The Term Asset-Backed Loan Facility, Explained
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The Term Asset-Backed Loan Facility,
The Term Asset-Backed Loan Facility, Explained → nyfed.org/talf.
Every day, households and businesses rely on loans to make crucial purchases and fund their operations. From buying the new family car to paying employees’ salaries, reliable access to credit plays a critical role.
But how are these loans actually financed? What happens if the process of financing credit breaks down due to unforeseen events? And, if the process breaks down, how does a Federal Reserve program known as the TALF play a role in meeting the daily credit needs of households and businesses?
In the United States, a large portion of consumer and business loans are financed by investors through a chain of interrelationships.
Suppose you want to buy a car, and plan to take out a loan to finance it. You go to your preferred car dealer, find the car that you want, and apply for a loan from the financing company of the car dealer.
The financing company needs cash to fund your loan as well as the other loans that it makes. So, the financing company - or perhaps a third party - takes customers’ loans and bundles them together, then slices that bundle into pieces called ABS, or Asset-Backed Securities. The ABS are then sold to investors.
The investors might pay for the ABS outright using their capital, or they might take out their own loans from lenders.
The sale of ABS provides the financing company with the cash it needs to fund your car loan, which means you get the credit to buy the car.
Student loans, credit card loans, and small business loans are financed in much the same way… but what happens when the chain of interrelationships is disrupted, and the process breaks down?
During the 2008 financial crisis, a wave of uncertainty gripped the financial system, leading investors to stop buying ABS. This meant that financing companies were unable to secure the cash needed to play their role in the process, and loans for households and businesses became harder to access.
To get the lending process functioning properly again, the Federal Reserve and the U.S. Treasury created a program called the TALF, the Term Asset-Backed Securities Loan Facility. In March 2020, when uncertainty once again gripped the financial system due to the Coronavirus pandemic, this program was re-established to support the flow of credit to households and businesses.
Through the TALF, loans are provided to investors for the purpose of purchasing very high quality ABS. This promise of financing promotes confidence in the ABS market. As a result, financing companies are able to access the cash they need to fund loans for households and businesses.
During 2009 and 2010, the TALF supported nearly 3 million car loans, over a million student loans, almost 900,000 loans to small businesses, and 150,000 other business loans, as well as millions of credit card loans - all without a single loss. In total, the TALF earned approximately $1.2 billion in interest income for the U.S. taxpayer.
Now re-established, the TALF continues to contain multiple safeguards to protect U.S. taxpayers from loss, all while ensuring that households and businesses are able to access the loans they need to live their lives and do their work.
For more information, visit nyfed.org/talf.
Every day, households and businesses rely on loans to make crucial purchases and fund their operations. From buying the new family car to paying employees’ salaries, reliable access to credit plays a critical role.
But how are these loans actually financed? What happens if the process of financing credit breaks down due to unforeseen events? And, if the process breaks down, how does a Federal Reserve program known as the TALF play a role in meeting the daily credit needs of households and businesses?
In the United States, a large portion of consumer and business loans are financed by investors through a chain of interrelationships.
Suppose you want to buy a car, and plan to take out a loan to finance it. You go to your preferred car dealer, find the car that you want, and apply for a loan from the financing company of the car dealer.
The financing company needs cash to fund your loan as well as the other loans that it makes. So, the financing company - or perhaps a third party - takes customers’ loans and bundles them together, then slices that bundle into pieces called ABS, or Asset-Backed Securities. The ABS are then sold to investors.
The investors might pay for the ABS outright using their capital, or they might take out their own loans from lenders.
The sale of ABS provides the financing company with the cash it needs to fund your car loan, which means you get the credit to buy the car.
Student loans, credit card loans, and small business loans are financed in much the same way… but what happens when the chain of interrelationships is disrupted, and the process breaks down?
During the 2008 financial crisis, a wave of uncertainty gripped the financial system, leading investors to stop buying ABS. This meant that financing companies were unable to secure the cash needed to play their role in the process, and loans for households and businesses became harder to access.
To get the lending process functioning properly again, the Federal Reserve and the U.S. Treasury created a program called the TALF, the Term Asset-Backed Securities Loan Facility. In March 2020, when uncertainty once again gripped the financial system due to the Coronavirus pandemic, this program was re-established to support the flow of credit to households and businesses.
Through the TALF, loans are provided to investors for the purpose of purchasing very high quality ABS. This promise of financing promotes confidence in the ABS market. As a result, financing companies are able to access the cash they need to fund loans for households and businesses.
During 2009 and 2010, the TALF supported nearly 3 million car loans, over a million student loans, almost 900,000 loans to small businesses, and 150,000 other business loans, as well as millions of credit card loans - all without a single loss. In total, the TALF earned approximately $1.2 billion in interest income for the U.S. taxpayer.
Now re-established, the TALF continues to contain multiple safeguards to protect U.S. taxpayers from loss, all while ensuring that households and businesses are able to access the loans they need to live their lives and do their work.
For more information, visit nyfed.org/talf.
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