MNI EXCLUSIVE: Fed's Harker Urges Banks to Offer Loan Relief

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve is looking at how to encourage banks

to offer loan modifications and other relief to borrowers, especially smaller

enterprises that may be the hardest hit by coronavirus-driven lockdowns,

Philadelphia Fed Bank President Patrick Harker told MNI Thursday.

     Harker also urged banks of all sizes to tap the Fed's 90-day discount

window loan to meet unexpected funding needs, saying it is the Fed's primary

tool as the lender of last resort, and preferred over a Term Auction Facility

for now.

     "We're very focused on thinking about ways to get relief on the monetary

policy side and supervisory side to small businesses," he said in a phone

interview. "The Fed can deploy programs used in natural disasters to stabilize

the situation immediately," and "banks should be working with regulators to

extend regulatory relief during the 90-day period," offering borrowers

forbearance plans and loan modifications.

     "We talked a lot about liquidity facilities, supervision regulation

function," said Harker. "there's no bad behavior to mitigate, unlike in the

financial crisis. We are having a lot of conversation about how to provide some

kind of relief in the short term to help banks service their customers. Making

sure small businesses don't have to close and people can make their rent."

     Harker sees the discount window as key to ensuring credit flows to all

businesses. Discount window loans continue to be hampered by stigma, but the Fed

is seeing an encouraging uptick in usage, especially test loans by banks trying

out the process, he said.

     --FORGET DISCOUNT WINDOW STIGMA

     While the Fed may still begin auctioning term discount window loans through

a Term Auction Facility, smaller banks are more apt to understand and use the

discount window directly, Harker said.

     "What we're hearing from banks is the C suite gets it, but the people down

below are still nervous. We have to get the message out as much as we can," he

said. "Forget stigma right now, this is what the discount window is designed

for. Come to it and get the liquidity you need."

     He dismissed the suggestion that the Fed should lower the discount rate

further from the record low rate of 0.25%, or that it needs to take it negative

to encourage usage.

     "I don't think cost of capital is what's driving the situation. I did not

pick up any sense from our contacts that people are not coming to the discount

window because the rate is too high," he said.

     Similarly, the fed funds rate is already "highly accommodative" with the

Fed committed to leaving it low for long. "At some point, if we recover maybe we

can see revisiting negative rates, but right now no."

     --ECONOMIC IMPACT

     The coronavirus is set to take a big toll on the economy, with data still

catching up to what Harker is hearing from firms in his district, he said.

     Earlier Thursday, the Philadelphia Fed's manufacturing business sentiment

reading sank to -12.7 in March, the lowest since July 2012, reflecting a sharp

pullback in factory activity as firms responded to coronavirus disruptions.

     "Workers can't get to work, tourism is terrible, and small businesses are

really hurting," Harker said. "Second quarter growth is going to be bad, but how

bad, the estimates vary and ultimately depends on the virus."

     Manufacturers in the region have so far opted to reducing hours or other

ways to avoid letting skilled workers go for fear of a hard time getting them

back when the economy recovers, Harker said.

     Another piece of good news is that supply chains appear to be back up and

running out of China, with firms reporting that parts have been shipped and are

expected to arrive in the next six to eight weeks, he added.

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

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