TALF – Definition and Explanation

Term Asset-Backed Securities Loan Facility – Definition and Explanation

“The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans,” – The Federal Reserve

Essentially, the Fed is stating, market participants, without this government program, would not be able to meet the credit needs of households and small businesses. In simple economic terms, the demand for credit from households and small businesses would not be met with a sufficient supply of credit from market participants.

There are many different ways to approach this situation. This should be the most straight forward and simple explanation. Market participants, who are businesses that are required to turn a profit or they will go bankrupt, will supply credit to these households and small businesses until it becomes too risky resulting in unprofitable loans. If there is not a sufficient supply of credit in the market, it most likely means supplying credit is not profitable or the risk outweighs the return. The main risk facing the market participants is that the households and small businesses will default on their credit and the market participants will not make a profit, potentially going bankrupt.

Through this Loan Facility, the Federal Reserve has taken on the role of subsidizing market participants, banks and large investors, thus eliminating some of the downside risk that households and small businesses will default. Since some of the downside risk has been mitigated by the Fed, the market participants are now in turn willing to supply more credit, make more loans. The downside risk of potential default by households and small businesses has been transferred from the balance sheet of banks and investors to the Federal Reserve’s balance sheet which is funded through our tax dollars and the Fed’s ability to print dollars.

CNN Money – Breakdown of TALF Program: To TALF or not to TALF

Federal Reserve Definition TALF

Federal Reserve TALF F.A.Q. (34 pgs)