US businesses race to tap Fed lending before year-end expiry


The Federal Reserve’s emergency lending programme for small and midsize businesses has seen a jump in demand with just weeks to go before it is shut down over the objections of the US central bank.

For the week ending Wednesday, the Fed lent out an additional $2.7bn through the Main Street Lending Programme, which was created early in the pandemic to help struggling businesses that are not big enough to access the bond market.

That made it the programme’s busiest week yet — a 37 per cent increase from the week before — and takes the amount doled out in loans to roughly $10bn.

The Treasury department, which backstops the facility, defied the Fed’s wishes and refused to renew the programme beyond its expiration date of December 31.

Treasury secretary Steven Mnuchin will also shut two Fed facilities set up to buy corporate debt, another that backstops the market for asset-backed securities and one aimed at supporting state and local governments.

As with the MSLP, the Fed’s Municipal Liquidity Facility for state and local authorities also garnered more interest in the past week. New York’s transit agency borrowed $2.9bn, its second helping from the Fed after a $450m request in August. The new loan lifted the facility’s usage to $6.4bn.

Neither scheme has been used to the extent originally expected, however. With the Treasury backstop, the Main Street programme was able to lend as much as $600bn to small and midsize businesses. The facility for municipalities had an upper limit of $500bn.

According to Financial Times calculations based on Fed data published last week, just $90.8bn of the central bank’s firepower is currently deployed through a total of 13 emergency lending facilities. That is down from a peak of $107bn in July and represents roughly 3.5 per cent of the minimum $2.6tn the Fed said it would make available.

Bar chart showing fed facility usage

The Fed has touted the low overall uptake as evidence of its success soothing markets with pledges of support alone. But it tinkered with the terms of the MSLP as late as October 30, suggesting there were issues with the overall design of the programme. Beyond reducing the minimum loan size to $100,000, the Fed also adjusted the associated fees.

Against the backdrop of rising coronavirus cases and a faltering economic recovery, investors have argued that Mr Mnuchin’s decision was misguided. The Fed itself issued a rare public statement of disappointment. Some Republicans on Capitol Hill, however, said the government backstop was distorting markets.

The issue re-emerged on Thursday as a potential stumbling block to a new fiscal stimulus bill. Pat Toomey, a Republican senator, sought to insert a provision in the legislation that would prevent the Fed from reviving the facilities, prompting opposition from Democrats.

Column chart of $bn showing Demand for Fed's emergency facilities ticks up

“These programmes are insurance,” said Eric Winograd, senior economist for fixed income at AllianceBernstein. “Getting rid of an insurance policy before it’s clear that the patient is healthy seems like risky business.”

He added that if the financial situation deteriorates again, “things will be worse than they otherwise would have” been without these programmes in place.

Kathy Jones, chief fixed-income strategist at Charles Schwab, said businesses that have borrowed from the MSLP do not have good alternatives.

“Banks won’t lend to them or the rates are so high they are prohibitive,” she said. “It seems like a shame to let businesses die and impose all of that pain on their employees.”

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