MNI EXCLUSIVE: Pressure On Fed To Boost Main Street Lending

The Federal Reserve is facing growing calls to broaden access to its Main Street Lending Facility or risk a K-shaped recovery which sees big companies survive while smaller businesses fold, former Fed officials told MNI.

The Main Street Facility has so far disbursed just USD898 million, a paltry figure compared to the USD75 billion in designated Treasury equity that the Fed had touted as potentially generating as much as USD600 billion in loans. Ex-officials noted the minimum loan threshold of USD250,000 excludes too many businesses, including customers of the 1,000 or so Community Development Financial Institutions (CDFIs) that serve low-income and minority communities.

"While the Fed has given champagne to the biggest companies, via its easy corporate bond programs, smaller businesses are being forced to catch the drops via a program that is currently not easily accessible," Sarah Raskin, former Fed governor, told MNI.

"This differential kind of relief means that size, more than creditworthiness, determines access to credit."

The Fed is administering the program through large banks, which have little interest in making high risk, low return loans to smaller borrowers. Instead, lenders have tended to direct capital to large firms with which they have existing relationships, a pattern reinforced by the speed of disbursement in the first round of fiscal stimulus.

BUSINESSES FAILING

And yet small businesses could badly use an influx of capital. Research cited by the New York Fed suggested active black business ownership declined by 41% between February and April.

The Main Street program not only took three months to come online, but when it did its terms were too stringent for firms that really need money, despite its loss-absorbing Treasury backstop. Meanwhile, companies in a strong financial position can borrow more favorably elsewhere.

"The banks don't want to touch this thing with a ten-foot pole," Danielle DiMartino Booth, a long-time Dallas Fed economist, told MNI. "The liquidity transmission mechanism is completely broken and it has to be very troubling to them given they are at the lower bound (on the fed funds rate). It's a frightening thought because businesses need credit."

The joint-custody arrangement with Treasury also makes it unclear who is leading the charge, complicating accountability, sources said.

Policymakers are concerned about what some are calling a K-shaped recovery -- one where big businesses thrive, or at least recover, while small ones fold.

Patrice Kunesh, former head of Minneapolis Fed's Center for Indian Country Development, told MNI the divide happens not just because of a lack of interest on the part of banks but also a lack of financial acumen and administrative capacity in the small business itself.

Unlike large firms, mom and pop operations rarely have someone focused solely on raising capital as their job rather than running the business.

MORE LENDING NEEDED

"I do think the Fed is missing Main Street," said Kunesh. "My experience is that CDFIs, especially in the more rural communities, really have their ears tuned to what the communities need."

Ex-Fed Chair Janet Yellen is among prominent former policymakers calling for an expansion of lending targeted toward the greatest need.

"I would love to see the Fed and Treasury explore a 13(3) (program), maybe something through the main street facility, through CDFIs, though would be oriented toward low and moderate neighborhoods and banks," Yellen told Congress in July.

CDFIs are private lenders but are not regulated like banks and can tailor loans more appropriate to smaller, less conventional businesses. They are backed by the Treasury's Community Development Financial Institution Fund, whose mandate is to expand lending to needier, more financially-stressed populations.

Some sitting Fed officials, like San Francisco Fed President Mary Daly, remain hopeful about the program's future.

"I see those positive developments occurring and it is a vital component of the package of support we are giving to the economy, and I wouldn't be surprised if take-up goes up," Daly told reporters last week.

However, Raskin and others worry that might be too little too late for a sector which could see a large swath of firms go under in six months.

"The program has had a rocky start -- with different criteria at different times -- and later than ideal to help keep midsized firms from having to lay off workers," Raskin said.