Richard Sandor

As America continues to combat the public health and economic consequences of COVID-19, local banks are doing their part to keep money flowing to small businesses. Ensuring that banks maintain liquidity, and have an interest rate benchmark appropriate to their business model, is critical to our nation’s recovery.

Local banks are playing a significant role lending to small businesses. The $250 billion second round of Paycheck Protection Program loans authorized in April allocated $60 billion in financing capacity to banks with less than $50 billion in assets, half of which is for banks with less than $10 billion in assets.

These funds are being distributed largely to small businesses, providing much needed relief to the companies that drive America’s job growth. In the United States, small companies have historically represented a large majority of the total number of businesses and about half of private sector jobs and payroll. Businesses have been hard hit by the pandemic, and PPP loans may well be the lifeline that determines whether mom-and-pop enterprises can continue after the lockdown ends.

However, PPP funds should be viewed as a bridge toward an environment where regional banks will once again make market rate loans to the small businesses in their communities. And in order to do that, they need a liquid, transparent lending market and the ability to determine appropriate interest rates. As we transition to a world without LIBOR, the long-time interest rate benchmark for nearly all lending products, choice is critical. Especially in times of crisis, it is better to have a choice of rates than a single benchmark.

Local banks should take the long view and embrace LIBOR alternatives because embracing the transition will give them a competitive edge. Having a choice of benchmarks enables banks to pick the appropriate rate for their circumstances.  It also helps lower systemic risk.

Large financial institutions have the Federal Reserve’s  Secured Overnight Financing Rate, which is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. This is not a very appropriate benchmark, however, for regional and community banks that borrow on an unsecured basis. For them, other available indexes like AMERIBOR, a volume-weighted interest rate, calculated daily from the average interest banks actually charge each other for unsecured loans overnight, may make more sense.

During the pandemic, community banks provided an important source of liquidity for banks that lend to small businesses in crisis.  In a number of cases, this liquidity enabled community banks to begin advancing small businesses cash even before the funds from the PPP arrived.

A choice of interest rate benchmarks – and access to a rate that allows banks to price and structure loans appropriately – will help them continue to support economic recovery.


Dr. Richard Sandor is the Aaron Director Lecturer in Law and Economics at the University of Chicago Law School. He is also Chairman and CEO of the American Financial Exchange, an electronic exchange for direct interbank/financial institution lending and borrowing.

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