MNI EXCLUSIVE: Fed May Consider Funding For Lending Program

--Ex Officials Tout Benefits After Main Street Loans See Little Take-Up

By Pedro Nicolaci da Costa and Jean Yung

     WASHINGTON (MNI) - The U.S. could consider adopting a UK-style Funding for

Lending program if markets become unsettled by a second wave of Covid-19

infections, former senior Federal Reserve officials told MNI.

     The program would be a way to ensure Fed credit provision makes its way

toward small- and medium-sized businesses by offering funds to banks at a lower

cost than prevailing market rates in return for their commitment to lend to

targeted groups.

     Proponents say it would be relatively simple to implement with precedents

not just in Britain but also Australia. Any program must entice banks to bear

the risk of bad loans and overcome the longstanding domestic stigma associated

with borrowing directly from the central bank's discount window.

     Funding for Lending may also compensate for the early unpopularity of the

"Main Street" emergency credit facility. Fed officials have so far given no

indication that they're considering such a program, though they have pledged to

do whatever it takes to keep credit flowing and increasingly see a protracted

recovery that may trigger a wave of corporate bankruptcies.

     "That's something they could look at to encourage banks to make more loans

-- this is in addition to fine-tuning Main Street lending," said Donald Kohn, a

former FOMC vice chair who spent three decades at the central bank and also

worked at the Bank of England.

     The Main Street lending facility came online this month with a USD600

billion capacity but has seen no take-up as of last week. MNI has reported that

community-based groups with strong ties to small businesses have expressed

concern to Fed officials that the loans will not reach intended recipients as

their terms are currently structured.

     Funding for Lending "could solve a shortage of credit if the Main Street

facility isn't really doing that," said Nellie Liang, founding director of the

Division of Financial Stability at the Federal Reserve Board, now at the

Brookings Institution and Yale School of Management. "In some ways, why wouldn't

you do it?"

     --TAF REVIVAL

     Funding for Lending could be ramped up without Treasury approval using the

discount window authority, much in the way that the Term Auction Facility was

created a decade ago.

     Bill Nelson, previously deputy director of Fed's Monetary Affairs Division

and now chief economist at the Bank Policy Institute, is a proponent of such a

new approach for the Fed should the economic outlook worsen. With current

expectations for Fed rates to remain near zero for a long time, the real

question is whether access to credit is a problem that needs solving through a

new program.

     Credit market conditions have generally improved since March but officials

have flagged the precarious situation of millions of small businesses without

established banking relationships.

     "The Fed did not use a Funding for Lending program in the last crisis,"

partly due to serious doubt over take-up, Nelson said. "But difficulties with

Main Street may now have the Fed searching for simpler alternatives."

     One option is targeting small business funding, he said, and the Fed could

piggyback its tracking of credit using already existing reports on how much

banks are lending to small firms.

     "The rates would probably have to be negative to get banks to make the

types of loans you want," he told MNI. "And if you want to make it simple and

fast then you can't include a lot of granular detail about what types of loans

Funding for Lending will support."

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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