Taylor: The Fed’s Emergency Loan Program
The Federal Reserve’s $ 600 billion Main Street Lending Program, launched in early July, slowly accumulated in August.
Only $ 530 million had been committed or was under loan review on Aug. 4, congressional testimony said.
The MSLP stands in stark contrast to the more well-known paycheck protection program. The P3 saw a stampede of desperate business owners and the rapid dispersal of $ 349 billion, followed by a second round of $ 310 billion as small businesses demanded more.
One difference is that MSLP offers business loans that must be repaid, unlike PPP, which was designed primarily as forgivable loans to encourage business owners to keep people on the payroll. It should come as no surprise that the demand is generally higher for free money than for loans.
MSLP uses more complex underwriting criteria than PPP. The Federal Reserve Bank of Boston, which administers the MSLP, says it caters to small and medium-sized businesses. But in this case, “Main Street” doesn’t really mean mom-and-pop operations.
“Main Street” is analogous to how the investment management world defines “small cap” companies on the stock exchange as those with a market value between $ 300 million and $ 2 billion. MSLP loans can range from $ 250,000 to $ 50 million. So some fairly large companies could participate here.
When financial authorities such as the US Treasury and Federal Reserve design bailout packages, it helps to understand what they think success looks like.
The success of the MSLP as a COVID-19 recession mitigation agent may depend on the simple fact that borrowers and lenders know it exists while companies pursue their usual private sector funding strategies.
Boston Federal Reserve Bank spokesperson Joel Werkema sees it that way. As he told me, “When it comes to emergency actions taken by the Fed, sometimes adoption is not the best course of action. For some of our actions, simply putting in place the facility or safety net is enough intervention for the private market to respond. “
A withdrawal of the full $ 600 billion is only likely in the worst case scenario – a deep, long and prolonged recession. Metaphorically, the program can work better as insurance or a bridge through a recession.
The former Federal Reserve, before the 2008 crisis, had a limited set of tools – only three – with which to increase or decrease the money supply.
The first was to set a rate at which banks would lend each other reserves overnight. Lower rates meant increasing the availability of money, while higher rates meant restricting it. The Fed also bought US Treasuries in the bond market to increase the money supply, or it sold those bonds to restrict the money supply. Finally, it offered emergency short-term loans to banks in a pinch, but this tool was rarely used.
In 2008, we saw the Fed significantly expand these tools, with interventions in the mortgage bond market and short-term money markets, but all in highly liquid securities. This year, the Fed is once again expanding its toolbox with the MSLP – a first. Customized business loans are unprecedented in modern Fed history.
Reading the terms of the program, it is clear that the design is to offer money to the American business community, as well as to encourage bank lending. Loans, according to the thought, should not be scarce during the COVID-19 crisis.
Even though adoption of the program has been slower than PPP, the Boston Fed is proud to have built a scalable lending platform capable of accepting up to $ 600 billion in business loans. Werkema says: “We wanted to do it in a state-of-the-art way, not just a labor intensive way. It was all a pretty big challenge. And to do it in three to four months, it feels really good. It’s a bit like setting up a new financial institution or a “fintech” solution in just four months. “
By early August, 509 banks, or about 10% of all U.S. banks, had registered as lenders on the platform, according to testimony in Congress from Boston Fed Chairman Eric Rosengren. Since participants include some of the largest banks in the country, registered lenders represent 58% of total banking assets in the United States.
One of the frustrations of deploying the PPP program in April was that small businesses did not have a strong enough banking relationship to merit special attention in the rush to apply for funds. Boston Fed lists online lenders open to applications from companies that are not already clients.
It is clear that a large part of the design of the program is to make the loans attractive to borrowers. No payment is due in year 1 of the loans. No principal payment is due in year 2, only interest. The principal of the loan is to be repaid in years 3 to 5, with principal repayments of 15%, then 15% and 70% in the final year. The structure is meant to help businesses weather some pandemic years in the short term and assumes a financial recovery after that. Interest rates would float over time, but they start at around 3.25% right now.
MSLP is also supposed to be attractive to banks. After securing the Main Street loan, the banks retain only 5% of the credit risk, while the Federal Reserve assumes 95% of the risk of default or non-payment. Private sector banks continue to perform underwriting due diligence, which must meet their criteria. The Fed could end up with a sizable portfolio of business loans. The US Treasury has provided up to $ 75 billion in protection for the Fed against future losses in corporate portfolios.
So far, the largest number of loans taken out is between $ 1 million and $ 2.5 million, but new loans can be taken up to $ 50 million. For businesses wishing to extend existing loans with their lender, the program allows extensions of up to $ 300 million. On the other end of the spectrum, loans of $ 250,000 without much collateral can be approved as long as they meet the bank’s standards.
In Texas, 24 banks are listed on the Federal Reserve Bank of Boston’s website as approved lenders ready to accept new customers – out of the 414 FDIC-insured banks that operate in the state.
Frost Bank, one of the largest regional banks operating in Texas, declined to register as a lender, according to spokesperson Bill Day. The Bank of San Antonio has had conversations with clients, but has yet to apply for the program, according to President J. Bruce Bugg Jr.
On its website, Vista Bank, with branches located along the Lubbock-Dallas axis, announces its desire to participate in the MSLP, as does TransPecos Bank, which operates in West Texas and San Antonio.
Michael Taylor is a columnist for the San Antonio Express-News and author of “The Financial Rules for New College Graduates”.
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