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What Was the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)?
The Asset-Backed Commercial Paper Money Market Fund (AMLF) was a lending program that the Federal Reserve Board created during the height of the 2008-2009 financial crisis in order to provide new funding to U.S. financial institutions. The AMLF provided funding that allowed financial institutions to purchase asset-backed commercial paper from money market mutual funds to prevent default on investors’ redemptions.
Key Takeaways
- The Asset-Backed Commercial Paper Money Market Fund (AMLF) was a government program established by the U.S. central bank during the worst of the 2008-2009 financial crisis.
- The program provided funding to troubled financial institutions, allowing them to buy high-quality asset-backed commercial paper from money market funds.
- This enabled those money market funds to stay solvent and liquid even as investors across the board were cashing out their holdings, amid the fallout from the crisis.
- J.P. Morgan Chase and State Street Bank and Trust Company were responsible for over 90% of what the AMLF loaned out.
- The program loaned out $150 billion in the first 10 days and $217 billion total by the time it closed on Feb. 1, 2010.
Understanding the Asset-Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF)
The Asset-Backed Commercial Paper Money Market Fund (AMLF) began operations on Sept. 19, 2008. One week earlier, Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy. The collapse of Lehman Brothers caused serious disruptions in short-term credit markets, as redemption requests by investors surged.
While money markets are typically considered to be conservative and liquid investments, they briefly became quite illiquid. Some money market funds put a temporary freeze on investor redemptions, a rare move that indicated just how severely the markets were shaken.
In response, the U.S. Federal Reserve announced that it would extend collateralized loans to depository institutions and bank holding companies to help finance their purchases of high-quality asset-backed commercial paper from money market funds, thus helping to keep those money market funds solvent amid the surge in redemptions.
The Federal Reserve’s intentions with the AMLF were to help stabilize outflows from money market funds and also to improve the liquidity in the asset-backed commercial paper market, as well as among money markets more generally. Doing so would hopefully prevent funds from liquidating further assets, which would deflate asset prices even further and possibly contribute to the worsening of the financial crisis.
History of AMLF
The Federal Reserve had the authority to implement the AMLF program because of Section 13(3) of the Federal Reserve Act. This section permits the Federal Reserve Board, in unusual and exigent circumstances, to extend credit to individuals, partnerships, and corporations that are otherwise unable to obtain adequate credit accommodations.
The AMLF lent $150 billion over the course of its first 10 days. In order to participate, financial institutions had to prove that they were experiencing serious outflows. Two banks, J.P. Morgan Chase and State Street Bank and Trust Company, made up more than 90% of the AMLF’s borrowing.
The AMLF closed on Feb. 1, 2010. Over the course of the program’s life, it lent a total of $217 billion. All loans made under the program were repaid in full, with interest.
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