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.

How Does an Asset-Backed Commercial Paper Money Market Fund Liquidity Facility Work?

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.