Certain government regulatory bodies have produced new guidance for financial institutions in light of the coronavirus (“COVID-19”) pandemic. The Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, National Credit Union Administration, and the Conference of State Bank Supervisors (known as the “Prudential Regulators”) have encouraged financial institutions to adapt to consumers’ and businesses’ varying financial needs in consideration of COVID-19.
The Prudential Regulators’ first piece of guidance stated that “financial institutions [should] meet the financial needs of customers and members affected by the coronavirus.” To facilitate financial services, the Prudential Regulators will “provide appropriate regulatory assistance to affected institutions subject to their supervision,” and will speed the approval process for providing financial services in certain affected communities. The guidance also specified that “[p]rudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
Other federal banking regulators issued further guidance surrounding the provision of credit. On March 15, the FRB issued a statement encouraging depository institutions to use the Federal Reserve’s discount window to facilitate liquidity in the economy. The statement stressed that use of the “discount window supports the smooth flow of credit to households and businesses.”
Quickly following on March 17, the FRB, FDIC, and OCC announced two new moves supporting depository institutions’ consumer and business lending practices. The first pledged that the regulators will “support banking organizations that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.” The statement highlighted the need for depository institutions to “continue to manage their capital actions and liquidity risk prudently,” while also caveating that “[t]he largest banking organizations hold $1.3 trillion in common equity and $2.9 trillion in high quality liquid assets.” The second offered a “technical change to phase in, as intended, the automatic distribution restrictions gradually if a firm’s capital levels decline.” In this regard, the regulators also issued an interim final rule that altered the definition of “eligible retained income” to “the greater of (1) a banking organization’s net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (2) average of a banking organization’s net income over the preceding four quarters.” Under the rule, “[t]his definition will apply with respect to all of a banking organization’s buffer requirements, including the fixed 2.5 percent capital conservation buffer, and, if applicable, the countercyclical capital buffer, the [global systemically important bank] surcharge, and enhanced supplementary leverage ratio standards.”
As COVID-19 continues to spread, it is possible that the regulators and, perhaps, the Department of the Treasury might expand the categories of eligible collateral as the need for such relief increases. Given the high variability of the stock market and Congress’s pending aid packages, the exact course of action of the regulators remains uncertain.