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
3. Federal Banking Agencies Issue Interim Final Rule to Mitigate Capital Effects of CECL
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 flowWe 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)
5. Fed Announces Six-Month Delay of Revised Control Framework
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.
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.
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.
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