Main Street Lending: right times, right places
New Boston Fed study finds program provided credit when and where it was most needed
Though it used only a fraction of its capacity, the Main Street Lending Program succeeded in supplying credit to small and medium-sized businesses during the COVID-19 pandemic, approving 1,830 loans totaling $17.5 billion. According to a Federal Reserve report released in March, 99% of the borrowers were smaller businesses with less than $50 million in annual revenue, and more than 70% were in the industries hurt most by the pandemic.
A new study from the Federal Reserve Bank of Boston finds that Main Street credit not only went to the type of businesses the program was intended to help, it went to businesses in states hit hardest by the pandemic, and it arrived in a timely fashion. The study, titled “A Helping Hand to Main Street Where and When It Was Needed,” uses mobility among residents as a measure of a state’s economic activity and COVID-19 case counts as a public health indicator.
“Businesses located in states with more severe declines in commercial activity (as proxied by mobility indicators) and higher infection rates obtained a higher volume of loans from Main Street,” the paper states. “Furthermore, the timing of the loans tended to coincide with the need: More loans were applied for and approved when a state experienced an increase in its state-wide infection rate.”
The authors’ conclusions are based on regression analysis that establishes links between mobility levels and loan volumes, and between infection rates and loan volumes. More specifically, the analysis shows that the volume of loans businesses in a state obtained through the Main Street program rose as the level of mobility in the state declined. The authors estimate that a 1 percentage point decline in mobility relative to the pre-pandemic baseline was associated with a 5.5% increase in the volume of Main Street loans.
In explaining why they use mobility as a gauge for a state’s business activity, the authors write, “Mobility levels reflect the de facto degree of restraint on economic activity, with or without de jure rules imposed by the state or local governments limiting in-person commercial activity. That is, when the pandemic conditions deteriorated, people reduced social interactions regardless of whether such interactions were explicitly forbidden.”
The authors employ indexes from Google’s COVID-19 Community Mobility reports to measure mobility in a state. The indexes use mobile phone data to present percentage changes in the number of visitors to and lengths of stay at categorized places relative to the baseline period of Jan. 2 through Feb. 6, 2020 – the month before the start of the pandemic.
The regression analysis also shows that as a state’s COVID-19 infection rate rose, the volume of Main Street loans in the state increased. The authors estimate that a 1% increase in the number of state cases resulted in a 1% increase in loan volume. They also find that when infection rates rose, businesses in states where the economy was hit particularly hard by COVID-19 increased their borrowing more than businesses in other states. In other words, the lower the mobility level in a state (or the worse the economic conditions), the more the volume of Main Street loans increased when the COVID-19 case count climbed.
“These findings suggest that the Main Street program was able to achieve one of its key objectives: providing liquidity support for firms in areas where the pandemic’s impact was more acute in terms of both the public health situation and the restraints on economic activity due to government-imposed as well as voluntary restrictions on mobility,” the authors write.
Main Street was the largest (by total principal outstanding) of the Federal Reserve’s emergency credit and liquidity facilities. The Boston Fed operated the program from July 6, 2020, until it closed on Jan. 8, 2021. As noted, Main Street used only a small portion of its capacity, which was $600 billion. Due to the inherent complexities of the program, it was the last of the pandemic-prompted facilities launched by the Fed and the Department of the Treasury. The program initially grew at a moderate pace but experienced a large acceleration toward the end of its operation.
The earlier Fed report on Main Street suggests that the qualifying criteria may have been too strict for businesses that otherwise would have obtained a loan through the program. Depending on the size and type of loan, Main Street’s leverage ratio limit was either 4 or 6, meaning a borrower could have a maximum of four or six times as much debt to earnings. (In this case, the leverage ratio was the adjusted debt-to-EBITDA ratio for 2019. EBITDA stands for earnings before interest, taxes, depreciation and amortization. The ratio may be adjusted to account for extraordinary expenses, for example.)
The program made loans available to businesses with as many as 15,000 employees or as much as $5 billion in annual revenue. Main Street could purchase 95% of a loan from the lending bank, with the bank retaining the remaining 5% of the balance. The loan amounts available ranged from $100,000 to $300 million, depending on, among other factors, the type of loan and the financial condition of the business before the pandemic.
Most loans were much larger than the minimum requirement of $100,000. However, the authors note, the minimum loan amount was $250,000 until October 2020, which left little time for smaller loans to be underwritten before the program closed. The loans also were generally concentrated in amounts substantially below the program’s maximum limits. For example, in the category of loans with the $300 million limit, the median loan was $40.5 million.
The program’s geographic reach was extensive. Requests for loans came from businesses in 49 states (all but Maine), the District of Columbia, Puerto Rico, and the U.S. Virgin Islands. Most of the loan volume was concentrated in businesses from Texas ($3.1 billion), Florida ($2.1 billion) and California ($2.1 billion). When the loan volume is scaled relative to the size of the state economy, the top three states by uptake were Oklahoma, Arkansas, and Missouri.
Falk Bräuning, José L. Fillat and J. Christina Wang are senior economists and policy advisors in the Federal Reserve Bank of Boston Research Depart. Frankie Lin is a research assistant in the Boston Fed Research Department.