BPInsights: June 20, 2020

BPInsights: June 20, 2020

Top of the Agenda

Quarles Previews Upcoming Stress Test Results and the COVID-19 Sensitivity Analysis at WHF Virtual Event

Federal Reserve Vice Chair for Supervision Randal Quarles presented remarks before a virtual hosted Women in Housing & Finance (WHF) event on June 19 where he discussed the upcoming Federal Reserve Comprehensive Capital Analysis and Review (CCAR) stress test and results of the COVID-19 sensitivity analysis.

In his remarks, Quarles indicated that the Fed would continue to use standard stress test results to set capital requirements for large banks, but would only use the sensitivity analysis “to inform our overall stance on capital distributions and in ongoing bank supervision.” With regards to the model of the sensitivity analysis, he stated that the test would focus on macroeconomic risks arising from three different types of scenarios, but would still be based on year-end 2019 data with some adjustments to account for the most material changes to banks’ balance sheets in the first quarter related to the COVID event.

In terms of disclosures, the Fed plans to release an aggregate result of the findings as opposed to releasing individual bank results. The Fed also asked banks to wait until after U.S. markets close on June 29, 2020 to publicly disclose any information about their planned capital actions and stress capital buffer requirements.

Throughout his remarks, Quarles reiterated the fortitude of banks and the financial system, stating that “the largest banks entered the COVID event in a position of strength, with high levels of capital and liquidity, and they have demonstrated that strength in the support they have provided to the economy during a crisis.”

The Fed is scheduled to publish results from the 2020 stress test on June 25. Learn More >>

Stories Driving the Week

OCC Bulletin Emphasizes Federal Preemption of State and Local COVID-19 Relief Programs that Conflict with a National Bank’s Lending Authority

The OCC issued a bulletin (OCC Bulletin 2020-62) on June 17 reiterating that national banks and other federally chartered or licensed banking institutions are primarily governed by uniform federal lending standards and encouraging states and localities to build in specific exemptions for these institutions from any state/local laws that conflict with these standards. The Bulletin notes many state and local proposals and actions intended to aid borrowers in response to the economic disruptions caused by the spread of COVID-19. While the Bulletin acknowledges the important policy reasons underlying these relief measures, it notes that these concerns are being addressed at the federal level and via provisions in the CARES Act that strike a careful balance between helping affected borrowers in the short term and preserving credit availability and affordability for other borrowers. The Bulletin goes on to recognize that a “wide range of stakeholders…have an important role to play in the country’s COVID-19 response,” but indicates that a multitude of competing requirements and indefinite local measures could pose risks to national banks’ safety and soundness, harm consumers by curtailing credit availability and affordability, and undermine Constitutional precepts that have long permitted national banks to operate across state lines to achieve efficiencies associated with operating under a uniform set of rules. In a related development, closely-watched loan forbearance and foreclosure moratorium legislation under consideration in California failed to garner the necessary support to advance in the CA State Assembly this week, dimming prospects for any future action this year. Learn More >>

BPI Blog Post Provides Additional Context on “Bank Dividends” Reported in the FDIC’s Quarterly Banking profile

The FDIC released the “Quarterly Banking Profile (QBP)” on June 16, which gives an overview of the performance of FDIC-insured commercial banks and savings institutions over the first quarter. Some reports indicated that U.S. banks paid nearly twice as much in dividends as they earned in the first quarter. A new blog post published by BPI provides additional context regarding the QBP and shows there is far less room for concern than initially meets the eye:

  1. Most of the dividends quoted in the QBP were payments by subsidiary banks to their holding companies and not dividend payments by independent banks to their shareholders.
  2. A large share of the subsidiary bank to holding company dividend was used to fund share repurchases that were already suspended by many banks.
  3. The rise in the payout ratio of banking organizations in the first quarter was in large part driven by the decline of banks’ income due to the implementation of the new current expected credit loss accounting standard combined with the sharp deterioration of the economic outlook.
  4. The bank dividends were all in compliance with regulations that limit the ability of a bank to up-stream the dividend to the parent holding company.

Bank revenues are expected to be strong in Q2 2020 based on better-than-expected trading income and underwriting activity. As a result, the ratio of dividends to net income will likely be lower in the second quarter. Learn More >>


Fed Opens Lender Registration for Main Street Lending Program

The Fed officially announced the launch of a lender registration portal for the Main Street Lending Program on June 15, set to offer financing in coordination with banks to U.S. businesses with up to 15,000 employees and revenues up to $5 billion. The program will be facilitated through the Federal Reserve Bank of Boston Bank with individual loans ranging in size from $250,000 to $300 million. BPI President and CEO Greg Baer issued the following statement in response to the announcement:

BPI banks have taken extraordinary action to meet the needs of their customers and to help the economy in response to the ongoing health and economic crisis. Banks have extended hundreds of billions of dollars in new business lending since the onset of the crisis, and the Main Street Lending Program offers another financing option for creditworthy businesses. It is important to note that the Main Street Lending Program is not a grant or loan forgiveness program but a loan program under which borrowers are expected to repay the loans. Under the architecture of the program, banks are required to employ traditional underwriting and bear the full loss from their portion of the loan. Whether through existing bank credit or other government programs, many creditworthy businesses have already found access to the credit they needed to overcome the effects of the health and economic crisis, so it is difficult to predict how large the program will turn out to be in its current iteration.

Learn More >>

Hearing Recap: Fed Chairman Jerome Powell Presents Semiannual Monetary Policy Report to Congress

Federal Reserve Chairman Jerome Powell appeared on Capitol Hill this week to present the Fed’s semiannual Monetary Policy Report and field questions from the House Financial Services Committee and the Senate Banking Committee.

During the hearings that took place on Tuesday and Wednesday, Powell responded to questions on a variety of supervisory and regulatory matters, including the economic outlook in light of COVID-19 and the Fed’s emergency lending facilities. Here are some of the major takeaways from the hearing:

  • Powell announced that lender registration for the Main Street Lending Program launched on June 15 and that he believed appropriate incentives were in place to solicit participation from both lenders and borrowers.
  • He defended the Fed’s recent decision to begin acquiring corporate bonds, noting that the Fed “want[s] to support market functioning” and arguing that bond purchases are a “better tool ultimately for supporting liquidity and market function.”
  • Powell concurred with a recent suggestion made by Vice Chair Quarles that Congress consider amending section 171 of the Dodd-Frank Act (the so-called “Collins Amendment”) to allow the banking agencies to provide flexibility under tier 1 leverage requirements as banks have seen “their balance sheets grow” after “tak[ing] in more deposits” and “engag[ing] in forbearance on [products] like credit cards” to “support their household and business customers.”
  • With respect to the Fed’s Community Reinvestment Act (CRA) regulations, he argued that “it’s a good time to update” the rules and said the Fed’s “one . . . non-negotiable condition” for CRA reform is to revise the regulations “in a way that has broad support among the community of intended beneficiaries,” noting that “there’s been a lot of great work done” and predicting that the Fed “will ultimately move forward.”
  • Asked whether the Fed’s forthcoming June 25th release of the Dodd-Frank Act Stress Test (DFAST) and Comprehensive Capital Analysis and Review (CCAR) results “will include a disclosure of the Fed’s COVID analysis and stress capital buffer requirements,” Chairman Powell said he “believe[s] it will” and that the Fed is “just working on that now.” When pressed about whether banks will “have to resubmit their capital plans or conduct additional stress tests” following the release of the CCAR and DFAST results, he responded only that the Fed is “making that announcement on the 25th” and that the Fed is “actively engaged in considering those issues right now.”

BPI Blog: Strong and Liquid Banks Helped Prevent a Financial Crisis This Spring

By several measures, the pandemic shock that hit the financial system between mid-February and mid-March was at least as bad as that caused by Lehman’s failure in September 2008. The reaction in financial markets to COVID-19 is not surprising given the size and speed of the downward revision to the economic outlook. What is surprising is that the shock did not cause a financial crisis. It is widely, and correctly, recognized that a crisis was avoided in large part because of the rapid and massive response of the Federal Reserve, but it also owed to the strength of the banking sector going into the crisis.

To shed light on how a financial crisis was avoided, BPI Chief Economist Bill Nelson and Research Analyst Adam Freedman published a blog post that does three things:

  1. It reintroduces a financial stress index that was designed to judge whether financial conditions are consistent with past instances when the Fed has engaged in emergency financial intervention;
  2. It discusses and assesses the impact of the Federal Reserve’s actions; and
  3. It discusses and assesses the role of the banking system in preventing a crisis.

Learn More >>


In Case You Missed It

Wells Fargo Continues to Prioritize Diversity and Inclusion Through New Commitments

Wells Fargo announced new company-wide commitments to improve diversity and inclusion by basing executive compensation to an increase in representation, according to an announcement made on June 16. In addition to compensation incentives for senior leadership, Wells Fargo CEO Charlie Scharf committed to doubling the number of black leaders within the next five years and adding a new senior role dedicated to diversity and inclusion that would report directly to Scharf.

Fed Announces Update to SMCCF, Which Will Begin Buying Corporate Bonds to Support Market Liquidity

The Fed announced on June 15 that it will begin acquiring corporate bonds through its Secondary Market Corporate Facility (SMCCF). The SMCCF will purchase corporate bonds to create a corporate bond portfolio that is based on a broad, diversified market index of U.S. corporate bonds. According to the revised term sheet and updated FAQs, the SMCCF will create a portfolio that “tracks a broad market index” made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and certain other eligibility criteria. This indexing approach will complement the facility’s current purchases of exchange-traded funds. Eligible bonds for the initial purchase must be investment-grade-rated as of March 22 and remain rated at least BB-/Ba3 when purchased, but the SMCCF will conduct recalculations of its index every 4-5 weeks to determine the list of bonds eligible for purchase.

Senior White House Economic Official Andrew Olmem Leaving Administration

Deputy National Economic Council Director Andrew Olmem is leaving his role as of June 19 after over two years with the administration, beginning in February 2017, reported the Wall Street Journal. Olmem reported to NEC Director Larry Kudlow and was responsible for the U.S. domestic economic portfolio. He is also credited with overseeing the nomination process of Federal Reserve Chairman Jerome Powell.


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