William Dudley, the president of the Federal Reserve Bank of New York, recognized Saturday that investors have been hesitant to participate in the Term Asset-Backed Securities Loan Facility (TALF) out of concern that borrowing money from the central bank might arouse scrutiny from Congress.
"Some investors are apparently reluctant not because the economics of the program are unattractive, but because of worries about what participation might lead to," he said in prepared remarks at a Vanderbilt University conference.
When the TALF debuted in March, the New York Fed received loan requests totaling $4.7 billion. A second round of requests totaled $1.7 billion earlier this month. The Federal Reserve has said it would lend up to $1 trillion through the program.
Dudley said the tougher scrutiny of firms that received money from the Troubled Asset Relief Program (TARP) has essentially scared investors away from the TALF.
"The TARP loans to banks led to intense scrutiny of bank compensation practices," he said, and "given that TALF loans are ultimately secured by TARP funds, investor anxiety about using the program has risen."
The Treasury Department has pledged up to $100 billion from the TARP to cover losses that might arise from the TALF. Still, Dudley said the concern over using the TALF is unnecessary.
"The TARP funds in the TALF program only come in on the backend of the program when loans are put back to the Fed," he said. "The lending to investors on the front end is completely a Federal Reserve program and operation."
In what could be seen as a warning to Congress, Dudley said "it is worth emphasizing that actions that lead investors to shun taking risk, especially in this environment, are ultimately detrimental to the ability of households and businesses to secure credit at reasonable borrowing rates."
Dudley also used the occasion to assess the success of the myriad programs the Fed has instituted since December 2007 to fight the financial crisis. Generally speaking, he said the programs have been helpful but noted they do not address the core problem daunting some banks.
"The facilities cannot address the fundamental problem the shortage of capital in the banking system," he said. "The facilities can slow down the deleveraging process, but until the banking system is viewed as being sufficiently well-capitalized and is able to expand its lending activity significantly, the limits on credit availability caused by an impaired banking system will make it more difficult to generate a sustainable economic recovery."