Jun 9, 2020 - Economy & Business

The Federal Reserve to take on more risk to aid small business loan program

Fed Chair Jerome Powell standing behind a podium

Federal Reserve Chair Jerome Powell. Photo: Mark Makela/Getty Images

The Fed expanded yet another of its special purpose vehicles Monday, increasing eligibility for its Main Street Lending Program and raising the percentage of the loans that it will take on to 95%.

What it means: The Main Street program is the Fed's attempt to get money directly to more American businesses that have been left out of the Paycheck Protection Program and other CARES Act initiatives.

  • The Fed lowered the minimum loan amount to $250,000, opening the vehicle to smaller companies than before, and also raised the maximum loan limit.
  • The Fed also lengthened the repayment schedule so that borrowers don't need to begin paying back the loan's principal for two years, and extended the term to five years.

Why it matters: These changes are likely to increase the number of borrowers able to participate in the program.

  • It could also invite significant moral hazard for both the banks that are assigned to approve the loans (but will now only be on the hook for 5% of the loan amount) and the companies applying for them.
  • It also makes it more likely the Fed will loan out money that will not be paid back, violating a central tenet of the Federal Reserve Act.

What we're hearing: "The Fed simply views the risks that they are taking as commensurate with the true needs of Main Street," Joe Brusuelas, chief economist at tax and consulting firm RSM, tells Axios.

  • Both the Treasury Department and the Fed "are signaling to the public that the risks around the economic outlook are sufficient to push aside notions of moral hazard to avoid long-term damage to the real economy."

Watch this space: The Main Street vehicle has become contentious on Capitol Hill because it is expected to be accessed by oil and gas companies that have been offered no other lifelines from Congress.

  • Many are heavily indebted and have low credit ratings, but are likely to hold significant sway among bankers, especially in oil-rich states.
  • Treasury and the Fed will be taking on almost all of the risk for the loans, but the banks will be making the decisions on who is approved.
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