BPInsights: April 4, 2020

BPInsights: April 4, 2020

Top of the Agenda

American Banks Have Increased Lending to American Businesses by $400 Billion During the Crisis So Far

As the country and economy continue to struggle to limit the damage of the coronavirus, banks are using their fortress balance sheets to meet the needs of their business customers. BPI research shows that its member banks have made about $400 billion in commercial loans to America’s small and large businesses in the first quarter of 2020 alone, increasing their lending by 12.7% during that period, or almost 51% on an annualized basis.

“While fiscal and central bank support for the economy was in process, America’s businesses turned to the banking system for support. The nation’s largest banks responded with over $400 billion in new commercial lending, serving as a lifeline for American businesses,” said Greg Baer, President and CEO of the Bank Policy Institute. “The strong balance sheets of the largest banks have allowed them not only to survive this shock but also help businesses in need of additional capital,” he added.

The data was collected by surveying BPI member banks with material exposures to U.S. businesses. Results were received from banks representing almost 80% of business loans held on the books of BPI member banks as of the end of last year. The definition of business loans generally includes the regulatory definitions of commercial and industrial loans, loans secured by nonfarm nonresidential properties, loans to nondepository financial institutions, and all other leases and loans (excluding leases and loans to consumers). For the non-surveyed BPI member banks, the net lending amount during the first quarter was approximated using the median growth rate of the surveyed banks (12.1%). Read More >>


5 Stories Driving the Week

1. Coronavirus Relief Law Establishes Small Business Administration ‘Payroll Protection’ Loan Program 

The $2 trillion CARES Act signed into law last week included the creation of a major new lending program under the Small Business Administration (SBA), providing loans to small businesses for payroll and other basic expenses during the COVID-19 outbreak. The Payroll Protection Program would allow independent contractors, eligible nonprofits, and other small business with fewer than 500 employees to access up to $10 million in low-interest, federally guaranteed loans to facilitate the payment of expenses like rent, employee benefits and payroll incurred between February 15 and June 30, 2020. American banks will help the SBA disburse the funds, and the Treasury Department late Thursday released an interim final rule that should enable banks to come online in the coming days and help get money into the hands of small businesses. Notably, loans used for these purposes may be eligible to be converted into grants and forgiven. A helpful fact sheet for small business owners released by the U.S. Chamber of Commerce can be found by clicking the “learn more” link below. Learn More >>


2. Fed Seeks to Ease Treasury Strain Through Temporary Supplementary Leverage Ratio Rule

On April 1, the Federal Reserve issued an interim final rule to temporarily exclude the on-balance sheet amounts of U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of total leverage exposure in the denominator of the supplementary leverage ratio through March 31, 2021. The definition of total leverage exposure in the total loss-absorbing capacity and long-term debt requirements are also modified by the interim final rule.


The rule would not change the Tier 1 leverage ratio, and the Fed has not been joined by the other agencies at this time. It would only apply to bank holding companies, intermediate holding companies and saving and loan holding companies, but not to insured depository institutions, pending further action by the OCC and FDIC. The Fed is also making conforming changes to the FR Y-9C and the FR Y-15 to reflect the interim final rule.


For purposes of CCAR 2020, banks will have the option to include these changes in their stress test results for purposes of the projections in 2Q20-1Q21. Comments on the proposal will be due 45 days after publication in the Federal Register. Learn More >>


3. Federal Banking Agencies Issue Interim Final Rule to Mitigate Capital Effects of CECL

On March 27, federal banking regulators issued an interim final rule on the Current Expected Credit Losses (CECL) methodology, permitting banks that have adopted CECL in 2020 the option to delay the impact on regulatory capital for two years, followed by a three-year transition to phase out the capital benefit provided by the delay including the day-one impact — referred to as the “five-year transition.” Banks that have adopted CECL are required to choose between the existing three-year transition for the initial CECL impact and the new five-year transition provided by the interim final rule.


The federal bank regulatory agencies issued a statement on March 31, intended to clarify the interaction between the CECL interim final rule and Section 4014 of the CARES Act. The statement indicates that banks choosing to utilize the relief provided by Section 4014 can elect the regulatory capital relief provided under the CECL interim final rule; however, the five-year transition period under the interim final rule begins on the date that CECL was originally required under US GAAP. As a result, if a bank utilizes the statutory relief, the initial two-year transition in the interim final rule would be reduced by the number of quarters the bank did not report CECL in 2020. Learn More >> 


4. Research Demonstrates Effect of U.K. Ban on Bank Dividends 

A recent research report published by the Bank of America Global Research team suggests that a U.K. ban on bank dividends may have done more harm than good. As detailed in the note:

[T]he UK ban announced on 30 March saved £8bn in dividends, but compressed the market value of the UK banks by £35bn – or £43bn including the lost dividends (Chart 1). The SX7E index lost €33bn, outweighing the dividend cancellation of €30bn. In the same period, the S&P index was flat, illustrating this was a sector-specific issue.
Static versus flow 
We see the dividend bans as the result of a static analysis: banks have book value of X, which provides lending capacity of Y. But we see European banks much more dynamic than that: their lending appetite is a function of their capital, but also their risk appetite, their economic outlook – and their valuation. Banks with low multiples are incentivised to shrink. At the all-time low of 0.4x tangible book at which the European banks now trade, the value of capital extracted from the business and returned to shareholders is 2.5x that of keeping it in.

Chart 1: UK banks into the dividend ban: 1 week change in market value, book value uplift from dividend zero (£ mn)

Source: BofA Global Research estimates. Market value loss includes final dividends added back

Learn More >> 


5. Fed Announces Six-Month Delay of Revised Control Framework

On March 31, the Fed announced that it will delay by six months, the effective date for its revised control framework due to the current COVID-19 crisis. The final rule, initially voted upon and approved in the last week of January, is intended to codify into regulation a series of presumptions that the Fed will use to help determine when one company has the ability to exert a “controlling influence” over, and therefore “controls,” another for purposes of the Bank Holding Company Act. The effective date will now be September 30, 2020, providing the necessary relief to financial institutions to focus on the current economic conditions. Learn More >> 


In Case You Missed It

CFPB Issues Guidance Outlining Responsibilities for Credit Reporting Companies and Furnishers

On April 1, the CFPB released guidance related to credit reporting and the responsibilities of credit reporting companies and furnishers during the health crisis. Most notably, the guidance encourages furnishers to seek efforts to provide payment relief and provides assurance that these efforts will be taken into consideration during examinations so as not to negatively affect the lending institution. Additionally, the guidance provides some relief toward the investigation of disputes, noting that investigations can take longer than the statutory timeframe, so long as a good faith effort is made.

Basel Committee Announces Deferral of Basel III Implementation
On March 27, the Basel Committee on Banking Supervision (BCBS) announced a deferral of Basel III implementation to enable banks and supervisors the ability to commit their full resources to respond to the effect and challenges of COVID-19.

In the press release, the BCBS announced that the implementation date of the Basel III standards has been deferred by one year to January 1, 2023, and the accompanying transitional arrangements for the output floor has also been extended by one year to January 1, 2028. Similarly, the implementation date of the revised market risk framework and the revised Pillar 3 disclosure requirements have been deferred by one year to January 1, 2023.

CFPB Affirms Commitment to Consumer Protection and Indicates Supervisory Efforts Will Take Health Crisis Challenges into Consideration


On April 2, the CFPB released a blog post affirming the agency’s commitment to protect consumers and continue their supervisory work through the current pandemic, including adapting supervisory activities and communications with supervised entities to accommodate for remote examination and supervision. Notably, the agency acknowledged that it would consider the current circumstances facing financial institutions and take into consideration institutional efforts made in good faith to assist customers.

The Banking Industry Is Open for Business
Wells Fargo’s Senior Bank Analyst Mike Mayo appeared on Bloomberg TV on March 30illustrating market conditions for viewers and underscoring that banks are fortified to withstand tempestuous market conditions. “Yes, there is a bank earning recession, but not a bank balance sheet recession,” stressed Mayo in his remarks. He emphasized that “banks entered this recession in the best shape than any time in the past century,” and that the banking industry is open for business. In his outlook, Mayo remarked that employees, customers, communities and regulators are all higher priorities than shareholders or short-term profits, offering examples such as banks waiving fees and offering forbearance to customers, suspending layoffs, voluntarily suspending stock buybacks, and increasing charitable investments in their communities.


Not Subscribed to BPinsights?