The Fed is paying 95% of the loan, so why would the banks be scared of lending?
Even if the bank loses their 5% because they partaked in Fed's Main Street Lending Program, can't the Federal Reserve or US Treasury can bail out and rescue the bank?
Banks Might Not Lend
Another problem is the mechanism by which the program will be implemented: through banks.
The Federal Reserve doesn’t normally lend to nonfinancial companies. So, as with the Paycheck Protection Program, banks will take on the responsibility of studying the finances and prospects of each business that wants a Main Street loan and decide whether to approve it.
To protect taxpayers and incentivize the banks to make good loans, the program requires banks to keep between 5% and 15% of the debt — and thus a portion of the risk — on their own books. But that clause also deter banks from participating.
Putting their own money on the line could be an obstacle, said Christy Hester, director of growth and development at the Independent Bankers Association of Texas. “It means they’ve got accounting and reporting requirements,” she said. “Just setting up the accounting side of that and the servicing side of that, if it’s not already set up, that’s a pretty big burden for a small community bank.”
The Small Business Administration, which is administering the lending program, has said it will disclose the names of companies that got loans — just not yet. News organizations are suing to stop the delay.
The Main Street program compensates banks by allowing them to charge an origination fee of up to 1% of the loan, plus an annual servicing fee. Because it’s so difficult to assess the risk of lending money in the climate of pandemic-induced uncertainty, that might not be enough.
It’s not surprising that banks would prefer to receive higher fees and take on less risk. But it does mean that running the program through the banks could slow things down.
More specifically, once your company gets its loan, the Federal Reserve will buy up 95% of the loan from the bank, leaving just 5% with the bank that originated the loan. The term of these loans is four years, and amounts generally range between \$1 million and \$25 million. These loans cannot be used to pay off any other existing debt the borrower has.
The Federal Reserve will be purchasing up to \$600 billion in loans.