Missouri Treasurer Vivek Malek kicked off the new year by opening applications for approximately $120 million in state-subsidized, low-interest loans designed to support small businesses, farmers, and affordable housing developers. However, the response was so overwhelming that Malek had to abruptly cease accepting applications within just six hours.
This surge in demand is not unique to Missouri but reflects a broader trend observed in states such as New York, Illinois, and Montana. These states have experienced a notable increase in public interest in programs that utilize state funds to incentivize private investment through discounted loans.
The popularity of such programs has grown in the aftermath of the Federal Reserve’s series of key interest rate hikes, which has resulted in higher costs for virtually all types of loans, impacting sectors ranging from agriculture to business expansion.
These initiatives, often referred to as linked-deposit programs, involve states depositing money in banks at below-market interest rates. Banks, in turn, leverage these funds to provide short-term, low-interest loans to specific borrowers, particularly in sectors like agriculture and small business. The programs aim to deliver significant savings for borrowers by reducing their interest rates by an average of 2-3 percentage points.
While these initiatives have gained traction due to their potential benefits for borrowers, states face challenges, including the impact on their earnings. Many states are considering caps on the amount of money available for discounted rates, either as a flat dollar amount or a percentage of their total fund balances.
The COVID-19 pandemic has left several states with substantial surpluses from pandemic-era revenues, providing them with more funds to deposit in banks and, consequently, support these linked-deposit programs.
While not all states currently offer such programs, some are revisiting the idea after shelving them during periods of low-interest rates. Illinois, for instance, has seen a substantial increase in deposits linked to low-interest loans, prompting Treasurer Michael Frerichs to raise the program’s overall cap from $1 billion to $1.5 billion.
In New York, the program has also experienced a surge in applicants. In 2022, there were 42 applications for state deposits linked to $20 million in low-interest loans. Last year, this number skyrocketed to 317 applications linked to over $220 million in loans, showcasing the program’s growing impact.
Missouri’s linked-deposit loan program, nearing its statutory cap of $800 million last May, is currently seeking legislation to raise the cap to $1.2 billion, marking a 50% increase in capacity. The proposed expansion, while potentially costing the state $12 million in earnings, could also stimulate economic activity generated by the loans, according to legislative fiscal analysis.
