Treasury’s Exchange Stabilization Fund and COVID-19
Updated April 10, 2020
Treasury’s Exchange Stabilization Fund and COVID-19
As part of the U.S. government’s economic response to the
“being consistent with U.S. obligations in the IMF
Coronavirus Disease 2019 (COVID-19), the Coronavirus
regarding orderly exchange arrangements and a stable
Aid, Relief, and Economic Security Act (CARES Act; H.R.
system of exchange rates” was inserted. As a consequence
748/P.L. 116-136), was signed into law on March 27, 2020.
of this change, the Secretary of the Treasury (with the
It appropriates $500 billion to the U.S. Department of
approval of the President) has almost unlimited authority to
Treasury’s Exchange Stabilization Fund (ESF) to support
“deal in gold, foreign exchange, and other instruments of
loans, loan guarantees, and investments for businesses
credit and securities.” Decisions of the Treasury Secretary
affected by COVID-19. In addition, the act temporarily
are final and may not be reviewed by another government
permits the use of the ESF to guarantee money markets, as
official. Nevertheless, Treasury is required to provide
occurred in the 2008 financial crisis. ESF assets have
monthly reporting on the ESF’s operations to Congress.
already been pledged in 2020 to backstop several
ESF loans are not open-ended. When Congress expanded
emergency lending facilities created by the Federal Reserve
the scope of the ESF’s authority in 1978, it added a
(Fed) in response to COVID-19.
restriction that ESF loans could not exceed six months
unless the President notified Congress that “unique or
The original purpose of the ESF was to give the United
exigent circumstances” were present. Such notifications
States adequate financial resources to stabilize the value of
were provided regarding ESF credit exposure to Mexico in
the dollar by buying and selling foreign currencies and
1982 and in 1995 and to Brazil in 1998.
gold. In the exigencies of the 2008 financial crisis, the ESF
was used differently as Treasury sought a source of
“Consistent with the obligations of the Government in
unfettered money to quickly stop a run on money markets
the International Monetary Fund on orderly exchange
that threatened further financial instability. Although
arrangements and a stable system of exchange rates,
legislation subsequently forbid Treasury from using the
the Secretary ... with the approval of the President
ESF for this purpose in the future, the ESF is being looked
may deal in gold, foreign exchange, and other
to today as a tool to address financial unrest.
instruments of credit and securities…” – 31 U.S. Code
§5302. Stabilizing exchange rates and arrangements
Background
The ESF was established by Section 10(a) of the Gold
In addition to its initial capitalization ($2 billion), Congress
Reserve Act of January 30, 1934 (31 U.S.C. §5302) to
allowed the ESF to remain outside annual appropriations
stabilize the exchange value of the dollar. Similar funds of
and imposed no overall size limit. Instead, the ESF retains
European countries were heavily intervening in foreign
all of the earnings from its operations. The main limitation
exchange markets at that time, engaging in competitive
on the ESF’s ability to intervene to impact the value of the
currency devaluations. The ESF was established with $2
dollar is the amount of dollar-denominated assets in its
billion appropriated from profits realized from the Gold
portfolio, which are $22.67 billion as of February 2020. To
Reserve Act’s revaluation of U.S. gold holdings from
secure more dollars for foreign exchange operations,
$20.67 per troy ounce to $35.
Treasury could (1) seek an additional appropriation from
Congress; (2) monetize its holdings of IMF special drawing
During the 1930s, the ESF was actively used to manage the
rights (SDR, an international reserve asset), valued at $50
foreign exchange rate of the U.S. dollar. After World War
billion, by temporarily selling them to the Fed; or (3)
II, when the International Monetary Fund (IMF) was
engage in a currency swap arrangement called
established, the ESF was the source of funds for the U.S.
“warehousing”—in which the ESF sells foreign currency to
contribution. As provided in the Bretton Woods Agreement
the Fed and agrees to repurchase it at a later date, during
Act of 1945 (31 U.S.C. § 5302), $1.8 billion of the ESF’s
which the Fed credits dollar reserves to the ESF for the
capital of $2 billion was used to make a partial payment on
duration of the swap. The limit on warehousing is $5
the U.S. subscription to the IMF. The Bretton Woods
billion, but this limit was temporarily raised to $10 billion
Agreement Act of 1945 also included permanent authority
in 1989 and $20 billion in 1995. The last use of the
for the ESF.
warehousing arrangement was from 1988 to 1992.
In 1973, with the demise of the post-World War II gold
ESF Use Before 2008
standard, where the dollar was pegged to gold and other
The ESF’s primary use until 2008 was to finance short-term
countries’ currencies were pegged to the dollar, the explicit
loans to foreign countries facing a financial crisis, including
purpose of stabilizing the exchange value of the dollar was
stricken from the ESF’s statute
Brazil and Mexico, primarily in Latin America and the
, and its purpose was
Caribbean. The ESF has also been used to provide bridge
expanded. Language alluding to “stabilizing the exchange
value of the dollar” was deleted
loans to foreign countries while they were negotiating
, and language referring to
longer-term IMF financing.
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Treasury’s Exchange Stabilization Fund and COVID-19
Since moving to flexible exchange rates, the United States
COVID-19 crisis has ended. There is speculation about
stopped intervening in foreign exchange markets, for the
whether such a guarantee would be initiated in the current
most part, by the mid-1990s. Since then, the United States,
crisis if the law were changed.
in coordination with other countries, has intervened on
three isolated occasions—in 1998, 2000, and 2011.
CARES Act Funding to ESF
The CARES Act provides Treasury with up to $500 billion
2008 Money Market Guarantee
through the ESF to make loans, loan guarantees, or
The 2008 financial crisis saw a novel and controversial
investments to assist eligible businesses, states, and
pledge of the ESF for purposes that were not directly
municipalities affected by COVID-19 until the end of
related to exchange rates or the value of the dollar—a
2020—referred to by some as “bailouts.”
money market guarantee.
Treasury can make loans and loan guarantees directly to
Money market mutual funds (MMFs) are a type of mutual
companies in three industries: (1) up to $25 billion to
fund that generally invest in high-quality, short-term assets.
passenger air travel; (2) up to $4 billion to cargo air
Often the value of a share is held at $1 per share, and fund
carriers; and (3) up to $17 billion to businesses critical to
gains are paid out as dividends mimicking interest
national security. Restrictions on executive compensation,
payments. Thus, they are seen as largely analogous to bank
stock buybacks and dividends, conflicts of interest, and loan
deposits but are not guaranteed by the Federal Deposit
forgiveness apply to this assistance. Borrowers must issue
Insurance Corporation (FDIC).
financial protection (e.g., warrants) to Treasury to provide it
with potential financial upside.
As part of the market turmoil resulting from the bursting of
a nationwide housing bubble on September 16, 2008, an
The remainder (at least $454 billion) is available to support
MMF called the Reserve Fund “broke the buck,” meaning
facilities established by the Fed to provide liquidity to
the value of its shares had fallen below $1. This occurred
businesses, states, and municipalities. To date, these funds
because of losses it had taken on short-term debt issued by
have been used to cover potential future losses on Fed
the investment bank Lehman Brothers, which filed for
emergency facilities created in response to COVID-19 for
bankruptcy on September 15, 2008. Money market
corporate bonds, commercial paper, asset-backed securities,
investors had perceived “breaking the buck” to be highly
money market funds, municipal debt, and loans to
unlikely, and its occurrence set off a generalized run on
businesses with under 10,000 employees.
MMFs, as investors simultaneously attempted to withdraw
an estimated $250 billion of their investments—even from
These facilities were authorized under the Fed’s emergency
funds without exposure to Lehman Brothers.
lending authority (Section 13(3) of the Federal Reserve Act
(12 U.S.C. 343)). Some of these facilities resurrect ones
To stop the run, Treasury announced an optional program to
created in 2008 in response to the financial crisis, which
guarantee deposits in participating money market funds.
extended the Fed’s role as lender of last resort from the
Treasury would finance any losses from this guarantee with
banking system to the overall financial system for the first
assets in the ESF. Treasury announced this program without
time since the Great Depression. Although the Fed did not
seeking specific congressional authorization, justifying the
rely on the ESF in 2008 and no 2008 facility experienced
program on the grounds that guaranteeing money market
any losses, Treasury has pledged ESF assets to back several
funds would protect the value of the dollar. The program
Fed facilities in 2020, in some cases before the CARES Act
expired after one year in September 2009. Funds utilizing
was enacted.
the guarantee program paid fees for the guarantee of
between 0.015% and 0.022% of the amount guaranteed by
ESF backing of Fed facilities may reflect the significant and
the program.
uncertain economic risks associated with COVID-19. Use
of the ESF may be seen to allow these facilities to meet the
Over the life of the program, Treasury reported that no
Dodd-Frank Act’s (P.L. 111-203) requirement that the
money market fund guarantees were invoked, and $1.2
Fed’s 13(3) lending is secured “sufficient[ly] to protect
billion in fees had been collected. The ESF was small
taxpayers from losses”; although, given ESF losses would
compared to industry assets. More than $3 trillion of
ultimately be borne by taxpayers, it is unclear if this
deposits were guaranteed and, according to the Bank for
requirement is actually being met in a broader sense.
International Settlements, 98% of U.S. money market funds
were covered by the guarantee, with most exceptions being
CRS Resources
funds that invested only in Treasury securities. However, a
CRS Report R46301, Title IV Provisions of the CARES Act
guarantee was credible as long as the ESF was expected to
(P.L. 116-136), coordinated by Andrew P. Scott
be larger than guaranteed losses.
CRS Report R44185, Federal Reserve: Emergency
The Emergency Economic Stabilization Act of 2008 (P.L.
Lending, by Marc Labonte
110-343) included language that directed the Treasury
Secretary to reimburse the ESF for any funds used for the
Marc Labonte, Specialist in Macroeconomic Policy
money market guarantee program and prohibited use of the
Baird Webel, Acting Section Research Manager
ESF in the future for such a program. To date, a similar
Martin A. Weiss, Specialist in International Trade and
MMF guarantee has not been created in 2020. The CARES
Finance
Act temporarily removes these restrictions until the
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Treasury’s Exchange Stabilization Fund and COVID-19
IF11474
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