Companies Can Borrow From the Fed Now

There’s a lot going on here, but one thing that is going on here is that now if you are a big investment-grade company you can borrow unsecured from the Federal Reserve for up to four years.1 That is new! Traditionally the way that central banking’s lender-of-last-resort function works is that the central bank lends money to banks, secured by the banks’ assets, which most traditionally would be those banks’ business loans.2

Loosely speaking those two approaches ought to get to roughly the same place. In the traditional approach, if the Fed commits to supporting banks by lending freely against good collateral, then the banks will be free to continue lending to businesses. The flow of credit to businesses will continue, intermediated by the banking system, rather than directly from the Fed. And there are obviously good reasons to do it that way. The banks, after all, are in the everyday business of lending to businesses. They have experience in loan underwriting and pricing and due diligence and document negotiation and all the nuts and bolts of giving unsecured loans to companies; they have deep relationships with the companies and know how creditworthy they are and can customize covenants and terms for each company. The Fed has never met any of these companies; the Fed just knows the banks. For the Fed to jump into the business of commercial lending overnight is just weird.