Banks get big capital break for small-business loans amid crisis

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The Federal Reserve and other regulators are planning to grant a sweeping capital break for banks providing loans to small businesses as part of the government's response to the coronavirus-fueled economic crisis.

A rapidly written rule acknowledges that lending through what's known as the Paycheck Protection Program doesn't pose a risk for U.S. banks, according to documents posted on the Federal Deposit Insurance Corp.'s website. As a result, regulators won't make lenders maintain capital buffers as a protection against loans going bad, the documents show.

Such loans will be backed by a recently announced Fed lending facility, and the rule's text says the regulators would agree to "allow banking organizations to neutralize the regulatory capital effects of participating in the facility." It's not clear from the FDIC documents whether all the agencies involved have signed off on the relief yet. In addition to the FDIC and Fed, the other regulator involved is the Office of the Comptroller of the Currency.

An FDIC spokeswoman confirmed that the agency has approved the rule, which hasn't been formally announced. Spokesmen for the Fed and OCC declined to comment.

Facilitating lending

The rule documents, dated April 7, are meant to smooth the path for banks to facilitate Small Business Administration loans to companies that are facing the risk of bankruptcy amid the shut down of the U.S. economy. Roughly $350 billion in rescue funds were made available as part of the $2.2 trillion stimulus package that Congress passed last month. Lawmakers are now negotiating a second bill that would add $250 billion to the SBA program.

The FDIC documents show that the capital relief is being granted through a so-called interim final rule, meaning it takes effect immediately while still giving the public the chance to offer comments. The move is similar to what was previously done for banks participating in the Fed's Money Market Mutual Fund Liquidity Facility.

De-regulatory moves

Banks ranging from Wall Street giants to community lenders have already benefited from a number of de-regulatory moves by the Fed and other agencies amid the worsening coronavirus pandemic. The Fed on Wednesday said it is temporarily lifting a cap on asset growth for Wells Fargo to allow it to boost lending through the SBA program. The penalty was imposed on the bank for opening millions of accounts without customers' approval, one of the biggest industry scandals in recent years.

The Fed had announced its new lending facility Monday in a brief statement, saying it would provide term financing to banks against loans issued under the SBA program. Under the initiative, banks provide loans to small businesses to cover payroll, rent and utilities for as long as eight weeks. The loans convert to grants if the companies retain or rehire their workers.

Bloomberg News