An overwhelming number of U.S. banks do not expect to become more willing to make loans to businesses under a key pandemic relief program amid concerns over the financial condition of borrowers and overly restrictive loan terms.

The Main Street Lending Program is aimed at keeping middle-market firms afloat that were solvent before the coronavirus pandemic but only about $2 billion of a potential $600 billion in funding has been approved by the Federal Reserve so far.

According to a Fed survey released on Tuesday, a major fraction of large banks approved at least 40% of the inquiries for Main Street loans that they had received since mid-June and nearly a third of banks expect demand for loans to increase over the next three months.

However, only 13.4% of banks said they expected their willingness to approve loans to increase over the next three months, with 83.6% expecting it would stay the same.

Banks enrolled in the program “often cited concerns about borrowers’ financial condition before and during the COVID-19 crisis, as well as overly restrictive MSLP loan terms for borrowers as reasons for not approving MSLP loans,” the Fed said.

More than half of the senior loan officers who responded to the survey indicated they had rejected Main Street loans for firms that were “creditworthy before the COVID-19 crisis, but too severely impacted to remain viable and hence unable to repay the loan.”

According to Reuters, the survey, which offers a first look by the Fed at how the Main Street program is playing out among banks, “suggests that as it stands the program’s use may well remain limited.”

“The results indicated that while banks expect demand for business loans to increase or hold steady in coming months, there is no clear sign that the so-far limited use of the Fed program will change much in response,” Reuters said.

Nearly three-fourths of respondents said they had made no Main Street loans at all or were not registered for the program and, for most of those that had made loans, the program accounted for less than 2.5% of their overall commercial and industrial lending.

 

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One response to “Banks Wary of Fed’s Main Street Loan Program”

  1. The reality is that the terms of the Main Street Program are such that a financial institution is almost guaranteed to need to reserve their portion retained of the loans as a bad debt under GAAP. Further, given how the government reacted in 2008-9 to financial institutions; why would any bank want to participate?

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