Weaknesses of Fed lending facilities remain low, but uncertainties exist under higher interest rates, report finds

Vulnerabilities remain low in credit markets targeted by 13 emergency lending programs set up by the Federal Reserve three years ago in response to the coronavirus crisis, although some uncertainties still exist, according to a report from the congressional watchdog issued Friday.

The Government Accountability Office (GAO) said the lending programs set up by the Fed — called “facilities” to ensure the flow of credit to various parts of the economy – has routinely (at least five times between 2020-23) identified areas in which to enhance internal processes and controls, including for collateral and asset management. “As of September 2023, no new enhancement opportunities had been identified,” the agency said. “GAO also found the Federal Reserve’s plans for ongoing monitoring of the facilities generally aligned with federal internal control standards for ongoing monitoring of an entity’s internal control system.”

The GAO noted that corporate bond issuances are now higher than prepandemic levels, and credit spreads (reflecting borrowing costs) generally remain low. “These factors indicate that corporations have relatively easy access to credit,” the agency said.

However, the report stated, there are some outstanding uncertainties. The GAO said small businesses’ access to credit has decreased since 2022, with banks tightening credit standards in response to a less positive economic outlook and industry-specific problems.

Also, the agency said, municipal bond issuances have decreased since mid-2022 and are at prepandemic levels. “This trend reflects challenges for raising new debt or refinancing existing debt, especially given that interest rates have increased,” GAO said. “However, debt levels carried in sectors the facilities targeted appear sustainable.”

Meanwhile, delinquent payments for outstanding loans are on the upswing. GAO noted, for example, that 1,175 loans from the Main Street Lending Program (64% of all those made) remained outstanding as of August. “Since required interest payments began in August 2021, most borrowers have been making them on time,” GAO reported. “However, delinquent payments increased to about 7.6% in August 2023, which may reflect the effects of increased interest payments as variable rates on Main Street loans have risen.”

GAO said it found that 610 loans (or about 33%) had been fully repaid, and 45 loans (or about 2.5 percent) had recorded losses.

Federal Reserve Lending Programs: Status of Monitoring and Main Street Lending Program