In connection with the ongoing efforts of various federal agencies to implement and execute the Paycheck Protection Program (PPP) established pursuant to provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), on April 9, 2020, the three federal prudential banking regulators—the Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (FRB), and Federal Deposit Insurance Corporation (FDIC) (collectively, the FBAs)—issued an interim final rule (IFR) targeted at neutralizing the adverse regulatory capital impact on insured depository institutions participating as lenders in the PPP program.

Following the FRB's announcement earlier this week regarding creation of the Paycheck Protection Program Lending Facility (PPPL Facility), which will provide term financing to lenders backed by PPP loans, the FRB indicated in the interagency IFR that it is authorizing each of the Federal Reserve Banks to participate in the PPPL Facility. Pursuant to the IFR, "under the PPPL Facility, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the [SBA] under the [PPP]." 

To enable PPP bank lenders to actively participate in the PPPL Facility without regard to regulatory capital constraints, the FBAs are implementing the IFR to provide that PPP loans will receive a zero percent risk weight under the FBA’s regulatory capital rules, as required by section 1102 of the CARES Act. In effect, a bank will not have to hold any capital against a PPP loan before it is sold into the PPPL Facility.

As explained by the FBAs, this will "permit [a bank] to exclude exposures pledged as collateral to the PPPL Facility from [the bank’s] total leverage exposure, average total consolidated assets, advanced approaches-total risk-weighted assets, and standardized total risk-weighted assets, as applicable."

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