The Fed - Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending

Summary

A Finance and Economics Discussion Series paper of the Board of Governors of the Federal Reserve System, dated December 2021, by Camelia Minoiu, Rebecca Zarutskie and Andrei Zlate. The abstract states that the authors study the effects of the Main Street Lending Program, an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis, on bank lending to businesses. Using instrumental variables, the authors document that the program increased banks' willingness to lend more generally outside the program. Participating banks were more likely to renew maturing loans and originate new loans than nonparticipating banks, according to the abstract.

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Board of Governors of the Federal Reserve System

Finance and Economics Discussion Series (FEDS)

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December 2021

Motivating Banks to Lend? Credit Spillover Effects of the Main Street Lending Program

Camelia Minoiu , Rebecca Zarutskie , and Andrei Zlate

Abstract:

We study the effects of the Main Street Lending Program (MSLP) an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis on bank lending to businesses. Using instrumental variables for identification and multiple loan-level and survey data sources, we document that the MSLP increased banks' willingness to lend more generally outside the program to both large and small firms. Following the introduction of the program, participating banks were more likely to renew maturing loans and to originate new loans, as well as less likely to tighten standards on business loans than nonparticipating banks. Additional evidence suggests that the MSLP, despite low take-up, supported the flow of bank credit during the pandemic by serving as a backstop to the bank loan market and by increasing banks' levels of risk tolerance in the face of uncertainty.

Keywords: Main Street Lending Program, Federal Reserve, bank lending, COVID- 19 pandemic, emergency lending facilities

DOI : https://doi.org/10.17016/FEDS.2021.078

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Last Update: April 15, 2022

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