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Fed’s Main Street lending may be missing core group of firms

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© Reuters. FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington
© Reuters. FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington

By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve’s high-profile Main Street Lending program may be missing one of its key targets, with half of banks in a recent survey saying they had rejected loans to companies that were in good shape before the pandemic but too damaged by it to justify a loan.

In crafting one of its cornerstone responses to the coronavirus recession, Fed officials said they wanted the Main Street program to help firms that were solvent before the pandemic find a financial bridge to better times.

But 44 of 86 bank senior loan officers in a Fed survey released on Tuesday said they had rejected some Main Street loans for firms that were “creditworthy before the COVID-19 crisis, but too severely impacted to remain viable and hence unable to repay the loan.”

The response points to the sort of economic damage that programs like Main Street were meant to limit. It also highlights calls for the Fed and the U.S. Treasury Department to be willing to take more risks in supporting firms that might ultimately fail.

The survey, offering a first look by the Fed at how the Main Street program is playing out among banks, suggests that as it stands the program’s use may well remain limited.

The results indicated that while banks expect demand for business loans to increase or hold steady in coming months, there is no clear sign that the so-far limited use of the Fed program will change much in response.

Rather, nearly three-fourths of respondents said they had made no Main Street loans at all or were not registered for the program. For most of those that had made loans, the Fed’s Main Street program accounted for less than 2.5% of their total commercial and industrial lending.

The lenders cited a variety of constraints around the use of the program, including Fed-imposed cash flow requirements and repayment terms that ruled out some potential borrowers, and the ability to simply make any attractive loans themselves without getting involved with the central bank.

“Respondents expected C&I loan inquiries to increase in the next three months,” from companies in the size category eligible for the Fed’s Main Street program, which is open to those with no more than 15,000 employees or $5 billion in revenue. “However only a modest share of banks expected their willingness to extend (Main Street) loans to increase over the same period,” the report noted.

The Main Street program is among the highest profile of the Fed’s many pandemic-related programs.

But uptake has been weak. Only about $2 billion of a potential $600 billion in lending has been approved by the Fed so far. While Fed officials have characterized that as evidence the private credit system is working without Fed support, it has also led to calls for the Fed to make the loan terms easier, or even to reallocate some of the funds to other programs.

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