US bank executives say they have seen minimal interest in a $600bn programme designed to help midsized companies through the Covid-19 pandemic, raising questions about whether the federal response to the crisis is helping key parts of the American economy.
Senior executives at some of the biggest US lenders told the Financial Times they had more people working on the Main Street Lending Program than they had borrowers interested in taking money from it.
The banks have typically seen fewer than 200 serious expressions of interest each since the programme — which is 95 per cent funded by the Federal Reserve — was launched a fortnight ago. That is a sharp contrast with the deluge of applications that initially flooded the federal Paycheck Protection Program, which offered forgivable loans to cover small businesses’ wage costs during the pandemic.
Bankers say the MSLP is overly complicated. Drawing up loan documents can costs tens of thousands of dollars, they say, and borrowers have also been deterred by the administrative burden. Although the Fed twice reduced the minimum borrowings from an initial $1m to attract more small and medium-sized businesses, demand for smaller loans has been particularly low.
“What banks are telling us is that once borrowers have a better sense of the details and the complexity of the programme — the legal documentation, the fact that it is a participation structure, the requirement that the borrower has to do quarterly reporting — they may lose interest,” said Lauren Anderson of the Banking Policy Institute.
The struggles of the MSLP come amid growing concerns that the fiscal support introduced during the crisis — including nearly $3tn in payments to households, unemployment benefits and aid to businesses — is fading or ending, even as Covid-19 cases are on the rise.
The Senate on Tuesday night voted to extend the deadline for the PPP to August 8 since about $130bn of its $659bn funding would have gone unused if it had closed as planned on July 1. The extension is not final until approved by the House of Representatives.
Jay Powell, the Fed chair, told Congress earlier on Tuesday that more than 300 banks were participating in the Main Street programme, which launched earlier this month, but were “not getting a ton of interest”, though they expected that to change “over the course of the next few months”.
“We continue to be open to playing with the formula and making adjustments,” he said.
During the hearing, Mr Powell was pressed to further lower the minimum borrowings from the current $250,000, to widen its appeal. Mr Powell said the Fed was open to the idea, but noted that it created challenges.
“We can see ourselves possibly lowering the threshold again but logistically for us to be making very very small loans would be difficult and those people would be better dealt with through fiscal policy,” he added.
Larger companies do not need the loans, which require only interest payments for the first year, since they have been able to raise money cheaply in booming debt markets, bankers said.
Kathy Bostjancic, chief US financial economist at Oxford Economics, warned the Fed could face a degree of “reputational risk” if it was perceived to be doing more to help Wall Street than Main Street.
“We have seen a V-shaped recovery in equity markets, but we are far from that in the real economy,” she said, as US stocks closed out their best quarter since 1998.
One of Congress’s biggest concerns has been that the MSLP would not help some of the hardest hit sectors of the economy, including commercial real estate groups in retail and hospitality.
Steven Mnuchin, US Treasury secretary, acknowledged it was a “large challenge”. Mr Powell said it was a “serious problem”, and added that central bankers were “racking our brains” to see how it could be addressed.
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“More debt may not be the answer here, debt doesn’t solve every problem,” the Fed chair said.
The Main Street scheme may be as unappealing for banks as it is for their clients. A senior executive at a large US bank said that if a client was a good credit “the odds are you make the loan outside the Main Street programme rather than within it”.
“The programme is really complicated,” he said. In addition to the costs involved in tailoring documents for every borrower, banks making loans to large customers have to seek agreement from all that businesses’ existing lenders. Banks are further constrained because they are blocked from reducing existing loans for some businesses that benefit from the MSLP.
A senior executive at another large bank said it takes a “village of people” at the bank to meet the requirements for a programme that is right for a “pretty narrow set of borrowers”.
The programme was more useful for banks whose balance sheets were stretched, or banks who already have a large exposure to a client and do not want to increase it, bankers said.
Ms Anderson of the Banking Policy Institute said banks were also struggling to find borrowers who met the programme’s requirements of being creditworthy enough to receive loans, but not creditworthy enough to secure loans in the commercial market.
A senior executive at a third bank said interest could pick up and the programme should not be viewed as a failure even if it does not make many loans.
“The reason why nobody is selling a lot of demand with a high sense of urgency today is because this is a tool to get liquidity for several years, it’s not like PPP where there’s a fear the money is going to run out.”
“When we first started working on this, the environment was so much more difficult, there was so little visibility,” he added. “We geared up waiting to be prepared for something like that [PPP] . . . We all wanted to do better than we did on PPP.”