BPInsights: May 02, 2020

BPInsights: May 02, 2020

Top of the Agenda

Relief Arrives for Small Businesses as SBA Overcomes Challenges to Clear Loan Backlog

Despite technical complications earlier in the week, small businesses again began to receive Paycheck Protection Program (PPP) relief loans as the Small Business Administration (SBA) overcame challenges and worked through system backlogs. The agency was forced to take measures earlier in the week to limit the number of batch processes permitted through the E-Tran loan system, and on Wednesday announced the creation of a temporary loan window that restricted the submission of new loans to institutions with asset sizes of less than $1 billion; however, despite these hiccups, the agency resolved many of the glitches by Thursday and large batch processing was able to resume.

On Friday afternoon, JPMorgan released encouraging new loan statistics, indicating that the bank had lent over $15 billion to small business customers, $29 billion in total, to 239,000 businesses since the inception of the program. Lending from JPMorgan alone is estimated to help support approximately three million jobs. Similar announcements are expected from other banking institutions as the SBA continues their tireless work helping support American consumers and small businesses in need.

5 Stories Driving the Week

Fed Releases Main Street Lending Program Term Sheets and FAQ and Expands Eligibility Requirements

The Federal Reserve released an FAQ and revised term sheets for the Main Street Lending Program on April 30 and announced that it would expand eligibility requirements for the program. The new requirements would increase the pool of eligible small and mid-size businesses who can take part in the program by reducing the minimum loan size from $1 million to $500,000 and adjusting the eligibility criteria based on a company’s size. Companies with up to 15,000 employees and $5 billion in revenue are now eligible, up from the previous eligibility criteria of 10,000 employees and $2.5 billion in revenue.

In addition to these changes, the Fed established a third lending option to accommodate companies with larger amounts of debt on their balance sheets (Main Street Priority Loan Facility). Previously, there were only two lending options that the Fed planned to offer: one provided lending for new term debt (Main Street New Loan Facility) and the other provided expansion of existing loan facilities through an “upsized tranche” (Main Street Expanded Loan Facility). As indicated in a recent Bloomberg op-ed authored by Bill Dudley, the design of the Main Street lending facilities presents a substantial challenge to establish the right balance between assisting viable small and mid-size companies and taking on too many bad loans.

Responding to the announcement, BPI President & CEO Greg Baer made the following statement:

It’s still too early to know how much demand there will be for the Main Street facilities from either the borrowers or lenders, but the Federal Reserve’s process — seeking and incorporating public comment, working to conform to market practice and making the rules clear — has given this program its best chance at success.

The Fed made several changes based on public feedback to bring the facilities more in line with current market practices:

  • They dropped reference to SOFR and replaced it with LIBOR;
  • They expanded lender eligibility to include U.S. branches of foreign banks, U.S. intermediate holding companies and U.S. subsidiaries of foreign bank organizations; and
  • They moved to a more market-based approach to measuring EBITDA for eligible borrowers by allowing banks to use their pre-existing borrower methodologies.

Several welcome clarifications were also made in the FAQ in relation to underwriting standards, creditworthiness determinations and the ability of lenders to rely on borrower certifications. Additional details are expected from the Fed prior to the launch of the program. Learn More >>

Government Accountability Office Flags Outstanding Recommendations in Letter to Fed

The GAO released a letter to Fed Chairman Powell on April 27 providing an update on the overall status of the Fed’s implementation of GAO recommendations and calling attention to open recommendations that should be given high priority. The GAO’s letter finds that several priority recommendations remain open from April 2019 and adds one new item relating to stress testing and three recommendations relating to the emergency lending facilities. The letter outlines recommendations made by the GAO to the Fed on financial technology and consumer protection, derisking, stress testing, emergency lending facilities and other topics. Learn More >>


Quarles Requests Congressional Modifications to Capital Requirements to Address Increased Credit Demands

In a letter sent by Federal Reserve Vice Chairman of Supervision Randal Quarles on April 22, Quarles wrote that to preserve credit access, “Congress should consider modifying section 171 of the Dodd-Frank Act (‘the Collins Amendment’) to allow regulators to provide flexibility under Tier 1 leverage requirements as banks respond to increased credit demands.” The letter continues: “In the current environment, it poses an additional challenge: complicating the regulatory agencies’ ability to address a severe economic stress period. Banking organizations are receiving significant inflows of customer deposits and the ability of these banking organizations to continue accepting significant deposits may become constrained due to Tier 1 leverage requirements.” Learn More >>

European Commission Issues Proposal to Help Banks Keep ‘Liquidity Taps Turned On’

The European Commission issued a proposal on April 28 that would provide new relief for European banks, after a survey of 144 European lenders indicated a growing demand for loans and an increase in customer defaults weighing on bank balance sheets, according to a report by the Financial Times. The proposal is designed to keep banks “liquidity taps turned on” and would institute a one-year delay on the implementation of the leverage ratio buffer that would apply to the largest banks, delay the full implementation of a new accounting standard known as IFRS 9, alter rules dictating the calculation of leverage ratios to account for central bank reserves, and provide preferred treatment to government-guaranteed loans. The proposal still requires approval from individual governments and the European Parliament. To review a full list of proposed changes, please click hereLearn More >>

Fed Expands Municipal Lending Facility Eligibility Requirements

The Federal Reserve announced on April 27 that it will expand eligibility for the Municipal Lending Facility, an emergency lending facility established as part of the Fed’s $2.3 trillion COVID-19 response to provide relief to state and local governments by offering up to $500 billion in lending to states and municipalities. U.S. cities with a population of at least 250,000 residents and U.S. counties with a population of at least 500,000 residents are now eligible, whereas the previous eligibility criteria only applied to cities with a population of at least one million, and counties with a population of at least two million. The expansion also allows participation in the facility by certain multistate entities.

Furthermore, the Fed expanded the criteria for eligible bonds that can be acquired by lengthening the eligible maximum maturity date of the bonds from 24 months since the date of issuance to 36 months. The termination date for the facility also was extended to December 31, 2020. Learn More >>

In Case You Missed It

WSJ Op-ed Describes ‘CARES Act Blame Game’

Don McGahn, a partner with the law firm Jones Day and former White House Counsel, published a new op-ed in the Wall Street Journal on April 27 titled “The Cares Act Blame Game Begins,” which illustrates criticisms about the handling of the CARES Act relief programs. According to McGahn’s characterization of current events, widely endorsed efforts to provide quick relief to recipients turned into criticisms of businesses and banks once negative headlines began to indicate flaws with the design of the program.

“When one has been around Washington long enough, these dramas become predictable,” wrote McGhan. “Congress passes a law that seems like a good idea. People and businesses follow it. Critics swarm in and declare problems. Then comes the rewriting, oversight and grandstanding.”

To read the full op-ed, please click here.



American Banker Launches New Cyberspace Podcast Series

John Heltman, a journalist with the American Banker, released the first episode of a new podcast series titled “Zero Day” on April 30 focusing on cyberspace and cybersecurity. The first episode evaluates cybercrime within the financial system and the work that cybersecurity experts are undertaking to keep the financial system secure. Numerous experts are interviewed as part of the episode, including BPI’s very own Executive Vice President and President of BITS, Chris Feeney. To access the podcast, please click here.


BPI and 21 Other Institutions Join Financial Data Exchange, Marking 100+ Member Milestone

The Financial Data Exchange (FDX) announced 22 new members, including the Bank Policy Institute, in a release published on April 27. The announcement marked an important milestone for the organization, which surpassed the one-hundred-member mark with a new total of 103 participating organizations. FDX is a non-profit organization, launched in 2018, comprised of financial institutions and financial technology companies committed to adopting a common, interoperable, royalty-free API and best practices for data sharing and aggregation.


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