Federal Reserve Moves to Pump Up Small Business Lending

The Federal Reserve said on Monday that it would take steps to urge more banks to lend to small businesses, moving in to support a new federal program that has gotten off to a rocky start.

Congress dedicated $350 billion to make small business loans as part of the $2 trillion coronavirus support package it passed in March. The effort, known as the Paycheck Protection Program, is intended to encourage banks to make loans to small businesses that agree to keep workers on the payroll. Most — and in some cases, all — of a loan would be forgiven if the borrower retains its workers and doesn’t cut their wages. The government would repay lenders for the forgiven portions of the loans.

Companies with 500 or fewer employees can apply, on a first-come-first-serve basis, and banks will give them the short-term funding they need to keep workers on the books and cover expenses.

But the first few days of the program, which began on Friday, have been fraught. It is hard for the Small Business Administration to get so much money out the door quickly, and the model itself poses a challenge for banks, particularly smaller lenders. Small-business loans could fill up their balance sheets, making it hard for them to keep lending to other customers — which is where the Fed’s new program would come in.

While the Fed has released scant detail on exactly what form the initiative will take, it has promised to create a financing solution to help banks lend to smaller companies. It could either loan directly to banks making Paycheck Protection Program loans, or essentially buy the loans once they are originated so that banks will not have to carry them on their balance sheets. It said in a statement that it would release more information this week.

The new Fed effort, called a facility, which the central bank is rolling out under its emergency lending powers with signoff from Treasury Secretary Steven Mnuchin, responds directly to industry concerns.

“I urge Treasury and the Federal Reserve to launch a secondary market facility to purchase Program loans from originating institutions,” Rebeca Romero Rainey, president of Independent Community Bankers of America, wrote in letter to Mr. Mnuchin and other government officials on Saturday.

“This program should not be limited by the balance sheet capacity of participating lenders,” she said.

Alan Rappeport contributed reporting.

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