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Designing the Main Street Lending Program: Challenges and Options

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Abstract

The Main Street Lending Program (MSLP) was established by the Federal Reserve to provide loans to small and mid-sized firms and large below-investment-grade firms that were financially sound before the onset of the COVID-19 pandemic. The program, which was established under the Fed's Section 13(3) emergency authorities, is supported by capital from the U.S. Treasury and became operational in July 2020; however, utilization has been slight. We describe the economic challenges in designing a loan support program and evaluate the MSLP program in terms of how it manages significant asymmetric information, adverse selection, poor targeting, and moral hazard problems while protecting taxpayer funds. We contrast the MSLP with other possible approaches, such as subsidies or loan guarantees. We conclude by recommending changes to the program to increase its usage and effectiveness.

Suggested Citation

  • Liang, J., 2020. "Designing the Main Street Lending Program: Challenges and Options," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 2(3), pages 1-40, April.
    • Handle: RePEc:ysm:ypfsfc:2311
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    File URL: https://elischolar.library.yale.edu/cgi/viewcontent.cgi?article=1099&context=journal-of-financial-crises
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    References listed on IDEAS

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    1. Michael J. Fleming & Nicholas Klagge, 2011. "Income effects of Federal Reserve liquidity facilities," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 17(Feb).
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    Cited by:

    1. Larry D. Wall, 2021. "So Far, So Good: Government Insurance of Financial Sector Tail Risk," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2021(13), November.
    2. Laine, Olli-Matti, 2022. "Evidence about the transmission of monetary policy," Bank of Finland Scientific Monographs, Bank of Finland, volume 0, number e53.
    3. Mark A. Carlson & Rebecca Zarutskie, 2022. "Considerations regarding the use of the discount window to support economic activity through a funding for lending program," Finance and Economics Discussion Series 2022-070, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Federal Reserve; Main Street Lending Program; Emergency Lending; CARES Act;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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