Money Market Mutual Fund Liquidity Facility

The Federal Reserve Board launched the Money Market Mutual Fund Liquidity Facility (MMLF) to support the flow of credit to households and businesses, enhance the liquidity and functioning of the financial markets, and support the economy." The Treasury Department also provided up to $10 billion to help the Fed cover loan losses under the program. The key goal of the program, which was announced late in the evening of March 18, 2020, was to support prime money market funds. The funds experienced heavy outflows from large corporate and institutional depositors that were desperate to raise cash as COVID-19 rattled the economy and the markets. The program expired on March 31, 2021.

Prime money market funds invest in short-term corporate debt, commercial paper, and government agency debt. They are thus designed to offer a somewhat higher yield than what is offered by U.S. Treasurys, while still being a low-risk investment option.

Details of the MMLF

The Money Market Mutual Fund Liquidity Facility (MMLF) was a joint initiative of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). "Under the MMLF, the Federal Reserve Bank of Boston will extend non-recourse loans to eligible financial institutions to purchase certain types of assets from money market mutual funds (MMFs)."

Though the Federal Reserve was the agency that was actually extending the loans under the MMLF, the cooperation of the OCC and the FDIC as banking regulators has been deemed necessary. "To facilitate this Federal Reserve lending program, the Board, OCC, and FDIC (together, the agencies) are adopting this interim final rule to allow banking organizations to neutralize the regulatory capital effects of participating in the program...the agencies believe that it would be appropriate to exclude the effects of purchasing assets through the MMLF from a banking organization's regulatory capital."

This means that the loans banks took out from the MMLF were not counted against leverage and capital requirements, which are limits on how much debt and capital a bank can have to prevent them from going under in the event of another financial crisis.

The program ran until March 31, 2021.

The MMLF was similar to a program that the Fed created during the 2008 financial crisis, the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF), which operated from 2008 to 2010 and performed a similar function. It was established after the collapse of Lehman Brothers caused the collapse of the Reserve Primary Fund.

On May 5, 2020, the Federal Reserve said that participation in the MMLF wouldn't affect the liquidity coverage ratio of participating banks.