The Fed took aggressive action today to prop up U.S. businesses, but these policies won’t necessarily reach small and medium-size enterprises (SMEs). This is a thread on why and what could help. Our latest proposal focuses on SMEs: scholar.princeton.edu/markus/news/co…
The Fed’s usual “capital markets approach” doesn’t reach SMEs. Most small business funding relies on banks and trade-credit (FinTech covers only 10%), and most SME loans are not securitized and traded, but held to maturity and not traded on the secondary market.
What can be done next as the Fed looks to help Main Street? The Fed should “evergreen” existing SME loans by offering banks low-cost refinancing against the collateral of existing loans that are refinanced.
For example, banks should be able to more easily finance SME loans via the FED’s discount window and use new FinTech approaches and Big Data to allow rating of SME’s assets, including their accounts receivables.
In these extreme times, the typical “do’s and don’ts” of central banking/economics may be reversed. In a typical recession, not requiring repayment crowds out credit for new firms. But today, that’s exactly what the Fed should encourage lenders to do in order to save SMEs.
Large corporations have liquidity & assets. They can restructure via Chapter 11 protections without involving taxpayers (airlines have done this several times; passengers never noticed). SMEs don’t have these options. It might hurt the social fabric if we leave SMEs behind.
