MNI INTERVIEW: Sheets: Fed Injection Won't Ease Business Loans

--Treasury Could Unclog Markets By Reviving 2008 Era Tools

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve's USD1.5 trillion liquidity

injection won't repair business funding shaken up by the COVID-19 outbreak,

former Fed and Treasury Department official Nathan Sheets told MNI.

     "The package ensures that there will be ample liquidity in the system,

which is helpful," Sheets said. "But it doesn't resolve the disruptions to

intermediation that are making it difficult for markets to function and firms to

find funding."

     Large institutions that transact with the Fed may just absorb the liquidity

onto their balance sheets as an additional layer of protection, Sheets said. 

     The Fed was caught flat-footed last year as a perceived scarcity of the

most secure assets led to a repo market squeeze, and it has been injecting money

to sustain that market. New regulatory and supervisory measures passed after the

2008 financial crisis to prevent another crash and protect economies from being

torn down by banking system weakness now face a major test.

     While there are few signs of another Lehman moment or too-big-too-fail

banking dilemmas, global officials say the big threat is the health crisis

breaks down household and business spending, especially if banks cut off credit

as financial markets crash.

     "One constraint is that during this stressful time, liquidity is valuable.

A whole additional set of constraints arises from regulatory requirements, which

may be limiting the scope for large firms to act as reliable market makers,"

Sheets said.

     "Will broker-dealers be willing - and able - to play a more vigorous role

in market making and supporting market functioning?" he asked.

     Sheets suggested that the Treasury Department bring back tools known by a

legal clause of 13(3), such as the Term Auction Facility or the Term

Asset-Backed Lending Facility established during the financial crisis. That

would require the Treasury Department to declare "exigent circumstances." 

     "The 13(3) tools are designed to cut through the clogs in the system and

get the funding directly to those firms which need it most," Sheets said. "Such

tools can help restore confidence and get normal intermediation processes

working again."

     The New York Fed said Thursday it would bring in three packages worth

USD500 billion each and start purchasing Treasuries across all durations to

"address highly unusual disruptions in Treasury financing markets associated

with the coronavirus outbreak." 

     That move came after the ECB expanded lending facilities, and was followed

by the Bank of Canada offering new term repos, underlining the global spread of

the virus. 

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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