FACTBOX-What is the Fed's "TALF"?

March 13 Fri Mar 13, 2009 5:06pm EDT

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March 13 (Reuters) - The Federal Reserve is launching its latest offensive against the worsening recession next week, targeting consumers and small businesses in what analysts call its most ambitious emergency lending program to date.

This latest addition to the Fed's alphabet soup of programs is known by its acronym TALF. For an analysis of the program, see [ID:nN13587089]

WHAT IS THE TALF?

The Term Asset-Backed Securities Loan Facility targets triple-A rated credit card, small business, student and auto loans by trying to thaw the securities markets backed by those assets. Before the crisis, ABS markets accounted for about 40 percent of all consumer lending.

But as the credit crisis heightened, markets seized up and lending all but ceased. Fears that consumers and small businesses could default on those loans drove the cost of funding higher as investors demanded more compensation for the risk of holding the securities.

WHY IS THE FED TARGETING CONSUMER LENDING?

Consumer spending makes up more than two thirds of the United States' economic activity, and the Fed hopes that making it easier to get credit will spur them to buy cars, for example, which in turn would help the beleaguered auto sector.

Apart from backing securities for consumer and small-business loans, the program also targets securitized loans for heavy industrial equipment, agricultural-equipment leases and rental-car fleets.

HOW DOES IT WORK?

Starting March 17, the Fed is offering loans to large investors to buy newly issued ABS. On a specific day each month, borrowers will be able to request one or more three-year TALF loans. Having the Fed as the backstop removes some of the risk for buyers who invest in these securities and may attract new hedge fund investors.

WHAT CHALLENGES DOES THE TALF FACE?

There are some concerns among market participants that even if the TALF makes credit more available, consumers may be reluctant to take out new loans given the worsening economic environment. Due to the financial crisis, banks may also be cautious in their underwriting standards.

In addition, Standard & Poor's said on Friday that some financial institutions have ample access to liquidity through other government support programs at more favorable rates, which could also curb demand.

Analysts said the focus on the highest rated tranches may also limit the program's immediate impact.

WILL THE FED EXPAND THE TALF?

The Fed has said that while the initial program will total $200 billion, it could be expanded to as much as $1 trillion.

New York Fed president William Dudley said last week that the next version, which he called TALF 2.0, could include commercial mortgage backed securities among other asset classes. Dudley said in principle it could be expanded to include older and lower-rated assets.

For the New York Fed's frequently asked questions on the TALF, please see here

(Reporting by Kristina Cooke and Nancy Leinfuss, Editing by Chizu Nomiyama)

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