The U.S. Federal Reserve created a new small-business loan program by allowing banks to exchange those loans for cash at the U.S. central bank. This program aids banks ease their concerns of having to hold low interest loans.
The Fed will announce further details of the new term financing arrangement for loans under the Payroll Protection Program later this week.
The program is similar to the mortgage agencies arranged with the U.S. government, whose approval stamp on loans encourages banks to lend.
The Payroll Protection Program is a major response to the pandemic as part of the $2 trillion stimulus to support the economy against the impact of the coronavirus crisis. The stimulus committed $350 billion for loans to support small businesses and employee payrolls.
However, some banks are uneasy with the risks if the loans turn bad, despite the assurance of the Treasury Department to guarantee them if it happens. Bankers are concerned about the 1% interest loans despite the Treasury’s notice that it could be sold back in seven weeks.
The Fed is also working on a Main Street Lending Facility that will focus on mid-sized employers with 500 to 10,000 employees.