Fed makes terms more favorable for Main Street loan program
The Federal Reserve said on Monday it would make terms more favorable for its fledgling small and medium-sized business lending program as the public feared the new effort to blunt the coronavirusA shock caused can produce disappointing results.
The Fed lowered the minimum loan amount and raised the maximum loan limit under its Main Street loan program. It also extended loan terms from four years to five years and will allow businesses to defer principal payments for the first two years of the loan, instead of the first year.
Fed Chairman Jerome Powell said the program was designed to help companies rehire workers as the economy emerges from a deep freeze designed to stop the spread of the coronavirus. “I am confident that the changes we are making will improve the ability of the Main Street Lending Program to support employment during this difficult time,” he said in a statement.
The initiative, announced in March, is designed to fill a void left by the government’s economic crisis relief efforts, and it is shaping up to be one of the thorniest things the Fed has ever done. The risk is that it will go where the central bank has rarely ventured and few companies ask for help, creating both financial and political headaches.
The main challenge for the Fed, which has now revised conditions twice before launching the program, is to avoid becoming a bad debt dump without setting conditions so onerous that companies or banks will not participate. .
“They have to be attractive and acceptable to different types of businesses and markets where they are trying to get credit,” former Fed Chairman Ben Bernanke said in a recent interview. “The design of these things is not straightforward.”
The $ 500 billion loan effort has not been officially opened, but officials have said it will soon begin accepting loans arranged by banks.
Unlike the Small Business Paycheck Protection Program, Fed loans cannot be canceled. But the latest changes are designed to make the program attractive to a wider range of businesses and potentially the banks the Fed will rely on to underwrite and extend loans.
Banks can then sell up to 95% of those assets to the Fed, freeing up bank balance sheets to make more loans to other borrowers.
Before the changes were announced on Monday, some analysts had warned that banks may be reluctant to participate in a complex new program due to broader bandwidth concerns.
“We are starting to have serious doubts as we speak with the country’s banks about whether the Fed can activate Main Street banks,” Jim Vogel, analyst at FHN Financial, said in an interview last month. “Banks are starting to realize that their credit portfolios are not what they thought they were two months ago. “
When the program was put in place, the Fed and the Treasury, which provided $ 75 billion to cover credit losses, faced two contrasting criticisms from elected officials, businesses and watchdogs.
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The first camp said the rules were too strict. Banks and some industry lobbyists have warned that the program is likely to disappoint because of its unique approach and perceived reluctance on the part of the Treasury Department to accept more loss of funds allocated by Congress to programs of Fed loan.
At the same time, some environmental groups have sharply criticized the Fed for trying to reach more companies because they fear this will allow oil and gas companies that cannot qualify for support from other lending facilities. the Fed to avoid bankruptcy.
At the end of April, the Fed said it would expand the program to allow more indebted companies to participate if the banks had a 15% stake in these loans. The Fed reduced this requirement to 5% on Monday.
Under the latest terms, banks can lend up to $ 35 million in new loans or refinance up to $ 300 million of an existing loan if a company’s total debt, relative to its 2019 profits, is is below certain thresholds. These maximum loan amounts were set at $ 25 million and $ 200 million, respectively, at the end of April.
The minimum loan amount will be reduced from $ 500,000 to $ 250,000, which will make the program more attractive to small businesses.
Fed officials said they were determined to fine-tune the program to reach more businesses, but they also tried to set expectations about what the program can and cannot do. “We will be of great help to businesses for a while, but over a longer period additional tax assistance may be needed,” Powell said last month.
The Main Street program is open to businesses with up to 15,000 employees or less than $ 5 billion in sales last year. More than 19,000 U.S. companies had between 500 and 15,000 employees in 2017, and they collectively employed between 30 and 40 million Americans, according to Census Bureau data.
Write to Nick Timiraos at [email protected]
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