Fed acts to broaden appeal of ‘Main Street’ lending program

Business
Jerome Powell

FILE – In this Tuesday, March 3, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference to discuss an announcement from the Federal Open Market Committee, in Washington. The Federal Reserve on Wednesday June 3, approved an expansion of its $500 billion emergency program to support state and local governments. The expansion will allow all states to have at least two cities or counties eligible to tap the Fed support program regardless of population.(AP Photo/Jacquelyn Martin, File)

WASHINGTON (AP) — The Federal Reserve is expanding the range of companies that will qualify for its soon-to-begin Main Street Lending Program, in which the Fed will lend directly to individual companies for the first time since the Great Depression.

Under the changes announced Monday, the Fed will lower the minimum amount companies can borrow, from $500,000 to $250,000. And it’s raising the maximum loan, from $200 million to $300 million, for companies that want to expand existing loans. The Fed will also extend the program’s loan repayment period from four years to five. In addition, borrowers won’t have to make principal payments for the first two years.

All told, the changes appear intended to make the Main Street loans more appealing to businesses and banks as they seek to recover from a deep recession.

The Fed’s move “should attract a wider range of participants,” said Joe Brusuelas, chief economist at RSM, a tax and advisory firm. It “bolsters the probability of a successful start to what we think is a sorely needed program.”

Fed officials have said that the Main Street program is intended for companies that were healthy before the coronavirus outbreak in March. They also seek to help companies too large for the government’s small business loan program but too small to issue corporate bonds — a market that the Fed is bolstering separately.

The Treasury Department has approved the program, which will lend up to $600 billion. Treasury will provide $75 billion to cover potential loan losses.

Chair Jerome Powell said late last month that Main Street is “far and away the biggest challenge” among the nine lending programs the Fed has established to try to keep credit flowing during the pandemic. That’s because each loan will be individually tailored. Normally, the Fed buys and sells largely identical Treasury securities.

The Fed announcedthe Main Street program in early April as part of a broad array of credit programs that are intended to provide up to $2.3 trillion to ensure that businesses, households and state and local governments could keep borrowing in the midst of the shutdowns forced by the pandemic. Yet most of that firepower has remained on the sidelines because the Fed has delayed the launch of Main Street and its municipal lending programs.

The expanded terms suggest that the Fed is prepared to absorb more risk with the program, economists said, and underscore that it’s still willing to take aggressive steps to counter the downturn. The Fed’s announcement helped support a late-afternoon stock rally that drove up the S&P 500 index and eliminated all its losses this year.

The Fed said it made the changes it announced Monday after consulting with banks and businesses. Potential borrowers asked that loans be extended for an additional year, the Fed said, and that the potential loan amounts be widened.

Smaller companies, many of which have endured severe damage from the shutdowns forced by the coronavirus, might now find the Main Street program more appealing. Borrowers will now be able to defer principal payments for two years, up from one.

Under the Main Street lending program, banks make loans to businesses; the Fed then buys the loans from the banks. This lessens the credit risk to the bank and frees up more of its capital to make more loans.

The central bank said Monday that it will buy 95% of the loans that are made to more highly indebted companies, up from 85% previously. For less-indebted borrowers, the Fed has said it will buy 95% of the loan.

Collectively, the changes suggest that the Fed might be having trouble attracting borrowers for the Main Street program. Chair Jerome Powell previously said the Main Street program would start making loans on June 1 or shortly after, but it has not yet done so.

On Monday, the Fed said the program would start registering banks “soon” and will then buy loans “shortly afterwards.”

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