Financial Positions of U.S. Public Corporations: Part 5, The Main Street Lending Program: Potential Benefits and Costs

Abstract: This blog post is the fifth in a series that discusses how the current pandemic affects the financial positions of publicly traded U.S. corporations, the potential implications of these financial developments, and the federal policy response. In this post, we study the economic benefits and costs of the Main Street Lending Program, created by the Federal Reserve to support corporations during this crisis. We make four points, which reflect our analysis and are not the views of the Federal Reserve System or the Federal Reserve Bank of Chicago. First, the main potential benefit of this program is to supplement private funding to corporations so that they can avoid financial distress during the pandemic. Private funding may be insufficient either because financial intermediaries’ ability to lend is limited or because the intermediaries do not take into account the broader benefits associated with lending to distressed firms. Second, while the program is quite large, so that it has the potential to provide credit support to many firms, its potential might not be fully realized because all parties involved (borrowers, banks, and outstanding creditors) may not always have sufficient incentives to participate. Third, the program excludes some firms, which may limit its efficacy. And fourth, it is possible that the program may help the economy in the short run but marginally slow economic growth in the medium run by increasing debt overhang for participating firms.

Keywords: Loans; Covid-19; CARES Act;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Source: Federal Reserve Bank of Chicago

Publication Date: 2020-06-18