The encyclopedia · Finance & Accounting · Financial decision · 2020
Fed lent banks cash against guaranteed PPP loans so small-business credit flowed
The PPPLF let any PPP lender pledge its SBA-guaranteed loans at face value for Fed funding, removing balance-sheet constraints from pandemic lending.
Federal Reserve System · U.S. Small Business Administration
the move
When the CARES Act created the Paycheck Protection Program in 2020, small businesses rushed to borrow, but banks had to fund the loans themselves. The Fed's April 9 announcement created the PPPLF as part of up to $2.3 trillion in lending support.
The facility extended credit to eligible financial institutions that originated PPP loans, taking the loans as collateral at face value. Since the SBA guaranteed 100% of each loan, the Fed held riskless collateral while banks got cheap term funding.
On April 30 the Fed widened access to every SBA-approved PPP lender, including non-depository fintechs, and expanded acceptable collateral. The facility let the loan program scale without a single bank hitting a balance-sheet wall.
why it works
- Face-value collateral pricing made the Fed's loan riskless and simple to administer.
- Non-recourse terms removed lender downside, so banks originated freely.
- Expanding eligibility to non-banks multiplied distribution channels.
- The facility monetised a government guarantee instead of inventing new credit risk.
what transfers
To scale a subsidy through private intermediaries, remove their capacity constraint: a guaranteed, monetisable asset turns every willing lender into a distribution channel.
what came after
The PPPLF underpinned a program that disbursed over $700bn to small businesses. It was extended and then wound down as PPP demand faded, and is now cited as the model for pairing government guarantees with central-bank liquidity in a crisis.
references
- Federal Reserve takes additional actions to provide up to $2.3 trillion in loans to support the economy
- The Fed's emergency lending supports the Paycheck Protection Program
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