Using the Federal Reserve’s Discount Window for Debtor-In-Possession Financing during the COVID-19 Bankruptcy Crisis

Using the Federal Reserve’s Discount Window for Debtor-In-Possession Financing during the COVID-19 Bankruptcy Crisis. Brookings Institution. Peter Conti-Brown and David Skeel. July 29, 2020

This paper outlines how the Federal Reserve can use its non-emergency statutory authority to substantially improve the functioning of debtor-in-possession financing markets during the bankruptcy crisis triggered by the COVID-19 pandemic.  The authors argue that, contrary to restrictions on the Fed’s emergency lending authority in Section 13(3) of the Federal Reserve Act, Section 10B permits the Fed to increase support for bank-led debtor-in-possession financing sufficient to meet the scale that this crisis presents. After explaining in detail the Fed’s statutory authority to intervene in these markets, the authors discuss several important benefits and manageable costs of this approach. The benefits include, first, better facilitation of bank-based financing for bankrupt firms and the reciprocal reduction of financing from the shadow banking sector and, second, better insight for the central bank into this important sector of the financial system for macroeconomic and financial stability purposes. The costs include perceptions of illegality given the limitations on the Fed’s emergency lending authority, the risk of undermining the Fed’s independence for monetary policy, and concerns about central bank meddling in the political prerogatives of Congress and the President. They argue that these costs, though real, are manageable and in any case less than the benefits of intervention.  [Note: contains copyrighted material].

[PDF format, 21 pages].

Preserving Small Businesses: Small-Business Owners Speak About Surviving the COVID-19 Pandemic

Preserving Small Businesses: Small-Business Owners Speak About Surviving the COVID-19 Pandemic. RAND Corporation. C. Richard Neu, Diana Gehlhaus, Howard J. Shatz. May 22, 2020.

With the coronavirus disease 2019 (COVID-19) pandemic causing severe economic dislocations worldwide, RAND researchers conducted a series of interviews with small-business owners, especially those with a physical and visible presence in their communities, to gain a better understanding of the challenges that these businesses are facing as a result of the global COVID-19 pandemic and what kinds of policies might help them survive. The 21 interviewees came from a variety of sectors⁠—owners of restaurants and small retail shops, specialty grocers, business-support and advisory organizations, small amusement parks, a hair salon, a yoga studio, a specialty manufacturer, an outdoor recreation company, and a painting contractor. Interviews focused on four principal issues: how the pandemic is affecting businesses; what business owners see as the biggest threats to their businesses; what assistance they have been able to access; and, most important, what they will need for their businesses to thrive once the immediate public-health crisis has passed. Although this group was not representative of the vast range of U.S. small businesses, a variety of experiences, challenges, and ideas for making assistance programs more effective were revealed. The most common concern was the need for assistance in covering fixed operating costs—most prominently, rent and mortgage payments but also utilities and insurance. Concerns about worker safety and liability were also mentioned. Adjustments to existing policies were also discussed, such as better government communications, clear rules for reopening businesses, and coordinated reopening policies across neighboring jurisdictions. [Note: contains copyrighted material].

[PDF format, 24 pages].