A pedestrian walks in front of the Federal Reserve Bank building in Washington.

Kevin Lamarque | Reuters

The Federal Reserve has reached out to investment and retail banks for comment on its Main Street lending program ahead of its official launch, according to people familiar with the matter.

Earlier this month, the central bank outlined its plans for the program, which aims to create up to $ 600 billion in loans for companies with up to 10,000 employees or up to 2 , $ 5 billion in sales in 2019.

Since then, the Fed has solicited a wide range of comments as it formulates more details on the program. In addition to speaking to investment and retail banks, he also spoke to his reserve banks and received over 2,200 comments online.

It is not known when the program will officially launch. The Fed has announced that it will issue more detailed guidelines for its Main Street program “soon”, but no official timetable yet. They are expected to be presented in the coming weeks, the people said. People requested anonymity because the conversations are confidential.

Lael Brainard, a member of the Federal Reserve Board of Governors, helps lead the program, one of the people said. His role in the program, which takes place under a Republican administration, is notable given his Democratic ties. Brainard was previously an economic adviser to former President Bill Clinton. Under former President Barack Obama, she was Undersecretary of the Treasury for International Affairs.

Still, his involvement in the Main Street program may help ease some partisan tensions, as there is an in-depth review of loans made to large corporations. Democrats urged to add surveillance to programs that rolled out business loans during negotiations over President Donald Trump’s $ 2.2 trillion relief bill signed at the end of March.

The Fed asks a wide range of questions, including those aimed at understanding which loan requirements make sense for specific industries, people said. Lobbyists from various sectors and industries have lobbied for the companies they represent to access the funds. Retail and hospitality lobbyists, for example, have expressed concern that the debt requirements are too restrictive.

Investment professionals, likewise, have asked for more clarity on certain details of the program, such as how the Fed will calculate a company’s earnings before interest, taxes, depreciation and amortization, or EBITDA. They are also seeking answers about the rate the Fed plans to charge on loans, bankers and private investors told CNBC.

The dialogue between the Fed and bankers of all stripes underscores the unique position in which the central bank finds itself. In his response to the coronavirusThe devastating impact on the economy, the Fed has blurred the lines of its mandate to maximize employment and stabilize the economy in the uncharted territory of direct business lending.

Federal Reserve Board Chairman Jerome Powell, however, said the Main Street agenda was not a departure from its mandate, but an expansion of its efforts under unprecedented circumstances to keep the flow of credit to households and businesses.

“The role of the Fed is to provide as much relief and stability as possible during this period of limited economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible,” he said. he said in announcing the first details of several of the programs earlier this month.

The central bank has already announced updated guidelines on another program it has put in place, saying on Monday it will expand the reach of its municipal fund to support towns that are smaller than originally planned.

“Dependent on banks”

As the Fed stretched, it turned to the banks for help and the Treasury for support on loan losses.

“The Fed doesn’t have the capacity to take out credit, so it depends on the banks to do it,” said Chris Whalen of consultancy firm Whalen Global Advisors, who previously worked at the Federal Reserve Bank of New York.

“Either way, the Fed is not taking credit risk. They want the Treasury to come in front of them. The Treasury should bear the first loss.”

The Main Street loan program will rely on banks to help select applicants and keep 5% of loans on their balance sheets. The Treasury, meanwhile, will offer $ 75 billion in cash for the program and take the first hit on any loss. These funds are part of a $ 500 billion pot established by the $ 2.2 trillion CARES law passed last month.

“The bigger question is whether the Fed will be willing to change conditions in different sectors,” said Kathryn Judge, Columbia Law School professor and financial markets expert.

Banks, which are already seeing customers rush to their lines of credit, have to manage their balance sheets themselves.

“If the Fed learns that banks are likely to grant qualifying loans only to certain industries (because they are relatively less risky or there is less uncertainty about the impact of Covid-19 on the viability sector), the Fed and the Treasury must then decide what to do with this information, ”the judge said in an email.

The Treasury could, for example, provide a thicker capital cushion for certain industries potentially considered more vulnerable, such as retail or energy, the judge said. Treasury Secretary Steven Mnuchin, however, hinted that the Treasury use your funds sparingly, with the aim of minimizing losses. He also, however, told Bloomberg News that the administration is considering creating a program through the Federal Reserve to support the struggling oil and gas industry.

If the Treasury chooses not to offer a buffer against vulnerable industries or businesses, some could be left behind. Already, small businesses have been excluded from the government program for businesses with fewer than 500 employees as demands have poured in. Banks, meanwhile, have come under fire for allegations they prioritize existing customers.

“The reason [the banks are] lending to big companies is because they see them as more likely to survive, ”Whalen said.


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