Key Takeaways
- The Money Market Mutual Fund Liquidity Facility (MMLF) was launched to support prime money market funds.
- MMLF provided liquidity to prime money market funds through non-recourse loans.
- The program was a joint initiative of the Federal Reserve, OCC, and FDIC.
- MMLF loans were exempt from affecting banks’ regulatory capital and liquidity ratios.
- The MMLF was similar to a program from the 2008 financial crisis, ending in March 2021.
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What Was the Money Market Mutual Fund Liquidity Facility?
The Money Market Mutual Fund Liquidity Facility (MMLF), launched by the Federal Reserve on March 18, 2020, helped stabilize financial markets during COVID-19 by providing non-recourse loans to support liquidity in money market funds. Working with regulators such as the OCC and FDIC, the program helped ease funding pressures and improve market stability before expiring on March 31, 2021.
How the Money Market Mutual Fund Liquidity Facility Operated
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.
The Bottom Line
The Money Market Mutual Fund Liquidity Facility (MMLF) was a temporary COVID-19 response that used Federal Reserve non-recourse loans, supported by the Treasury Department, to provide liquidity to prime money market funds and help prevent a repeat of the 2008-style funding crisis. The program reflected the Fed’s adaptive crisis response and expired on March 31, 2021, after serving its purpose.