BPInsights: March 28, 2020

BPInsights: March 28, 2020

Top of the Agenda

$2 Trillion Coronavirus Stimulus Package Signed into Law

On Friday, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act following the passage of the legislation in the House earlier in the day, and a unanimous vote by the Senate on Thursday evening. The bill includes $350 billion in Small Business Administration 7(a) loans and increases the maximum amount of such loans from $350,000 to $1 million through the end of the calendar year. The bill also provides the U.S. Treasury Department’s Exchange Stabilization Fund with $500 billion, which the Federal Reserve can then leverage to support various markets, including municipalities. Late changes to the bill created an independent inspector general and congressional oversight panel to oversee the fund. The CARES Act provides temporary relief from troubled debt restructurings (TDR) and permits insured depository institutions to delay implementing CECL. Read More >>

 

5 Stories Driving the Week

1. Federal Reserve Provides Guidance to Financial Institutions on Supervisory Approach During COVID-19 Crisis

On March 24, the Fed released a statement on supervisory activities in light of COVID-19. The statement builds upon the agency’s March 9 and March 22 releases encouraging financial institutions to work with customers impacted by COVID-19and notes that it is decreasing planned supervisory activities to allow institutions to deploy their resources more efficiently to do so. The key highlights from the statement include:

Changed Focus on Examinations — Generally, the Fed is reducing the focus on examinations and inspections, and all related activities will be conducted off-site. For institutions with less than $100 billion in assets, regular examination activity is ceased “except where the examination work is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need” and will be reassessed the last week of April. Examination reports may still be received for recently completed exams or exams near completion. For institutions with more than $100 billion in assets, a “significant portion of planned examination activity” will be deferred based on the burden to the institution and the importance of the exam to firms, consumers and financial stability.

CCAR — Firms are still required to submit capital plans by April 6, which will be used to “monitor how firms are managing their capital in the current environment, planning for contingencies, and positioning themselves to continue lending to creditworthy households and businesses.”

Extended Time Periods for Remediation of Supervisory Findings — The time period for remediating supervisory findings has been extended by 90 days, “unless the Federal Reserve notifies the firm that a more timely remediation would aid the firm in addressing a heightened risk or help consumers.“

Working with Customers — The statement reiterates the March 22 guidance on TDRs and loan modifications, noting that the Fed will not criticize institutions that “mitigate credit risk through prudent actions that are consistent with safe and sound practices.”

Increased Focus on Monitoring — The Fed notes it is focusing more significantly on monitoring and analysis of “operations, liquidity, capital, asset quality, and impact on consumers” for all institutions. Large financial institutions will be monitored for operational resiliency and impacts on broader financial stability.

Continuous Communication with Institutions — The Fed notes it will continue to communicate with all financial institutions as the situation continues and that banks supervised by the Fed should work with their reserve bank and state banking agencies if there are questions on planned supervisory activities. Learn More >>

 

2. Federal Reserve Enacts Aggressive Emergency Actions and Powell Emphasizes “Nothing Fundamentally Wrong with Our Economy”

On March 23, the Federal Reserve announced that it would be implementing a range of aggressive actions to respond to economic agitation resulting from the COVID-19 health crisis, stating that the measures will help to minimize economic disruptions and continue to boost credit availability for households and businesses. The Fed will establish two new credit facilities to acquire corporate debt and a third facility under which the Fed will lend to third-parties to finance their purchases of newly issued asset-backed securities collateralized by student loans, auto loans, credit card loans, SBA guaranteed loans, and other loans. The Fed also pledged to increase its purchases of Treasury securities and mortgage-backed securities and improve credit availability to municipalities through the expansion of the Money Market Mutual Fund Liquidity Facility and the Commercial Paper Funding Facility.

Later in the week, the Federal Reserve Chair Jerome Powell appeared on NBC’s “Today Show” optimistic about the resiliency of the U.S. economy and the Federal Reserve’s response to the crisis, stating “[w]hen it comes to this lending, we’re not going to run out of ammunition, that doesn’t happen.” Powell committed to continuing the Fed’s bond-buying program and emphasized that although the economy may be entering a recession, “there’s nothing fundamentally wrong with our economy.” Learn More >>

 

3. Agencies Provide Additional Information to Encourage Financial Institutions to Work with Borrowers Affected by COVID-19

On March 22, the federal banking agencies, NCUA and Conference of State Bank Supervisors issued important guidance on troubled debt restructurings (TDRs).The guidance provides clarity that short-term modifications on loans to borrowers impacted by COVID-19 need not trigger TDR treatment. In particular, the accounting guidance contained in the release, which was confirmed with FASB, provides that:

The agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs…  For modification programs designed to provide temporary relief for current borrowers affected by COVID-19, financial institutions may presume that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.

The release also notes that financial institutions are not expected to designate a loan with a deferral granted due to COVID-19 as past due, absent another reason for doing so. Furthermore, “each financial institution should refer to the applicable regulatory reporting instructions, as well as its internal accounting policies, to determine if loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports. However, during the short-term arrangements discussed in this statement, these loans generally should not be reported as nonaccrual.” Importantly, the release indicates that agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.

Lastly, the agencies note that loans that have been restructured pursuant to the guidance are eligible for a pledge to the discount window. Learn More >> 

 

4. Department of Homeland Security and U.S. Department of Treasury Affirm Financial Services Workers as ‘Essential Workers’

In response to the ongoing COVID-19 health crisis and a growing number of shelter-in-place orders issued by local and state governments, the Department of Homeland Security Cyber and Infrastructure Security Agency (CISA) and the U.S. Department of the Treasury released memorandums affirming financial services workers as ‘Essential Workers,” and Financial Services as one of 16 critical infrastructure sectors.The memorandums both reference the CISA Guidelines for Essential Workers released on March 19, 2020, and can be used as companion pieces.
In addition to the memorandums, Treasury Secretary Steven Mnuchin released a statement emphasizing his support of the Department of Homeland Security’s guidance, stating,“[t]he American people need access to financial sector services, and State and local governments must ensure the continuity of critical financial sector functions.”
BPI worked with Treasury, CISA, association partners, other sectors and information sharing groups to develop these guidelines. Upon completion, CISA and the Department of the Treasury released these for broad distribution to the critical infrastructure sectors and state police associations, police chiefs’ associations, the National Governors Association and others, including international partners (e.g., G7 and G20) to assist with the reasonable movement of essential workers. Learn More >> 

 

5. Merchants Unsuccessfully Lobby to Expand Interchange Price Fixing

Bloomberg News reported that the National Restaurant Association asked Congress to include an unrelated provision in the phase 3 coronavirus stimulus package that would expand the scope of the socalled “Durbin amendment” to include credit cards. “They are advocating in the midst of an economic and health crisis for what a lot of people now realize is a failed policy. It never benefited consumers, while at the same time it harmed small banks and credit unions who are on the front line in many communities,” Jeff Tassey, Chairman of the Board of the Electronic Payments Coalition, told Bloomberg. The provision was rejected by Congress and not included in the legislation passed this week. Learn More >> 

 

In Case You Missed It

Federal Agencies Issue Statement Encouraging Small-Dollar Lending to Businesses and Consumers

On March 26, the Board of Governors for the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency issued a joint statement acknowledging that “small-dollar loans can play an important role in meeting customers’ credit needs.” The statement encourages banks and credit unions to offer small-dollar loan products and to work with borrowers unable to repay existing loans under the current terms. Furthermore, the statement referenced a separate joint statement issued on March 19, indicating that lending activity to low-to-moderate income communities, small businesses and small farms would reflect ‘favorably’ on an institution for Community Reinvestment Act purposes.

OCC Revises Short-Term Investment Fund Rule

On March 22OCC issued an interim final rule and a related order that would provide temporary relief for short-term investment funds (STIFs) operated by national banks. The relief allows banks to temporarily extend/increase maturity limits otherwise applicable to STIFs. The OCC says this action is needed to address disruptions in the financial markets that prevent banks from being able to operate the STIFs within their investment mandates, including with respect to weighted average maturity and weighted average life of the assets in STIFs’ portfolios. The relief is valid for 4 months, or through July 20, 2020, but could be extended by the OCC.

Federal Reserve Board Announces Technical Change to Support the U.S. Economy and Encourage Prudent Lending

On Monday, the Fed issued an interim final rule revising the definition of eligible retained income (ERI) for purposes of the TLAC rule. The revised definition is intended to phase in the automatic distribution restrictions gradually if a firm’s TLAC levels decline, and is consistent with the rule issued by the agencies last week modifying the ERI definition in the capital rules.

Rakuten Announces Withdrawal of FDIC Application for Deposit Insurance

On March 23, Japanese e-commerce company Rakuten announced that it was withdrawing its application with the FDIC for deposit insurance for its proposed Utah industrial loan company. Rakuten Bank America, a Rakuten subsidiary, stated that withdrawing the application would allow for extra time to strengthen the application and address feedback received from members of the FDIC staff.
BPI joined the American Bankers Association in filing a comment letter in August 2019 opposing Rakuten’s application. The letter calls attention to the potential risks that could be posed by permitting the close affiliation of the company’s banking and non-financial business.

In Rakuten’s statement announcing the decision, the company indicated that it intends to re-file an application in the coming months.

 

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