Report finds use of Fed lending facilities ‘relatively limited’ because terms were ‘deterrent’ to some

Use has been relatively limited of 13 special lending programs set up by the Federal Reserve in response to the financial impact of the coronavirus crisis, primarily because terms and conditions for some of the programs are deterrents to some borrowers, a report issued Thursday stated.

The congressional Government Accountability Office (GAO) said only 1.2% of the total $1.95 trillion allocated to back transaction balances has been utilized through the lending programs established by the Federal Reserve, with funding for nine appropriated under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted last spring.

For example, in a table, the report shows that none of four of the lending facilities has reached more than 4% of transaction volume relative to capacity. Those facilities are: Primary and Secondary Market Corporate Credit Facilities (with transaction volume of $13.6 billion), 1.8%; Main Street Lending Program (with five facilities, and transaction volume of $5 billion), less than 1%; Municipal Liquidity Facility ($1.7 billion), less than 1%; Term Asset-Back Securities Loan Facility ($3.9 billion), 3.9%.

“According to representatives from small business associations, banks, and state and local governments, the terms and conditions for some facilities are a deterrent for some potential participants,” the GAO wrote in its report. “Further, some small businesses may prefer not to take on more debt.”

The report added that the Fed has continued to adjust some of the terms of its facilities, which are designed to function as backstops.

GAO also observed that corporate and municipal credit markets, which are targeted by certain of the lending facilities, have improved since the onset of the pandemic. “For example, from March through September 2020, companies nearly doubled the amount of corporate bonds issued compared to the same period in 2019,” the report stated.

However, the report noted, state and local governments and small businesses continue to face financial challenges.

The report points out that the CARES Act included a provision for GAO to periodically report on these loans, loan guarantees, and investments through the facilities. Their report, GAO said, examines the level of participation in the facilities and what available evidence suggests regarding the effects of the facilities on corporate credit and related markets, states and municipalities, and small businesses; and the status of CARES Act funding available to support the Federal Reserve’s facilities, among other things.

The report also notes that as of Nov. 15, the U.S. Treasury had committed $195 billion (of which it had disbursed $102.5 billion) of the $454 billion in CARES Act funds available to support the facilities.

However, it adds, on Nov. 19, Treasury Secretary Stephen Mnuchin voiced his understanding of the congressional intent related to the facilities’ authority to purchase new assets or make new loans was for all CARES Act facilities to stop purchasing eligible assets or extending credit on Dec. 31, 2020.

“As such, the Secretary requested that the Federal Reserve return unused funds from facilities that received CARES Act funding,” the report states. “On November 20, 2020, the Federal Reserve stated it would work with Treasury to return unused CARES Act funds.”

GAO said it would continue to monitor the facilities’ use through the end of this year and the repayment of facilities’ outstanding loans and investments.

Federal Reserve lending programs: Use of CARES Act-Supported Programs Has Been Limited and Flow of Credit Has Generally Improved

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