Federal Reserve to smooth lending to small businesses

The Federal Reserve will provide support to the government’s new small business lending program in its latest attempt to smooth the flow of credit in the virus-stricken U.S. economy.

The Fed said Monday that it will purchase loans that banks make under the government’s small business program. The program was set up under the $2.2 trillion economic relief package and can provide $349 billion in loans to small companies. Those loans can be forgiven if they are spent on payroll, to encourage firms to keep paying their employees or rehire workers they may have recently laid off.

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By purchasing the loans, the Fed would create an incentive for the banks to lend under the program. Buying the loans removes them from the bank’s balance sheets and eases repayment concerns. If the banks held onto the loans, they would typically be required to hold some cash in reserve in the case of default.

The Fed’s two-sentence announcement said that further details will be provided this week.

Instead of purchasing the loans, the Fed may also lend to banks and allow banks to use the small-business loans as collateral, but the impact would likely be similar.