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Bankers issue warning over US business support scheme

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Via Financial Times

A $600bn Federal Reserve scheme to help larger companies during the coronavirus pandemic will need to be carefully designed to attract users, according to bankers and industry figures.

While the Fed’s $350bn Paycheck Protection Programme for small businesses has been so popular that Republicans are pushing to add another $250bn of funding, bankers say demand for the Main Street Lending Programme (MSLP) will hinge on the interest rate the Fed settles on, the appetite for risk among banks as well as how credit markets develop. 

Initial plans for the scheme propose that the four-year loans on offer — which will be available to companies employing up to 10,000 workers or with revenues of less than $2.5bn — will charge a rate of between 2.5 and 4 percentage points above the US main interbank lending rate. 

“For this to work, there’s going to have to be a calculus where the borrowers wish to participate, and the lenders wish to participate,” said one industry figure, adding that the same was not true for the small business scheme because it was “free money”. 

The Paycheck Protection Programme writes off loans of up to 2.5 times a company’s monthly wage bill, provided the cash is spent on payroll and other allowable expenses. 

David Fanger of rating agency Moody’s, said take-up of the MSLP “definitely depends on the detail” and that pricing would likely be higher than a “normal fully functioning capital market” but below “a highly stressed capital market”. 

The biggest US banks said it was too soon to comment on the scheme, but several privately said the interest rate would be key as would individual client circumstances, with some companies having better options.

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The industry figure said bank risk appetite would also have an influence on the programme’s success, because banks keep 5 per cent of the loan while the rest is taken by the Fed. The companies applying for the loans have been hit by the coronavirus crisis, and this could discourage banks from lending to them. 

“If you already have outstanding credit to that borrower . . . that might look pretty good to you,” they said. “If you haven’t lent to that borrower before, it seems like that calculus would be significantly different.” 

Banks said MSLP would be easier to launch than the PPP because there were likely to be far fewer borrowers and banks would not need to set up new systems for the loans. 

The Fed has given banks and industry groups until April 16 to submit feedback on the MSLP, which is part of a $2.3tn package to insulate the US economy from the worst of the coronavirus shock.

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