Asset-Backed Commercial Paper Money Market Fund Liquidity Facility - AMLF
This is a lending program that helped US depository institutions finance high-quality Asset-Backed Commercial Paper purchases. The intention is to help banks meet their investors' demands for redemptions and boost liquidity in the money markets.
When there are disruptions in the money markets, the government extends help by initiating AMLF. This is because such disruptions might cause illiquidity when too many investors try to redeem their amounts. Money markets are considered conservative and liquid investments, but they might briefly experience illiquidity during this period.
AMLF saves the day by extending out collateralized loans to banks and other affected depository institutions to help them purchase high-quality asset-backed commercial paper from money market funds. Thus, keeping the markets solvent even during high volume redemptions. AMLF was created to provide new funding to distressed financial institutions to avoid a situation where they would default on investors' redemptions, which would have been catastrophic for the economy.
Asset-Backed Commercial Paper (ABCP) is collateralized by assets such as securities, mortgages, commercial loans, and CDOs. It was this type of investment that led to the economic collapse of 2007–2008. ABCPs are issued by an ABCP program or a Structured Investment Vehicle (SIV). The SIV purchases and holds financial assets from various asset sellers and finances the assets by selling asset-backed commercial paper to outside investors, including money market funds and retirement funds.
Real World Examples of AMLF
The collapse of Lehman Brothers, the fourth-largest bank in the United States, in the 2007–2008 crisis caused major disruptions in the credit markets as investors' redemptions surged overnight. Everyone tried to withdraw their deposits, and since there is always a finite and small percentage of liquid money compared to total deposits, there was a run on banks.
This started when the US mortgage situation became more serious, which caused asset-backed commercial paper (ABCP) to be unfavorable among market participants. Asset prices dropped, leading to even less demand for ABCP, which led to the liquidation of investment vehicles that relied on ABCPs at a loss. Seeing the danger looming, the Federal Reserve Board decided to extend non-recourse loans at the primary credit rate to US banks and depository institutions.
This was an effort to finance their purchases of high-quality asset-backed commercial paper from money market funds. They anticipated this would assist funds that held such paper to meet demands for investor redemptions while fostering liquidity in the asset-backed commercial paper markets and broader money markets. This liquidity facility aided a lot of banks that would have otherwise defaulted on redemptions.
History of AMLF
The Federal Reserve implemented the AMLF program following the Federal Reserve Act (section 13). This particular section permits the Federal Reserve Board to extend credit to financial organizations unable to obtain adequate credit facilities.
The AMLF program lent $150 billion over the first ten days of its initiation, a testament to how severe the 2007–2008 financial crisis was. Over its whole course, the program dispensed a total of $270 billion to distressed financial institutions. The Fed reported no losses; all loans were repaid in full, with interest, which shows that this program was successful and met its intended goals superbly.