Former Fed Economists Call for Updates to Main Street Lending Program
- The Federal Reserve has expanded the reach of its Main Street lending program twice since its announcement in April, but two former central bank economists said more could be done to encourage participation.
- The Fed should allow loans with maturities of more than five years and make interest rates dependent on the credit health of participating companies, urged William English and Nellie Liang at a Brookings Institution. report released Thursday.
- The central bank can increase the participation of small lenders if they lower the minimum loan amount by $ 250,000, they added.
- “The risk of permanent damage to labor markets” outweighs the increased risk associated with such revisions, economists said.
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The Main Street Loan Program has already been updated twice to extend eligibility to small and medium businesses.
Two former central bank economists believe there is still a long way to go.
Facility set to begin business lending, with Fed start of lender registration on Monday. Once opened, the program will spend up to $ 600 billion to purchase 95% of each eligible loan in a bid to help businesses weather the coronavirus pandemic and a widespread freeze in consumer demand. Still, economists William English and Nellie Liang said they believed the Fed could do more to boost the use of the program’s emergency funds.
“We believe that the current program would be more attractive and therefore more effective if loan terms were better suited to borrowers’ characteristics, the rigidity of fixed debt repayments was reduced and lenders received more compensation for taking additional risk. “, explain the economists. written in a Brookings Institution report released Thursday.
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The two former Fed staff have suggested the central bank should open its Main Street facility to loans with maturities of more than five years and create incentives for earlier repayments. Participating companies with higher credit quality should enjoy cheaper rates than borrowers with more debt, they wrote. Currently, all loans made through the facility carry an interest rate of 3 percentage points above a common short-term rate.
The program will allow businesses with up to 15,000 employees or less than $ 5 billion in revenue in 2019 to tap into its credit pool. The Fed twice lowered its minimum loan amount to $ 250,000 from $ 1 million, but Liang and English asked for an even smaller minimum, saying such borrowing would encourage smaller banks to participate.
Banks should also be able to extend loans to riskier companies if they take on more debt “to demonstrate confidence in their credit,” the economists wrote.
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Liang and English called on the Fed to lift its compensation from participating lenders in another offer to encourage participation. Since new loans under the program “will correlate with the risks of existing loans,” the increased fees for banks may also offset the increased risk of default, they wrote.
Making such significant changes would endanger the $ 75 billion the Treasury Department contributed to the Main Street program to make up for the losses. Still, increased risks pale compared to induced coronavirus
and the economic fallout damaging businesses across the United States, they said.
“The downturn is very deep and the risk of permanent damage to labor markets from high and prolonged unemployment is significant,” Liang and English wrote. “So the Fed and the Treasury should act quickly to adjust the terms of the program if underwriting is low.”