Banking Organizations Get Capital Relief on Paycheck Protection Loans

Thoughtware Alert Apr 10, 2020
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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allocated $350 billion to the U.S. Small Business Administration (SBA) to create the paycheck protection program (PPP) for small businesses hit hard by COVID-19. Larry Kudlow, director of the U.S. National Economic Council, said on April 7, 2020, that 178,000 loans totaling $50 billion had already been approved. The $350 billion initially allocated to the PPP is on a first-come, first-served basis until the funds run out. However, U.S. Treasury Secretary Steven Mnuchin is likely to request an additional $250 billion from Congress this week. Initial PPP details can be found in BKD’s article SBA Releases Details on Paycheck Protection Program.

On April 7, 2020, the Federal Reserve Banks were authorized to extend credit under the Paycheck Protection Program Lending (PPPL) Facility. Under the PPPL Facility, each of the Federal Reserve Banks will extend nonrecourse loans to institutions that are eligible to make PPP-covered loans, including depository institutions subject to the agencies’ capital rules. The facility’s term sheet indicates the loans will be nonrecourse. There are no fees associated with these loans and the interest rate will be 35 basis points. The principal amount of loans will be equal to the PPP loans pledged as collateral, i.e., no haircuts. This facility will be available until September 30, 2020.

On April 9, 2020, the FDIC, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency issued an interim final rule to provide regulatory capital relief for FDIC-supervised institutions issuing loans under SBA’s PPP and participating in the PPPL Facility. Participation in the PPPL Facility could potentially subject institutions to increased regulatory capital requirements because they must originate and hold PPP-covered loans on their balance sheet as collateral pledged to the PPPL Facility.

Regulatory Capital Treatment of PPPL Facility Exposures

Banking organizations can exclude loans pledged as collateral to the PPPL Facility from a banking organization’s total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets and standardized total risk-weighted assets, as applicable.

Regulatory Capital Treatment of PPP-Covered Loans

PPP loans receive a zero-percent risk weight under the agencies’ regulatory capital rules regardless of whether they are pledged as collateral to the PPPL Facility. However, such loans will be included in a banking organization’s leverage ratio requirement unless they are pledged as collateral to the PPPL Facility.

This rule is effective once published in the Federal Register.

Conclusion

BKD will continue to follow this developing situation. As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. Visit BKD’s COVID-19 Resource Center to learn more. If you have questions, contact your BKD Trusted Advisor™ today.

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