BPInsights: March 20, 2020

It’s been an extraordinary week in Washington, D.C., and across the country. In the midst of a health crisis and resulting economic crisis, it is encouraging that the nation’s banks have been a source of strength and support. The industry’s resilience is taken for granted, and the policy focus has been on how banks can most effectively deploy their capital and liquidity to help their business and consumer customers. As Washington works to put together legislative and regulatory programs to limit economic damage, BPI banks are providing their own programs of forbearance and assistance. We’ve launched a COVID-19 resource hub to provide an additional one-stop-shopping resource to our banks’ customers, so they are aware of the options available to them during these trying economic times. We at BPI continue to work with you and with policymakers to identify operational and policy obstacles to economic recovery, operating in a bipartisan spirit. And we are washing our hands a lot. 

Over the past week, the Federal Reserve has taken some extraordinary steps to provide economic stimulus to the economy and liquidity to the financial system. To provide stimulus, on Sunday, the Federal Open Market Committee (FOMC) announced that it was cutting its target for the effective federal funds rate by 100 basis points to a range of 0 to ¼ percent and that it intended to maintain that range “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

To provide liquidity and improve market functioning, the Federal Reserve has taken the following steps:

• The FOMC increased its planned purchases of Treasury securities to $500 billion and added $200 billion in purchases of agency mortgage-backed securities (MBS) to $200 billion. The FOMC also decided to start reinvesting all principal payments on its holdings of agency MBS and agency debt in agency MBS. The FOMC also expanded its provision of repo funding for the primary dealers against Treasury and agency securities.
• The Federal Reserve reduced the discount rate to 25 basis points and lengthened the initial term on discount window loans from overnight to 90 days, “prepayable and renewable by the borrower on a daily basis.” Because of these changes, a depository institution can now boost its liquidity coverage ratio (LCR) by borrowing from the discount window.
• The Federal reserve reduced reserve requirements from 10 percent of transactions accounts to zero.
• The Federal Reserve reduced the interest rate it charges other central banks on the central bank swap lines by 25 basis points to OIS+ 25 basis points and lengthened the maturity of the draws from one-week to 84 days. In addition to the existing set of central bank counterparties — the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank – the Fed added the Reserve Bank of Australia, the Banco Central do Brasil, the Danmarks Nationalbank (Denmark), the Bank of Korea, the Banco de Mexico, the Norges Bank (Norway), the Reserve Bank of New Zealand, the Monetary Authority of Singapore and the Sveriges Riksbank (Sweden).
• The Federal Reserve Board established a Commercial Paper Funding Facility (CPFF). Under the CPFF, the Federal Reserve would lend to a special purpose vehicle that is capitalized by Treasury funds to finance purchases of newly-issued, top-rated, commercial paper.
• Federal Reserve Board established a Primary Dealer Credit Facility (PDCF). The PDCF provides primary dealers overnight and term funding collateralized by a broad range of investment-grade debt securities and a broad range of equities.
• The Federal Reserve Board established the Money Market Mutual Fund Liquidity Facility (MMLF). Under the MMLF, the Federal Reserve Bank of Boston lends to banks and bank holding companies to finance purchases by the banks of a wide range of securities from prime money funds. The loans are extended without recourse and with a zero haircut and so provide the bank complete credit protection on the asset purchased.
• The Federal Reserve also encouraged banks to make use of overnight credit and the discount window.

The banking agencies together also issued:

• A statement encouraging banks to use the strength from increased capital and liquidity levels to support households and businesses, and issued related Q&As.
• An interim final rule with a technical change to phase in the automatic distribution restrictions gradually if a firm’s capital levels decline.
• An interim final rule related to the MMLF, which provides for regulatory capital neutrality for institutions utilizing the MMLF.
• A joint statement on CRA consideration for activities including certain retail banking services, retail lending activities, and community development activities in response to COVID-19. The statement also encourages financial institutions to work with affected customers and communities, particularly those that are low- and moderate-income.
• The FDIC issued FAQs to address a number of issues that may arise as institutions work with customers and communities affected by COVID-19.
• The Federal Financial Institutions Examination Council (FFIEC) issued updated guidance that identifies actions that banks should take to minimize the potential adverse effects of a pandemic and to remind institutions that business continuity plans should address the threat of a pandemic and its potential impact on the delivery of critical financial services.

FDIC Chairman Jelena McWilliams sent a letter to FASB requesting that (i) COVID-19 related modifications be excluded from troubled debt restructuring classification, (ii) banks currently subject to CECL be given the option to postpone implementation, and (iii) a moratorium be placed on the effective date for banks not yet subject to CECL.

To track all the agencies’ actions related to the recent market volatility, please visit our COVID-19 resource page, which includes links to agency developments.

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