Fed may give Wells breathing room; Dimon says not yet to dividend halt
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Deepening the loan pool
The Federal Reserve plans “to create a new program to finance loans that banks and other lenders make through the government’s emergency small-business lending program,” the Wall Street Journal says. “The move will free up financial firms to make more loans guaranteed by the Small Business Administration’s Payroll Protection Program.” Details on the plan will be announced later this week.
The initiative will let banks take PPP loans off their balance sheets, American Banker says.
“While the Fed has released scant detail on what form the initiative will take, it has promised to create a financing solution to help banks lend to smaller companies,” the New York Times says. “It could either lend directly to banks making Paycheck Protection Program loans, or essentially buy the loans once they are originated so that banks will not have to carry them on their balance sheets.”
The program has been plagued by “operational issues [that] have led to a wave of complaints from frustrated applicants that began with the scheme’s launch on Friday and continued on Monday,” the Financial Times says.
“Pressure on the program is expected to build later this week, when it will open to millions of independent contractors, including gig economy workers such as Uber drivers,” the Washington Post says. “Demand for the program also is expected to increase dramatically after the Small Business Administration said Monday that faith-based organizations would be eligible for loans.”
Wells Fargo wants to do more lending under the program but says it is hamstrung by the $1.9 trillion asset limit imposed on it two years ago as punishment for its 2016 phony accounts scandal. The bank said Sunday night “it could lend just $10 billion to companies appealing for help under the $350 billion” program, according to the FT. “That means that Wells, which has a $1.9 trillion balance sheet and has a 9% share of the U.S. loans market, will do just 3% of the lending for the scheme.”
The bank said it is “donating all fees from the program to non-profits that support small businesses.”
“There is so much demand and chaos in the $349 billion lending program that Fed officials are now discussing a temporary truce with Wells,” the New York Times said. “The truce would involve lifting a cap on the amount of assets the bank can hold, so that it can lend more to small businesses.”
CEO Charles Scharf told the paper the bank plans to "try to find ways to shrink its balance sheet and make more room for loans."
JPMorgan Chase “could suspend its dividend for the first time in its history if the coronavirus crisis triggers the kind of sharp recession that some economists now expect, chief executive Jamie Dimon warned on Monday, striking a more cautious tone on payouts than its Wall Street rivals,” the FT reports. “In his annual letter to shareholders, Dimon said JPMorgan was ‘not immune’ to the coronavirus crisis and is exposing itself to ‘billions of dollars of additional credit losses’ as it lends to businesses and individuals in need.”
Dimon said the bank’s board would “likely consider suspending the dividend [in an] extremely adverse scenario,” which he hoped would be “unlikely.”
“Dimon said his bank hasn’t sought looser regulations to help it handle the economic collapse caused by the coronavirus pandemic, detailing instead its ability to keep lending in even more dire circumstances,” the Journal says. “In internal stress testing, he said the nation’s biggest bank would be able to increase lending to clients even if U.S. gross domestic product were to drop 35% in the second quarter and stay there for the remainder of the year. Only then would the bank consider cutting its dividend, he wrote.” Wall Street Journal, Financial Times, New York Times
Wall Street Journal
Banks have been given a reprieve from adopting current expected credit loss (CECL) accounting standards to realize loan losses. But “many banks may just adopt them anyway,” the paper says, even if defaults are expected to soar because of the economic shutdown. “The Fed [has] said it would delay the effect of CECL provisions on its calculations of whether banks hold sufficient capital relative to their assets for two years. [So] even if a bank does add to its provisions under CECL, it won’t reduce its balance-sheet capacity for loans, securities and other risky assets in regulators’ eyes.”
“Many banks have already suspended their share-buyback programs for now,” the paper adds. “That means that their equity capital measures may be higher than they would otherwise be. So in effect, banks may have a cushion now to take hits to their equity capital from provisions. On top of that, banks that transition to the new CECL rules now would be in position to benefit later from some of the pain of future losses being already accounted for.”
Alison Harding-Jones, Citigroup’s head of mergers and acquisitions for Europe, Middle East and Africa, is used to three days of travel a week, but the efforts to control the coronavirus have changed her situation. The paper profiles her and the challenges of being “holed up for 2½ weeks in Aldworth, England, because of the pandemic." Instead of discussing mergers, the paper says, "conversations currently focus on how clients are doing internally, how their competitors are holding up and the impact of the virus generally."
“While we are actively working to create balance sheet capacity to lend, we are limited in our ongoing ability to use our strong capital and liquidity position to extend additional credit.” — Wells Fargo CEO Charles Scharf, who wants the Fed to relax the bank’s asset cap so it can make more emergency small business loans