Fed lowers bar for access to small-business lending programme

The Federal Reserve has lowered the bar for small businesses and charities to access central bank loans as they struggle through the economic downturn triggered by the pandemic.

In a statement on Friday, the Fed said it would reduce the minimum loan size from $250,000 to $100,000 for the Main Street Lending Program, a $600bn scheme launched earlier this year with the backing of the US Treasury.

The Fed’s move follows pressure from many members of Congress to boost usage of the MSLP, which has so far issued just $3.7bn of loans, representing only 0.6 per cent of its total capacity.

While larger US companies, which have access to global capital markets, have benefited hugely from the Fed’s interventions since the start of the pandemic, the US central bank has struggled to provide assistance to smaller and medium-sized businesses. The Fed does not have the power to issue grants that would not be repaid.

Although the US economy has been steadily recovering from this year’s shock, there are fears that the recovery could slow sharply amid a new rise in coronavirus cases and fading fiscal assistance, leading to more small-business failures.

Jay Powell, the Federal Reserve chair, had always said he was open to adjusting the terms of the MSLP. But he has cautioned that there had not been huge unmet demand from smaller businesses, because many are wary of taking on additional debt.

In its statement, the Fed said it was adjusting the fees associated with the programme as well as the minimum loan size to “encourage the provision of these smaller loans”.

The US central bank also said businesses that had taken on loans through the Paycheck Protection Program, a small business aid scheme administered by the Trump administration this year, could exclude up to $2m of that from their leverage calculations, which could make it easier for them to access the MSLP.

One of the sectors that has been pushing hardest for changes to the MSLP is the commercial real estate industry, which has been walloped by the pandemic as Americans steer clear of shopping malls and office buildings. The sector has been pushing for more lenient terms on the loans, but it is unclear that the new terms announced on Friday will satisfy those demands.

Beyond Main Street, usage for the remainder of the Fed’s 11 lending facilities — which were announced in March under powers that allow the central bank to make asset purchases in “unusual and exigent circumstances” — has also remained modest.

The Fed has consistently framed many of these facilities as “backstops”, in the event that the dysfunction that swept through financial markets in March and April re-emerges. Investors have since ascribed the minimal take-up to the central bank’s success in quelling any concerns of a repeat event in the near future.

The municipal bond facility, which involves the Fed buying up to $500bn of short-term notes from select states, counties and cities, has purchased just $1.7bn of assets as of Wednesday, according to figures released this week.

Meanwhile, the Fed’s holdings of corporate bonds and exchange traded funds that track the market has stalled out around $13bn for weeks. The central bank had set the cap at $750bn.

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