SBA looks to CDFIs in PPP lending; U.K. banks worried about ‘PR disaster’

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CDFIs and PPP loans

Trump administration officials say they are addressing concerns that groups “underserved by traditional banks are getting access” to the Small Business Administration’s Paycheck Protection Program by getting smaller lenders and community development financial institutions to participate in the program, the Wall Street Journal reports.

“CDFIs focus specifically on low-income and other underserved communities. There were 305 such lenders issuing PPP loans as of May 23, according to the SBA, and they had been authorized to issue more than $7 billion of the program’s $511 billion in approved loans. The SBA and Treasury Department also recently said that an additional $6.8 billion of the program’s second round of funds would be earmarked for loans through CDFIs, a move that received bipartisan support.”

“These community-development financial institutions are a tiny slice of the banking system; all told, they have about $222 billion in assets—roughly the size of one regional bank.” The Journal looks at one of them, Andy Posner’s Capital Good Fund.

“Mr. Posner founded Capital Good Fund in 2009 when he was 24 years old. In its 11 years, the firm has made almost $11 million in loans and nearly went bust three times in the process. Since mid-March, the Providence, R.I., lender has given hundreds of borrowers a break on their monthly payments. It has doled out loans to hundreds more—$300 here, $1,000 there—money needed to keep the lights on in the absence of a paycheck.”

The New York Times looks at how six businesses that got PPP loans are faring as the end of their eight-week relief period nears.

Wall Street Journal

Ahead of his time

The story of A.P. Giannini, who created the bank that became Bank of America two years before the great 1906 San Francisco earthquake hit and thrived, “shows that hard times can breed the upstarts who fuel the next boom,” the Journal reports. The bank, originally called the Bank of Italy, also survived and prospered during the Great Depression by figuring out “how to consolidate financial reporting across branches, manage a multitude of risks and develop record-keeping and analytical technology. By pioneering those techniques, Giannini designed much of the template by which big banks could turn into behemoths.”

Squeezed

“A slow economic recovery could test the strength of nonbank lenders” such as business development companies that lend to small and medium-size companies, “forcing many to raise capital if the businesses that have borrowed from them struggle to recover or shut down after the lockdown enforced during the coronavirus pandemic. In the coming weeks and months, these private-credit lenders will be looking to maintain enough cash to fund loan commitments, pay down debt, and keep their financing options open, analysts said. But for some lenders, that could prove to be challenging, particularly as a large number of borrowers are expected to draw down credit lines to weather the slow pace of economic recovery.”

Financial Times

Payment relief

Banks in the U.K. “are warning that up to half of the £18.5 billion of ‘bounce back’ coronavirus loans are unlikely to be repaid and are lobbying the chancellor to prepare for the collapse of hundreds of thousands of small businesses. Although [a government] guarantee spares the banks from credit risk, executives are worried that pursuing through the courts hundreds of thousands of small, often family-run businesses — which have borrowed an average of £30,000 each — would be logistically impossible and a ‘PR disaster.’ Under the terms of BBLS participation it is made clear that banks bear the responsibility of pursuing delinquent borrowers.”

Meanwhile, British lenders have granted “almost 1.5 million payment holidays on credit cards and personal loans,” according to UK Finance, a bank trade association. “Arrangements for payment holidays started in March and allow a customer to make no monthly repayment for three months without being considered in arrears. In addition to such payment holidays, lenders have also offered interest-free overdrafts of £500 on more than 27 million bank accounts. The announcement comes days after UK Finance revealed lenders have approved 1.8 million mortgage payment holidays up to May 20, corresponding to about one in six of UK mortgages.”

We’re watching

BaFin, Germany’s financial markets watchdog, “is examining whether Wirecard chief executive Markus Braun violated insider trading rules when he bought €2.5 million shares” in the payments company last week. “The purchase on Thursday took place inside the 30-day closed period ahead of Wirecard’s full-year results, scheduled for June 18, a time when executives are usually prohibited from stock trading. Shares in the Dax 30 member rose 3.9% to €94 following the news of the purchase.”

“We are evaluating if the transaction actually violated the trading ban,” a BaFin spokeswoman told the FT.

Elsewhere

Dirty money

“While most struggling businesses will take payment in any form to make ends meet during the economic downtown, a minority reject cash, fearing that it could be a transmission vehicle for the SARS-CoV-2 virus,” the Los Angeles Times reports. “The use of greenbacks makes some retailers and customers flinch, and contrary to popular belief, there is no federal law that requires businesses to accept cash and coins, according to the Federal Reserve’s website. Some experts predict that the pandemic will accelerate a steady flight by American consumers away from dollars and cents.”

Quotable

“This crisis is clearly pushing us even farther away from using cash in our everyday legal transactions. And it’s for obvious reasons. No one wants to touch something you or someone else just touched. That’s not going to change anytime soon.” —Harvard University economics professor Kenneth Rogoff, on the growing number of businesses that are refusing to accept cash.

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CDFIs Small business lending Paycheck Protection Program Bank of America Nonbank Cash
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