News | Wednesday, 08 October 2008

US Central Bank to provide funding to the commercial paper market

The United States (US) Central Bank yesterday moved to provide funding to the commercial paper market, which had contracted sharply in recent weeks, putting severe strains on many businesses’ ability to raise short term funding.
In a significant extension of its normal role, the Federal Reserve said it would start buying three-month unsecured and asset-backed commercial paper directly from issuers, many of which are not banks or financial services companies, in order to provide a liquidity backstop to the US commercial paper market.
The commercial paper market is a key forum for large companies to raise short-term finance. The move was intended to assuage fears that the credit crisis would spread to non-financial companies and that companies could find themselves unable to carry out basic functions such as payroll that were often financed by short-term borrowing in the commercial paper market.
The Federal Reserve said: “An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households.”
The commercial paper market had been under stress as money market mutual funds and other investors had become reluctant to buy commercial paper, especially at longer-dated maturities.
“As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day,” the Federal Reserve said.
The programme, to be called the “Commercial Paper Funding Facility”, was the latest in the series of emergency operations that the Federal Reserve had undertaken to ease strains in the credit markets.

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