to companies. These commitments are typically not reflected in loan totals but are tacked on to other disclosures — and can be enormous. With these loan commitments and other items, the balance sheets of the six biggest U.S. banks would have been a combined $2.8 trillion larger at the end of last year, according to regulatory filings.

Executives at the banks say their institutions could handle big loan drawdowns. The companies receiving the loans would put it back in the banking system, and if they pay the cash out to employees and suppliers, they too would put it in bank accounts, said one senior bank executive who was not authorized to speak publicly. And if there were temporary problems, the banks could get the funding they need at the Fed’s discount window, this person added.

The Fed’s many interventions — which also include daily efforts to keep overnight lending between banks and financial institutions functioning smoothly — seem to be helping. But some analysts and investors said that additional relief may still be needed.

Article source: https://www.nytimes.com/2020/03/17/business/economy/federal-reserve-coronavirus.html