April 10, 2020

Fed Encourages Increased PPP Lending with a Funding Facility and Modified Capital Rules

2 min

The Paycheck Protection Program (PPP), as discussed here, is a Small Business Administration (SBA) program intended to rapidly get $349 billion into the hands of businesses affected by the COVID-19 pandemic. To accomplish this, the PPP relies on banks and credit unions to make loans, which are then guaranteed by the SBA. For various liquidity and regulatory reasons, discussed below, these lenders have been moving more slowly than needed. The Fed's actions increase the liquidity available for PPP loans, which will allow banks and credit unions to make more PPP loans more quickly.

Insured depository institutions (IDIs) and credit unions making PPP loans are facing a surge of new assets, which is impacting their liquidity and could lead to increased capital requirements. The Board of Governors of the Federal Reserve System (Board) announced two separate actions to address IDIs' concerns and encourage them to increase their PPP lending. To provide liquidity, the Paycheck Protection Program Lending Facility (PPPLF) allows depository institutions to pledge PPP loans as collateral for credit from the Reserve Banks. Then, working jointly with the Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC), the Board announced an interim final rule (Rule) favorably modifying the capital treatment of the pledged PPP loans.

The PPPLF is essentially a specialized form of the Board's Term Asset-Backed Securities Loan Facility. Under the PPPLF, the Reserve Banks are authorized to extend non-recourse loans to depository lenders that pledge as collateral covered PPP loans originated by an eligible lender. The PPPLF credit will be extended at 35 basis points and have the same maturity as the underlying PPP loan. Although PPP lenders may be either depository or non-depository lenders, at this time the PPPLF is available only to IDIs.

The IFR makes several modifications to the regulatory capital rules for IDIs. First, it implements the CARES Act requirement that the federal banking agencies assign PPP loans a zero percent risk weight. The IFR then addresses the capital consequences of the PPPLF. An IDI that pledges PPP loans to the facility would have to hold those assets on its balance sheet, which could subject the IDI to increased regulatory capital requirements. The IFR, therefore, permits lenders to exclude exposures from PPP loans pledged as collateral to the PPPLF from its calculations of total leverage, average total consolidated assets, and total risk-weighted assets for both advanced and standardized total risk-weighted assets.

The IFR is effective upon publication in the Federal Register and is open for a relatively brief 30-day comment period.