Federal Reserve Chairman Jerome Powell said the central bank is “days away” from making its first loans under the $600 billion Main Street Lending Program—it’s an emergency lifeline for cash-strapped businesses that are too big for new emergency programs like the Paycheck Protection Program but too small to access capital markets by issuing bonds or equity.
Companies with less than 15,000 people or annual revenue of up to $5 billion are eligible for the loans, which will come directly from banks and range from as little as $500,000 to as much as $100 million.
After that, the Fed will buy either 95% or 85% of every loan to ease the burden on banks’ balance sheets.
Because the Fed operates under a strict mandate to avoid risky lending, the biggest challenge of the program is the potential that some loans might not be paid back if a business fails.
As a result, the Wall Street Journalpoints out, the Fed must balance loan terms that are strict enough to ensure that most companies pay the money back but not so strict that businesses are deterred from participating.
Speaking with Princeton University economist Alan Blinder on Friday, Powell said Main Street Lending is “far and away the biggest challenge” of any action the Fed has taken so far during the pandemic.
Loan participation forms for lenders were releasedon Monday, and Powell had previously indicatedthat the program would be up and running by June.
“It’s challenging to get in there,” Powell said about the challenges of creating a standardized, direct lending product that will work for most middle-market businesses. “Nonetheless, get in there we will.”
This new loan facility is just one way the Fed is rewriting its playbook during the coronavirus emergency. It’s also buying municipal bonds for the first time and taking its first steps into certain types of riskier corporate bonds, and it’s promised to buy an unlimited amount of government debt for the duration of the crisis.