“I expect I fear that the community will continue to expand in many parts of the United States and that this will likely continue to be a problem, not only for public health, but also for the economy “Said Eric Rosengren, president of the Federal Reserve Bank of Boston.
“If my expectations are good, there will be more companies who will start to wonder if they have sufficient funding. . . So I expect we will progress over time, and we will see more banks and more borrowers, “said Rosengren in an interview with The Financial Times.
The Main Street Lending Program, where banks lend but the Fed takes 95% of the risk, was announced in March but did not become fully operational until June. The Boston Fed, which is responsible for the program, has spent months looking for ways to expand eligibility and ease loan conditions after skepticism from banks and borrowers.
Even with these changes, banks say there has been little or no interest in the program since its launch, blaming the fact that large companies can raise record levels of funding in the debt markets while small ones companies find the program too expensive and complex.
The corporate finance environment is so good that US banks are expected to announce next week that overall lending fell in the first quarter as companies repaid the lines of credit they pulled in March when they feared a funding crisis.
Nonetheless, Mr. Rosengren said the Fed is beginning to respond to corporate loan applications ranging from movie channels to software, beverages and oil services.
The Fed also continues to attract banks to help originate loans: some 260 have signed up to participate in the program, including 90 that will process loans for non-clients as well as for businesses with which they have relationships existing. Many other banks are in the process of registering, bringing the total number of registrants to over 400.
“If the pandemic and the economy continue to be closely linked with the approach of fall, and perhaps with a more serious problem in the fall, this program provides very important insurance against both borrowers with no access to credit, and banks are reluctant to lend because their own balance sheets are potentially constrained by problematic loans, “said Rosengren.
The chairman of the Boston Fed has also suggested that the plan may have a longer lifespan than its original expiration date in September. “I think if there is a need – and I expect there probably will be – that it should be extended, but no decision has been made at this point,” said Mr. Rosengren.
He dismissed criticism that the terms of the loan in the Main Street plan were too stringent and the process too costly for struggling businesses, particularly the small ones, which had to pay tens of thousands of dollars in fees for loans as low as $ 250,000.
«Libor [the interbank borrowing rate] plus 300 basis points for a business that is either closed or has been closed for a long time and has had a bad income disruption, I think for many of these borrowers it will actually be an attractive rate, ” he declared.
But Rosengren warned that the most troubled companies could not participate because the Fed is constrained by the credit risk it can take.
“Companies that do not have the capacity to go into debt and are at risk of failing quickly are not suitable for this program,” he said. “This program is intended to meet a particular need, and that particular need is a business that has been disrupted, but this business is probably doing well.”
The plan will soon be expanded to include non-profit organizations, such as hospitals and universities, he added, and the current loan conditions could still be changed.
“As we see the program going on and see what is going on with the economy, we certainly have the ability to reassess what is working and what is not and if we see that there are major problems , we’ll have to take a look at that, “he said.