United States: Paycheck Protection Program Liquidity Facility

The PPP, signed into law on March 27, 2020, provided a mechanism for authorized lenders to extend concessionary, forgivable loans to small businesses to keep their workers on their payrolls (CARES Act 2020, sec. 1102). The Fed created the PPPLF to provide financing for PPP lenders. In the Fed’s first report to Congress on the facility, explaining its creation and terms, the Fed notes, “the availability of credit has contracted for small businesses while, at the same time, the disruptions to economic activity have heightened the needs for small businesses to obtain credit in order to sustain themselves and meet their payroll and other expenses until economic conditions normalize” (FRB 2020i). The Fed established the PPPLF “to help facilitate access to credit by PPP lenders so that they can lend to small businesses, enabling them better to manage the economic dislocations related to the pandemic” (FRB 2020i).

The Fed introduced the PPPLF on April 9, 2020, alongside the rollout or expansion of several other emergency lending measures in response to the pandemic. These parallel measures responded to disruptions in other pockets of financial markets—those for corporate and municipal bonds, midsize business lending, and structured finance (FRB 2020e).

The Federal Reserve Board authorized the PPPLF by invoking its authority under Section 13(3) of the Federal Reserve Act (FRB 2020i). Section 13(3) permits the Fed, “in unusual and exigent circumstances,” to “discount for any participant in any program or facility with broad-based eligibility” (FRA n.d.a). The invocation of Section 13(3) allows the Fed to provide liquidity more broadly than its monetary policy and discount window authorities allow. This authority also requires the approval of the secretary of the Treasury (FRA n.d.a). Each extension of the facility required a new FRB vote and renewed approval from the Treasury secretary; see Key Design Decision No. 23, Duration.

While PPP loans were eligible collateral under the Fed’s standing discount window, the Section 13(3) invocation allowed the Fed to lend to nonbanks, and the facility also carried terms distinct from the discount window (FRB 2021a).

As the PPPLF was a facility authorized under Section 13(3) of the Federal Reserve Act, the Fed was required to submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives within seven days of authorizing 13(3) assistance. The report needed to describe “the justification for the exercise of authority to provide such assistance; the identity of the recipients of such assistance; the date and amount of the assistance, and form in which the assistance was provided; and the material terms of the assistance” (FRA n.d.a).

Furthermore, the Section 13(3) statute requires the Fed submit an updated report every 30 days on the details of any outstanding credit under 13(3) lending facilities. The law calls for such reports to contain updates on “the value of collateral; the amount of interest, fees, and other revenue or items of value received in exchange for the assistance; and the expected or final cost to the taxpayers of such assistance” (FRA n.d.a).

In addition to direct congressional oversight, the PPPLF was subject to review by the Fed board’s Office of Inspector General and the Government Accountability Office (GAO 2020; OIG 2021, 10).

The Federal Reserve Bank of Minneapolis led the administration of the PPPLF, but depository institutions accessed PPPLF loans from the reserve bank that served as their usual discount window lender (FRB 2020b; FRBM 2021). When the Fed expanded PPPLF eligibility to borrowers without access to the discount window, it assigned these borrowers to specific reserve banks. Figure 3 outlines where each type of firm was to access the PPPLF.

The Fed made regular press releases accompanying decisions on the terms and regulatory rules surrounding the PPPLF.

The reports to the congressional committees required of the Fed disclosed “the name of each participant . . .; the amounts borrowed, interest rate charged, and value of pledged collateral; and the overall costs, revenues, and fees” of PPPLF loans (FRB 2020h). The Coronavirus Aid, Relief, and Economic Security (CARES) Act stipulated that the Fed make its monthly reports to the congressional committees available on its website within seven days of submitting them (CARES Act 2020, sec. 4026(b)(2)(B)). While this statute applied only to 13(3) facilities that used CARES Act funding, which the PPPLF did not (see Key Design Decision No. 10, Source of Funding), the Fed elected to similarly publish the reports for the PPPLF (FRB n.d.a; FRB 2020h; GAO 2020, 19–20).

The Fed chair could elect to keep identifying details of individual liquidity recipients confidential in its reports to the committees^FNIf the Fed chair elects to keep borrowers’ identifying details confidential, Section 13(3) stipulates that “such information shall be made available only to the Chairpersons or Ranking Members of the” Senate Banking Committee and House Financial Services Committee. and only release them publicly up to one year after the closure of the lending program—the maximum delay permissible under Section 11(s) of the Federal Reserve Act (FRA n.d.b, sec. 11(s)(2)(A); FRA n.d.a, sec. 13(3)(D)). However, the Fed elected not to take this option in the case of the PPPLF (FRB 2020h). This contrasted with some of its other COVID-19 Section 13(3) facilities, where the Fed thought disclosing participant identities would increase financial stress for the intended beneficiaries (GAO 2020, 19–20; Guida 2020). The monthly transaction-specific disclosures thus shared all the information that will ultimately be revealed by the Section 11(s) report (FRB n.d.a; FRB 2021i).

The Fed also publicly reported aggregate PPPLF lending data on a weekly basis as part of the usual publication of its overall balance sheet (FRB 2021a, 11).

The PPPLF operated out of each of the 12 Federal Reserve Banks, alongside their respective discount window operations (FRB 2020b).

The amount of Fed lending available was limited only by the supply of PPP loans, which ultimately reached approximately $800 billion (FRB 2021a, 9; SBA 2021). The PPPLF reached $70.8 billion on July 29, 2020, fell to $46.7 billion in January 2021, and ultimately peaked at $90.6 billion on June 30, 2021 (FRB 2022a). See Figure 4.

The Fed used the creation of central bank reserves to fund its PPPLF loans. Given regulatory exemptions implemented by the Fed and other federal bank regulators, these reserves did not interact negatively with bank borrowers’ leverage ratios; see Key Design Decision No. 21, Regulatory Relief. As PPP loans were repaid (by either the borrower or the SBA), the Fed extinguished the reserves (FRB 2021d, 33–34). In contrast to many of the Fed’s other Section 13(3) facilities set up in response to the pandemic, the PPPLF did not utilize Treasury funds as additional credit support (Clarida, Duygan-Bump, and Scotti 2021, 12, 16).

As announced on April 9, 2020, the PPPLF was available only to depository institutions—banks, savings associations, and credit unions—that originated PPP loans, but the Fed said it was “working to expand eligibility to other lenders that originate PPP Loans in the near future” (FRB 2020a; FRBM 2021).

On April 30, two weeks after the facility became operational, the Fed announced it had expanded PPPLF eligibility to all lenders that were eligible to lend under the PPP. It also expanded the collateral eligibility to include PPP loans purchased, rather than just those originated by the PPPLF borrower. Eligible lenders included banks, credit unions, Community Development Financial Institutions, members of the Farm Credit System, small business lending companies licensed by the SBA, and some financial technology firms (FRB 2020g).

Like the Fed’s standard discount window, the PPPLF was continuously accessible, at the borrower’s election (FRB 2021a).

For a PPPLF loan, the lending reserve bank lent on a nonrecourse basis against the PPP loan as collateral (FRB 2020b). This contrasts with standard discount window lending, which is done on a recourse basis (FRB 2021a, 4).

The PPPLF lent exclusively against SBA-guaranteed PPP loans. PPPLF borrowers could pledge any PPP loan, whether they had originated or purchased it (FRB 2020b).

The loan amounts were determined exclusively by the amount of collateral of the borrower; there were no individual borrower limits (FRB 2020b).

The PPPLF lent against the full principal amount of the PPP loan pledged as collateral (FRB 2020b). This was slightly favorable to the 1%–2% haircut applied to Treasuries and other government-guaranteed debt at the discount window (FRB 2021b).

The Fed charged borrowers an interest rate of 35 bps for PPPLF loans (FRB 2020b). Throughout the life of the facilities, this was 10 bps above the prevailing primary credit (discount window) rate (FRB 2020d). PPP borrowers paid lenders an interest rate of 100 bps, and the loans were SBA guaranteed (SBA n.d.).^FNLenders also received fees from the SBA for 1%–5% of the face value of the loan, inversely related to the loan size (CARES Act 2020, sec. 1102(a)(2)(P)(i)(I)).

There were no fees associated with use of the PPPLF facility (FRB 2020b).

PPPLF loan maturities were set to match the maturity of the underlying PPP loan collateral (FRB 2020b). PPP loans had maturities of either two or five years (SBA 2020). This maturity was accelerated if the PPP lender received reimbursement from the SBA because the loan either entered forgiveness or went into default (FRB 2020b).

Section 13(3) of the Federal Reserve Act stipulates that borrowers under such lending programs cannot be insolvent (FRA n.d.a). The Fed required borrowers to attest to such, and said the borrower could comply with the solvency requirement by certifying “that it [was] not (1) in bankruptcy, resolution under Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or any other Federal or State insolvency proceeding, and that it [was] not (2) generally failing to pay undisputed debts as they become due during the 90 days preceding the date of borrowing under the PPPLF” (FRB 2021a, 12). The first standard is stipulated by Section 13(3), and the second is prescribed by regulation (FRA n.d.a; Availability and Terms of Credit n.d.).

Prior to engaging in Section 13(3) lending, the Fed must also “obtain evidence” that a borrower “is unable to secure adequate credit accommodations from other banking institutions” (FRA n.d.a). The Fed required each borrower to certify that it lacked such credit. As the Fed noted, the borrower did not need to lack credit access altogether. The Fed also noted several things that a borrower could cite to certify that its credit access was less than adequate:

• Economic or market conditions, including cost and availability of credit to small businesses;
• The fact that the Fed created PPPLF “to improve the ability of PPP lenders to obtain reasonably priced long-term financing for PPP Loans”; and
• Terms of the PPPLF that made it more “adequate” than alternative sources of funding, “including, for example, beneficial capital treatment for PPP loans pledged to the PPPLF.” (FRB 2021a, 12–13)

Section 1102 of the CARES Act provided that, under banks’ risk-based capital requirements, PPP loans would “receive a risk weight of zero percent” (CARES Act 2020, sec. 1102(a)(2)). On April 9, 2020, the federal banking agencies—the Fed, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency—further provided that PPP loans that were pledged to the PPPLF facility would have no impact on any bank capital ratios “because there is no credit or market risk in association with PPP loans pledged to the facility” (OCC, FRB, and FDIC 2020a; OCC, FRB, and FDIC 2020c).

On May 5, 2020, the federal banking agencies issued a rule to also alleviate the impact of the PPPLF on banks’ liquidity coverage ratio (LCR). The LCR requires some banks (particularly larger ones) to maintain sufficient high-quality liquid assets to protect against liquidity outflows over a 30-day stress period. The agencies issued the rule for the purpose of “neutralizing the LCR impact associated with the non-recourse funding provided by” the PPPLF (OCC, FRB, and FDIC 2020b; OCC, FRB, and FDIC 2020d).

The Fed and Treasury did not appear to engage in any international coordination with respect to the PPPLF.

When the Fed introduced the PPPLF on April 9, 2020, it stated, “No new extensions of credit will be made under the Facility after September 30, 2020, unless the Board and the Department of the Treasury determine to extend the Facility” (FRB 2020a). On July 27, 2020, November 28, 2020, and March 8, 2021, the Fed board and the Treasury secretary voted to extend the facility an additional quarter. These extensions cited “the price and availability of credit . . . as compared to normal market conditions” and “the effects of the pandemic on economic activity generally, including unemployment claims and on . . . revenues and expenses” (FRB 2020k; FRB 2020m; FRB 2021c). The Fed noted that these conditions existed even though “financial markets have stabilized significantly” (FRB 2020k; FRB 2020m; FRB 2021c).

In its report to Congress on its March 2021 extension, when the Fed and Treasury extended only the PPPLF and no other active Section 13(3) facilities, the Fed said, “the availability of credit for small businesses served by the Paycheck Protection Program remains limited, and there is substantial continued uncertainty” due to the pandemic (FRB 2021c).

On June 25, 2021, the Fed and Treasury approved a final extension to July 30, 2021 (FRB 2021g). The PPP closed to new applications May 31, 2021, and the SBA could process applications until June 30, 2021 (PPP Extension Act). In its final extension of the PPPLF, the board noted that “although financial markets have stabilized significantly, some PPP lenders have indicated that they continue to face liquidity challenges to support PPP lending.” The board also cited loan processing delays, saying the PPPLF extension “facilitates PPP lending that will be originated through the expiration of the PPP program on June 30, 2021” by giving PPP lenders additional time to pledge those loans to the PPPLF (FRB 2021g).