The nation’s banks pulled in near record profits last year. Now the Trump administration is asking U.S. lenders to work essentially for free as it rushes to keep America’s small businesses from collapsing during a pandemic, according to an analysis by S&P Global Ratings.
President Donald Trump has put small businesses aid at the forefront of his administration’s coronavirus relief efforts, saying on Tuesday that banks already had “essentially loaned” $70 billion from an initial $350 billion emergency payroll program to keep workers employed during the economic shutdown.
U.S. Treasury Secretary Steven Mnuchin said Wednesday he hoped Congress would sign off on additional funding for the hallmark Paycheck Protection Program before the weekend, while touting some 3,500 lenders already being “up on the system with many more getting signed up every day,” in a CNBC interview.
But analysts at S&P Global Ratings think getting relief into the hands of small business owners might be more complicated than the U.S. government anticipates, for a number of key reasons.
“While we expect demand for small businesses loans to accelerate meaningfully, banks will have their work cut out for them to quickly respond,” wrote a team of S&P Global analysts led by Brendan Browne on Wednesday.
“Small business loans make up a minor proportion of the loan portfolio of the largest banks, meaning they would have to devote many more resources to significantly ramp up in this area.”
There is also the question of what it is worth to banks to participate in the novel lending program, which aims to help hasten the U.S. economic recovery, once businesses are allowed to re-open and travel resumes.
On the plus side, banks won’t need to hold extra capital against this new type of small business loan, which S&P called “almost like a grant,” due to the program’s low 1% interest rates, which kick in only after a six-month deferral period, and its partial or complete forgiveness option for funds used to make qualifying payroll and essential business expenses.
But since lenders can’t count on collecting interest on the debt, they will instead rely on processing fees, which S&P pegged at 3% on average for the initial $350 billion pool of funding, or sharing about $10 billion in total fees - before expenses.
“That compares to the $290 billion in pretax income FDIC-insured banks reported in 2019,” Browne’s team wrote.
Politico reported this week that many community banks, in particular, have struggled to tap into the program, which is being run through the Small Business Administration’s systems and is part of the larger $2 trillion pandemic rescue package signed into law in March.
And while the small business funds have been available to farmers too , getting them relief has been a challenge, said Mark Hayes, a spokesman for the Farm Credit Council, a trade association for agriculture lenders.
“Farm Credit hasn’t been involved with SBA in a meaningful way before this program and has virtually no experience accessing SBA’s platform,” he said in an email to MarketWatch, adding that as of April 6, only one Farm Credit institution had successfully made a loan.
U.S. stocks closed higher on Wednesday, with the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% up more than 770 points on hopes that the American economy might start percolating sooner than anticipated if the coronavirus can be kept under control.
U.S. stocks opened higher Thursday as Wall Street looks to close out a holiday-shortened week on a high note, after the Federal Reserve released the details of a plan to provide $2.3 trillion in new support for the economy in an effort to fight the impact of the coronavirus epidemic.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.07% was up 2.03% the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.48% , gained 1.4%, and the Nasdaq Composite index /zigman2/quotes/210598365/realtime COMP +1.29% 1.62% .