The COVID-19 related stimulus bill (Coronavirus Aid, Relief, and Economic Security Act or CARES Act) provides relief to the banking industry directly. The CARES Act authorizes guarantees of bank-issued debt and noninterest-bearing transaction deposits, changes the community bank leverage ratio from nine percent to eight percent, makes COVID-19 related debt restructurings exempt from the definition of troubled debt restructurings, and delays the implementation of the Current Expected Credit Losses standard. There are other provisions related to SBA lending and emergency relief lending to eligible businesses to help ease the economic impact as well, which may be of interest. Below is a summary of some the provisions relevant to banks in the $2 trillion relief package passed by the Senate on March 25, 2020.

Debt Guarantee (Section 4008)

The CARES Act authorizes the Federal Deposit Insurance Corp. to revive its crisis-era program backstopping bank-issued debt and noninterest-bearing transaction deposits that exceed the FDIC's $250,000 limit. Specifically, through December 31, 2020:

• The FDIC may establish a program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies; and
• The National Credit Union Administration may temporarily increase the share insurance coverage on any non-interest-bearing transaction account in any federally-insured credit union.

Temporary Reduction in Community Bank Leverage Ratio (Section 4012)

The CARES Act requires banking agencies to adopt an interim final rule reducing the community bank leverage ratio from nine percent to eight percent and providing a grace period for qualifying community banks to satisfy the requirement. This will help community banks provide resources to meet their customers' financial needs. The interim final rule will expire the earlier of the expiration of the national emergency declaration, or December 31, 2020.

Temporary Relief for Troubled Debt Restructuring (Section 4013)

This section allows financial institutions to suspend requirements under Generally Accepted Accounting Principles (“GAAP”) and make loan modifications related to COVID-19 or it effects without being categorized as a troubled debt restructuring. The TDR designation reduces the incentive for banks to work out loans for struggling borrowers, since it requires banks to set aside more in capital reserves and creates other administrative problems. Such suspensions are applicable for the term of the loan modification, and may be made from March 1, 2020 through the earlier of 60 days after the expiration of the national emergency declaration or December 31, 2020.

Optional Temporary Relief From Current Expected Credit Losses (Section 4014)

The CARES Act includes an optional temporary delay to the start of the Current Expected Credit Losses standard. This section allows depository institutions (including a credit union), a bank holding company or any of its affiliates to not to be subject to the Current Expected Credit Losses (“CECL”) methodology by delaying measuring credit losses on financial instruments until the earlier of the termination of the public health emergency or December 31, 2020.

Other provisions that may be of interest to banks are:

Subsidy for Certain Loan Payments (Section 1112)

This section covers loans –

• Guaranteed by the Small Business Administration under:
  • The SBA Business Loan Program (including the Community Advantage Pilot Program, but excluding the new payroll loan program established under Section 1102); or
  • Title V of the Small Business Investment Act; or
• Made by an intermediary to a small business concern using loans or grants received under the SBA's Microloan Program.

With respect to these loans, in addition to the SBA relief already provided under the CARES Act, the SBA "should encourage lenders to provide payment deferments, when appropriate, and to extend the maturity of covered loans, so as to avoid balloon payments or any requirement for increases in debt payments resulting from deferments provided by lenders" during the COVID-19-declared emergency.

Additionally, for these loans, the SBA must pay (and relieve the borrower of any obligation to pay) the principal, interest, and any associated fees owed in a regular servicing status:

• For loans made before this bill is enacted not on deferment, for the six-month period beginning with the next payment due;
• For loans made before this bill is enacted that are on deferment, for the six-month period beginning with the next payment due after deferment; and
• For loans made within six months of enactment of this bill, for six months after the first payment is due.

The CARES Act also instructs the SBA to work with the Federal Deposit Insurance Corporation (“FDIC”), the Office of the Comptroller of Currency, and state banking regulators to:

• Not require lenders to increase their reserves based on payments received from the Administrator under this section;
• Waive statutory limits on maximum loan maturities for certain covered loans; and
• Extend lender site visit requirements to account for volume increases, travel restrictions, etc., during the COVID-19 emergency to –
  • Not more than 60 days (which may be extended at the Administrator’s discretion) following the occurrence of an adverse event (other than payment default) that sends a loan into liquidation; and
  • Not more than 90 days after a payment default.

Emergency Relief for Eligible Business (Section 4003)

Provides $500 billion to Treasury’s Exchange Stabilization Fund for loans, loan guarantees, and investments in the Federal Reserve’s lending facilities to support states, municipalities, and “eligible businesses,” which include air carriers and US businesses that have not received “adequate economic relief” in the form of other loans or loan guarantees. The $500 billion is allocated as follows:

• $25 billion in loans and loan guarantees for air carriers;
• $4 billion in loans and loan guarantees for cargo air carriers;
• $17 billion in loans and loan guarantees for businesses critical to maintaining national security; and
• $454 billion for loans, loan guarantees, and investments in support of facilities established by the Federal Reserve to support lending to eligible businesses, states, and municipalities.

The CARES Act gives the Treasury Secretary discretion to make loans and loan guarantees for a duration no longer than five years and at an interest rate not less than prevailing market rates prior to the COVID-19 outbreak. The loans cannot be forgiven.

In order to access a loan, a business must be U.S.-domiciled and its employees must be predominately located in the United States. The business also must show that alternative financing is not reasonably available.

For 12 months after the expiration of the loan or loan guarantee, the business will be prohibited from buying back its company stock, paying dividends or making other capital distributions, and reducing its workforce by more than 10%.

Temporary Suspension of Restrictions on ESF (Section 4015)

This temporarily suspends the restrictions of the Emergency Economic Stabilization Act of 2008 on Treasury’s use of the Exchange Stabilization Fund, thereby permitting Treasury to establish a guarantee program for the U.S. money market mutual fund industry. Any guarantee is limited to the total value of a shareholder’s holdings in a participating fund as of close of business the day before the announcement of the guarantee and any guarantee established under this authority would need to terminate by December 31, 2020.

Temporarily Enhanced Access to CLF (Section 4016)

This section temporarily enhances access to the Central Liquidity Facility (“CLF”), including for corporate credit unions, to meet liquidity needs. The Board does not have to obtain evidence that the applicant has made reasonable efforts to first use primary sources of liquidity before approving an application. The Board, on behalf of the Facility, may borrow from any source so long as the total face value does not exceed 16 times the subscribed capital stock and surplus of the Facility from the date of enactment of the CARES Act to December 31, 2020. The amendments under this section must sunset by December 31, 2020.