What is an Asset-Backed Commercial Paper Money Market Fund Liquidity Facility?

Asset-backed commercial paper money market fund liquidity facility was an institution for loaning that the Federal Reserve Board established in 2008 that ran up to 2010. It provides funds to bank holdings companies and depository institutions to enable them to purchase high-quality asset-backed commercial paper from money market mutual funds.

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A Little More on What is an Asset-Backed Commercial Paper Money Market Fund Liquidity Facility - AMLF

The AMLF began operating on September 22, 2008. It happened one-week earlier before the United States fourth-largest investment bank, Lehman Brothers, filed for bankruptcy. The collapse of this bank led to serious disruptions in credit markets operating on a short-term basis, as investors requests for redemption surged. Although money markets are always considered to be liquid investments and conservative, the situation made them become illiquid for a short time. There was a temporary freeze on investor redemptions by some money market funds. It was an unusual move signifying how bad the market was affected. The U.S. Federal Reserve responded by announcing that it would prolong the collateralized loans to bank holding companies and depository institutions to help in financing their AMLF purchases from money market funds. By doing so, they would help to keep the money market funds solvent amid the surge in redemptions.

What was the Intention of AMLF?

The intention of the Federal Reserve with the AMLF was to assist in improving liquidity and stabilizing outflows from money market funds among the asset-backed commercial paper market and in money markets. It was hoped that by doing so, it would prevent funds from liquidating assets further, hence deflating asset prices even more and worsening the financial crisis. The AMLF program was under the Federal Reserve disposal because of the Federal Reserve Acts Section 13(3). The section allows the Federal Reserve Board in unusual circumstances to extend credit to corporations, individuals, and partnerships that are otherwise unable to obtain sufficient credit recommendations. The AMLF lent $150 billion in the course of its first ten days. To be able to take part, financial institutions had to demonstrate that they were going through serious outflows. Two banks, State Street Bank, Morgan Chase, Trust Company, made up over 90% of the AMLFs borrowing. The AMLD came to closure on February 1, 2010. Throughout the life of the program, it was able to lend a total of $217 billion. All loans given through this program were paid back in full with interest.

Academic research on Asset-Backed Commercial Paper Money Market Fund Liquidity Facility AMLF

• When safe proved risky:Commercial paperduring thefinancialcrisis of 2007-2009, Kacperczyk, M., & Schnabl, P. (2010). When safe proved risky: Commercial paper during the financial crisis of 2007-2009.Journal of Economic Perspectives,24(1), 29-50. Commercial paper is a short-term debt instrument issued by large corporations. The commercial paper market has long been viewed as a bastion of high liquidity and low risk. But twice during the financial crisis of 2007-2009, the commercial paper market nearly dried up and ceased being perceived as a safe haven. Major interventions by the Federal Reserve, including large outright purchases of commercial paper, were eventually used to support both issuers of and investors in commercial paper. We will offer an analysis of the commercial paper market during the financial crisis. First, we describe the institutional background of the commercial paper market. Second, we analyze the supply and demand sides of the market. Third, we examine the most important developments during the crisis of 2007-2009. Last, we discuss three explanations of the decline in the commercial paper market: substitution to alternative sources of financing by commercial paper issuers, adverse selection, and institutional constraints among money market funds.
• How effective were the federal reserve emergency liquidity facilities? evidence from the asset-backed commercial paper money market mutual fund liquidity facility, Duygan-Bump, B., Parkinson, P. M., Rosengren, E. S., Suarez, G., & Willen, P. (2012). How effective were the federal reserve emergency liquidity facilities? evidence from the asset-backed commercial paper money market mutual fund liquidity facility. The events following Lehmans failure in 2008 and the current turmoil emanating from Europe highlight the structural vulnerabilities of short-term credit markets and the role of central banks as back-stop liquidity providers to financial markets. The Federal Reserves response to financial disruptions in the United States importantly included creating liquidity facilities. Using unique micro datasets and a differences-in-differences approach, we evaluate one of the most unusual of these interventions the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Our findings indicate that this facility helped stabilize asset outflows from money market funds and reduced asset-backed commercial paper yields significantly.
• US dollar money market fundsand non-US banks, Baba, N., McCauley, R. N., & Ramaswamy, S. (2009). US dollar money market funds and non-US banks.BIS Quarterly Review, March. The Lehman Brothers failure stressed global interbank and foreign exchange markets because it led to a run on money market funds, the largest suppliers of dollar funding to non-US banks. Policy stopped the run and replaced private with public funding.
• Moremoney: understanding recent changes in the monetary base, Gavin, W. T. (2009). More money: understanding recent changes in the monetary base.Federal Reserve Bank of St. Louis Review,91(March/April 2009). 
• Income Effects of Federal ReserveLiquidity Facilities, Fleming, M. J., & Klagge, N. (2011). Income Effects of Federal Reserve Liquidity Facilities.Current Issues in Economics and Finance,17(1). One of the chief actions taken by the Federal Reserve in response to the financial crisis was the introduction or expansion of facilities designed to provide liquidity to the funding markets. A study of the programs suggests that the liquidity facilities generated $20 billion in interest and fee income between August 2007 and December 2009, or $13 billion after taking into account the estimated $7 billion cost of funds. Moreover, the Fed took important steps to limit the credit exposure it incurred in connection with the facilities. 
• Shadow banking andfinancialstability: Europeanmoney market fundsin the globalfinancialcrisis, Bengtsson, E. (2013). Shadow banking and financial stability: European money market funds in the global financial crisis.Journal of International Money and Finance,32, 579-594. When the troubles in the subprime markets began surfacing 2007, developments unfolded rapidly in the European MMF industry. The industry suffered from asset price drops and investor redemptions. But the difficulties of the MMF industry also spread to the banking sector and contributed to general financial instability that prevailed in 20072009. In this article, we describe the main events and developments of the European MMF industry during the global financial crisis. Based on these observations, we analyse the transmission channels through which financial instability may spread from the MMF sector to the wider financial system. Insofar, our article contributes to the understanding of how other financial intermediaries and shadow banking may affect financial stability. A number of policy conclusions on shadow banking and financial stability are also provided.