Federal Reserve Filter: Help me understand what's going on
March 30, 2020 6:54 PM   Subscribe

I've been trying to understand the recent actions taken by the Federal Reserve to keep the financial sector running and in this Bloomberg oddlots podcast episode at around the 21:40 mark the interviewee states that "the fed is basically not taking credit risk." Can anyone explain this to me?

The remark confused me because my understanding of the new Fed "facilities" (for example the Secondary Market Corporate Credit Facility (SMCCF) to provide liquidity for outstanding corporate bonds) is that the Federal Reserve will put the bond or loans on its books and become the the creditor while giving cash to the bank that was the original creditor. But if the company that issued the bond failed to pay it back while the bond is on the Fed's books wouldn't that leave the fed holding the bag so to speak?

I'm new to all this so please try to explain accordingly. Thanks!
posted by 12%juicepulp to Work & Money (2 answers total) 3 users marked this as a favorite
My understanding: "The $1.5 trillion operation announced on March 12 allows banks to borrow from the Fed for periods as long as three months, using Treasury securities as collateral." There is no credit risk (risk of default) because there is for all practical purposes no risk of the U.S. Federal goverment defaulting. There may be market risk - the value of the bonds could decline if interest rates increase.
posted by Mr.Know-it-some at 7:08 PM on March 30, 2020 [3 favorites]

Best answer: The Fed provides lots of explanation and education on its policies and practices in an accessible way, and lots of in depth studies and reports besides, if you want to dig in.

Here’s the Fed’s intro level look at managing credit risk.

(Basically: high quality collateral, valued at market less a haircut.)
posted by notyou at 9:08 PM on March 30, 2020 [1 favorite]

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