Fed to Provide Financing for Small-Business Stimulus Loans (2)

The Federal Reserve said it will create a program to help speed the flow of funds to small companies through the government’s coronavirus stimulus, marking its latest step to shield the U.S. economy from the pandemic.

The facility will provide term financing to banks against loans issued under the Small Business Administration’s Paycheck Protection Program, the Fed said in a brief statement Monday.

The $349 billion program is a centerpiece to the $2.2 trillion legislation that President Donald Trump signed into law March 23. Under the program, banks provide loans to small businesses to cover payroll, rent and utilities for up to eight weeks. The loans convert to grants if the firms retain or rehire their workers.

The program has been slow to get moving. Banks and non-bank lenders since last week have voiced concerns to the Treasury about holding loans for seven weeks before they can be purchased by the government. Community banks have said they lack the liquidity to continue making loans to small businesses under such a delay.

Read More: Trump Calls Virus Relief ‘Flawless’ Despite Bankers’ Struggles

The Fed’s move would help bridge that gap by lending to the banks and accepting the PPP loans as collateral.

Banks had another alternative: bringing their PPP loans to the Fed’s discount window. Banks may have balked at that because “there’s a stigma at the discount window,” said Nathan Sheets, a former Fed and Treasury official who’s now chief economist at PGIM Fixed Income in Newark, New Jersey.

Discount Stigma

“There’s a stigma at the discount window. To the extent you create a whole new facility, that may facilitate banks’ willingness to go to the Fed and collateralize these loans,” Sheets said.

Mnuchin last month said “there’s no stigma about going to the discount window,” as he encouraged banks to use it. “They should feel free to draw from the discount window. That’s another great source of liquidity for them to lend to companies.”

The Fed said it would announce additional details later this week.

Fed Unbound: All the U.S. Central Bank’s Corona-Related Moves

The move is the latest in a rash of emergency steps by the central bank to keep credit flowing as the U.S. economy shelters from the pandemic. The Fed has also slashed interest rates to near zero and pumped hundreds of billions of dollars into the financial system to keep markets functioning and help support businesses and households.

It is also working to establish a Main Street lending facility to help smaller- and medium-sized businesses. Eric Rosengren, president of the Boston Fed, said on April 1 that was a couple of weeks away.

(Updates with background starting in fourth paragraph.)

--With assistance from Rich Miller.

To contact the reporters on this story:
Saleha Mohsin in Washington at smohsin2@bloomberg.net;
Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story:
Margaret Collins at mcollins45@bloomberg.net

Alister Bull, Scott Lanman

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