Rosengren's Main Street pitch to banks: Get in it for long haul

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WASHINGTON — Federal Reserve Bank of Boston President Eric Rosengren says the coronavirus pandemic offers banks a unique opportunity to help steer their communities through the rocky months likely ahead and forge lasting bonds with commercial and nonprofit customers.

The Boston Fed has been tasked with administering one of the central bank’s most anticipated lending vehicles, the Main Street Lending Program, which seeks in conjuction with banks to provide a lifeline to small and midsize businesses that have suffered during the coronavirus pandemic.

"The Federal Reserve provides lending facilities ... but for many individuals and many firms, it may be much more effective to give direct transfer payments to those organizations and individuals," Boston Fed President Eric Rosengren says. "If we really want the kind of recovery that everybody's hoping for, more fiscal support is necessary."

The $600 billion program is offering loans of at least $250,000 to eligible businesses that were in sound financial condition before the pandemic, and have at least 15,000 employees or $5 billion in annual revenue. Banks will originate loans through the program, and the Fed will then purchase a 95% stake in each loan made under the program’s terms.

“This is the time where that banking relationship really becomes valuable, and it’s not only valuable to the borrower, it’s valuable to the community and the country at large,” Rosengren said in an interview.

Although the program has been met with some criticism from some who feel that banks might not participate in it and others who worry that the loan terms are too onerous for smaller businesses, Rosengren said that the program — which opened for lender registration last week — has already attracted substantial attention from banks looking to serve their customers.

"These are still early days in the program, and we are seeing a steady stream of interest," Rosengren said Friday in a speech to the Greater Providence Chamber of Commerce. He added, "I anticipate that many more institutions will register for the program, given its benefits to them, their customers and the areas where they operate.”

The Fed is also still expanding the Main Street program: Last week it asked for feedback on a proposal to extend the program to nonprofit organizations, which Rosengren thinks could allow banks to establish relationships with new customers.

American Banker spoke with Rosengren about his expectations for the program, the economy and additional actions Congress or the Fed may need to take to aid the recovery. This interview has been condensed and edited for clarity.

You talked in your speech on Friday about lender registration in the Main Street Lending Program, which officially opened last week. How is that going?

ERIC ROSENGREN: As of Friday, we had more than 200 institutions going through the registration process. More institutions entered the process on Friday. More are also entering today, so that's going to continue to climb, but the important thing is that we're getting banks that are registering — and that registration process is critically important, because we're not able to fund the loans until the bank is registered.

Given the complexity of the program, and the need to make sure that we do things that are in compliance and can address any concerns you might have with wiring large sums of money over time, it does take that two to three days for an organization to go through the [registration] process in general, so I'm very pleased with how things are going so far. I think we are getting a pretty steady stream of banks as they get more familiar with the program, as organizations like yourself talk about the program. I think more banks are looking at it, looking at the various legal arrangements, and borrowers are becoming more informed about the program. So I would expect over the next two weeks we'll continue to get a significant stream of lenders that start signing up for the facility.

When do you expect the program to begin purchasing loans, and do you have any indication as to if banks are starting to make loans through the program?

Banks are able to make loans under the program right now. We're not yet up and running for actually funding our 95% share of the loan. That is likely in the next couple of weeks, but since the banks are able to fund the loans now, it's really not an impediment.

If banks want to be in a position to get funded when we're first open, now is the time to start having those negotiations, having that discussion with the loan participants, having the discussion with the borrower, getting the legal arrangements all set. And presumably when a lot of that is done will be about the same time that we'll be opening for actually funding the loans.

You mentioned Friday that you were encouraged by the interest of community banks in the program, and I found that point notable because I've heard some comments about the loan sizes being ill suited for smaller, “mom and pop” businesses. Do you think that the current terms will enable smaller institutions to serve their customers, or do you foresee having to adjust the terms at all?

We've already adjusted the terms pretty substantially. One of the very important changes that we made was we lowered the minimum loan amount to $250,000. For many borrowers, including borrowers that frequently work with community banks, a $250,000 loan is a relatively small business loan. When you get the loans that are much lower than $250,000, they normally have more of an asset-based financing or personal guarantee — almost an upsized consumer loan. This program is really designed to be a cash flow lending facility, so I think that we've hit the sweet spot for a lot of community banks and midsize banks for having borrowers that are big enough to need a [commercial and industrial] loan. It probably doesn't address the concerns of very, very small borrowers, but those are probably under very different underwriting conditions than what the Boston Fed's facility is designed to do.

You, along with some of your other colleagues at the Fed, have said that you believe it’s likely the economy will need more monetary and fiscal support. What else can the Fed do at this point to stem long-term economic damage, and are there any fiscal policies in particular that you think Congress should consider?

The Federal Reserve provides lending facilities, it can provide loans, but for many individuals and many firms, it may be much more effective to give direct transfer payments to those organizations and individuals. That's not something the Fed can do. That's only something that fiscal policy can do, so hopefully Congress over the course of the summer will get a program together that takes into account that an awful lot of people are still unemployed, that an awful lot of firms are still closed. If we really want the kind of recovery that everybody's hoping for, more fiscal support is necessary.

On the monetary policy side, I would say that we're continuing to look at our lending facilities to see what more we can do. As I mentioned in the talk, the nonprofit part of Main Street is open for comment. We're then going to spend time evaluating all the various comments that we've got from banks and from nonprofit organizations. We'll try to tailor the terms of that to make it as broadly available as appropriate. You have to remember that an awful lot of people are employed by nonprofits when you think about colleges, universities, hospitals as well as all the other nonprofits that affect low- and moderate-income communities. So I think that's a critically important expansion of Main Street, and we still don't have a finalized term sheet.

I think other things that we're looking at are: Where are there holes in the economy where credit is either not available, or is not available on terms that are attractive enough that individuals or firms will borrow. That process will be ongoing as we watch the progress of the economy, and I would highlight that the economic outlook is heavily intertwined with how we do with the public health part. So if we don't do a very good job of controlling the pandemic, as we get into the fall, that's going to have economic repercussions both for individuals and firms whose finances are already fragile. So I think that's something that we're going to have to monitor very closely.

What considerations do you have to take into account when working with nonprofits as opposed to traditional Main Street businesses?

Many nonprofits have limited banking relationships. I would say that it's not unusual for hospitals to have either loans or debt. They sometimes have bank loans, but sometimes do not, so I think this is going to be a new market for banks.

I think this will provide an opportunity for banks to have deeper relationships with the nonprofit sector than they have, particularly educational organizations, hospitals, other large nonprofits, where they may not have immediately thought to turn to banks for their financing needs. But I think that is an important sector of our economy, probably a sector of our economy that could benefit from more bank lending, and I think this facility will hopefully facilitate both needed lending at a time of great distress, but hopefully provide relationships that continue on once the economy is no longer so distressed.

What do you think our readers should be paying attention to right now?

I think this will be an opportunity where banks are very flexible working with borrowers. That’s going to be a banking relationship that continues on for some time, so this is the time where that banking relationship really becomes valuable and it’s not only valuable to the borrower, it’s valuable to the community and the country at large. The Federal Reserve is setting up these programs out of a public service, but I think there is a public service element that we think about for banks as well, in that financing is the lifeblood of the economy and having continued access to financing is critically important.

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Commercial lending Main Street Lending Program Small business lending Non-profits Federal Reserve Eric Rosengren Federal Reserve Bank of Boston Coronavirus Monetary policy
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