Fed says backstop for small business loans fully operational

FILE PHOTO: Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

WASHINGTON (Reuters) - The Federal Reserve’s program to back emergency government loans to small businesses is “fully operational,” the U.S. central bank said on Thursday, a boost to banks as they await a possible expansion to the total amount of funds they will be allowed to disburse to help companies through the coronavirus crisis.

The Fed’s program is designed to make it easier for banks to offer loans under the $350 billion Paycheck Protection Program run by the Small Business Administration (SBA) by extending credit to financial institutions that make them, using the loans as collateral.

There are no fees for using the facility but the Fed said it will charge banks a 0.35% interest rate.

“Supplying financial institutions with additional liquidity will help increase their capacity to make PPP loans,” the Fed said.

The SBA has already allocated more than 1.6 million loans, which have the potential to be forgiven, to small businesses in all 50 states. These account for more than $338 billion of the initial $350 billion, since the initial program passed by Congress was launched less than two weeks ago.

With funds set to be exhausted shortly, U.S. Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranza on Wednesday urged Congress to approve an additional $250 billion in funds. Democrats have said they are in favor, but only if there are additional safeguards to ensure that credit is reaching businesses in underserved communities that don’t have strong pre-existing relationships with banks.

Data released on Tuesday showed that the construction, professional services and manufacturing sectors so far are among those topping the list of recipients, although the program has been hampered by slow disbursement of the actual funds and criticism that it shows preference to those who are existing business customers of participating lenders.

The Fed’s own program does not expand the amount available but it does allow banks to move loans off their balance sheets more quickly, freeing up capital to lend further if Congress adds more to the pot.

Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Chizu Nomiyama, Jonathan Oatis and Bernadette Baum