By Howard Schneider and Megan Davies
WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Reserve rolled out its third emergency credit program in two days to battle the fallout from the virus crisis, this one aimed at keeping the $3.8 trillion money market mutual fund industry functioning if investors make rapid withdrawals.
The Money Market Mutual Fund Liquidity Facility unveiled on Wednesday will make up to 1-year loans to financial institutions that pledge as collateral high quality assets like U.S. Treasury bonds that they have purchased from money market mutual funds.
The Fed is in effect encouraging banks to buy assets from those mutual funds, insulating the funds from having to sell assets at a discount if they come under pressure from households or firms wanting to withdraw money.
Money market mutual funds are meant to serve as low risk places for households and companies to hold cash, and limit their investments to high-grade assets like government bonds and a type of short-term corporate credit known as commercial paper.
Still, they are not insured like bank deposits by the Federal Deposit Insurance Corporation, and one of the darkest moments of the 2008 financial crisis occurred when the Reserve Primary Fund collapsed because of soured investments in Lehman Brothers commercial paper.
Its demise forced the Fed to launch new programs to shore up both the commercial paper and money market fund sectors.
While there have not been widespread redemptions from money market funds and total fund assets rose by nearly $94 billion last week, investor demands for cash have been increasing.
And "if markets like this persist for many days or weeks, things could change," said Peter Crane, President & Publisher of Crane Data - Money Fund Intelligence.
The Fed said it will exclude any assets purchased from money market mutual funds from bank regulatory capital requirements, providing another incentive for banks to purchase assets from the funds as needed.
The loans will be offered through the Boston Federal Reserve and the facility is being provided with $10 billion in credit protection from the U.S. Treasury Exchange Stabilization Fund.