Banking and Finance Law Daily Senate Banking hearing reviews regulatory agencies’ pandemic relief efforts
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Wednesday, May 13, 2020

Senate Banking hearing reviews regulatory agencies’ pandemic relief efforts

By Colleen M. Svelnis, J.D.

The Senate Banking committee held a hearing with testimony from federal agency heads describing their regulatory response to the coronavirus pandemic.

The Senate Committee on Banking, Housing and Urban Affairs held a remote hearing, "Oversight of the Financial Regulators," centered on the federal agencies’ response to the coronavirus pandemic. The hearing included testimony from Randal K. Quarles, Federal Reserve Vice Chairman of Supervision, Joseph Otting, the Comptroller of the Office of the Comptroller of the Currency, Jelena McWilliams, Chairman of the Federal Deposit Insurance Corporation, and Rodney Hood, Chairman of the National Credit Union Administration. The hearing included information about the current state of the financial system amid the pandemic, the actions the agencies have taken to support the economy, and what additional actions can be taken to further support the economy.

Banking Chairman Mike Crapo (R-Idaho), delivered an opening statement praising the "extraordinary actions to mitigate the impact and provide conditions that will lead to a forceful economic recovery." Crapo stated his appreciation for the "significant steps that each of your agencies have taken to encourage financial institutions to use their resources to meet the needs of affected borrowers, and to give institutions room to more easily and efficiently lend to households and businesses, both in response to the coronavirus and as a matter of right-sizing regulation." Crapo noted that each agency head responded to his April 8 letter requesting details on additional steps or statutory changes that should be taken to promote lending and to mitigate the economic impact of COVID-19. According to Crapo, the federal financial regulators "face a substantial challenge" in developing a regulatory response to support households and businesses, while ensuring safety and soundness of the financial system."

Ranking Member Sherrod Brown (D-Ohio) chastised the agencies, stating that regulators have two basic jobs: to make sure the financial system is safe and strong, so that a public health crisis or a natural disaster doesn’t also turn into a financial crisis; and to make sure the banking system is actually getting money to the people who grow the real economy. According to Brown, they are "failing" at both. Brown also admonished the OCC for "marching ahead with its plan to dismantle a civil rights-era law that requires banks to actually serve the communities where they do business, including low- and moderate-income communities."

Fed relief response. Quarles testified about the contents of a report, which reviews the more than 30 supervisory and regulatory steps the Fed has taken to address the economic and financial challenges as a result of the coronavirus pandemic. According to Quarles, because of these measures, "and the strong foundations on which they were built, banking organizations are well-positioned to serve as a source of strength, not strain, in the current crisis." Quarles highlighted that banks: have been able to lend to creditworthy firms; have been able to absorb new deposits from households and businesses; have been able to process a flood of transactions from investors responding to higher volatility; and have helped stabilize the financial system and restore market function."

According to Quarles, banking organizations "must continue to work constructively with borrowers, offering them the flexibility to weather a hardship they could not expect and did not create." Quarles stated that banks must still manage the challenges of operating during a public health emergency, and stressed that banking organizations "can only be as robust as the economies they serve."

OCC response. Otting testified about the actions the OCC has taken in response to the COVID-19 pandemic to provide banks greater flexibility to meet the needs of the households and businesses that depend on them, to enhance the condition of the banking industry as it responds to the current economic and public health stresses, and to expand the range of activities underway or planned at the OCC. The OCC published more than 25 separate issuances during March and April, often with other regulatory agencies. These included bulletins, statements, press releases, and interim final rules to provide timely information to examiners and the banking industry.

"The condition of the federal banking system prior to the COVID-19 pandemic and related containment measures was in strong standing with ample capital, liquidity and sound credit quality," stated Otting. As of Dec. 31, 2019, the overall federal banking system, including community banks with less than $1 billion in total assets, held record high levels of capital as reflected in their leverage ratios as well as their tier 1 risk-based capital ratios. This ensured the industry was well equipped to carry out the range of congressional policies advanced pursuant to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The full extent of the economic and banking effects will greatly depend on the depth and duration of the current downturn, stated Otting. "As we move to the next phase of this pandemic crisis, we expect that bank earnings will continue to be under stress as interest rates decline and it becomes necessary for banks to increase provisions for expected loan losses." According to Otting, the OCC has continued to pursue its other priorities and objectives, including:

  • strengthening and modernizing Community Reinvestment Act regulation;
  • promoting small-dollar lending;
  • streamlining Bank Secrecy Act and Anti-Money Laundering;
  • supporting responsible innovation; and
  • existing regulatory activity in the rulemaking process.

FDIC actions. According to McWilliams, the FDIC "has taken swift, decisive actions to maintain stability and public confidence in the nation’s financial system. These actions have focused on providing necessary flexibility to both banks and their customers—particularly the most heavily affected individuals and businesses—while maintaining the overall safety and soundness of the banking system." McWilliams stated that the FDIC has acted to:

  • encourage banks to work with affected customers and communities;
  • increase flexibility for banks to meet the needs of their customers;
  • foster small business lending;
  • protect consumers and increase financial options, and
  • actively monitor the financial system.

McWilliams stated that the FDIC has encouraged financial institutions to actively work with small businesses that have less financial flexibility to weather the near-term operational challenges. This included making clear that "prudent efforts to modify the terms on existing loans for affected customers of FDIC-supervised banks will not be subject to examiner criticism."

Additionally, the agency provided additional information regarding loan modifications to help mortgage borrowers. According to McWilliams, the FDIC "encouraged financial institutions to consider arrangements to ease cash flow pressures on these borrowers, improve their capacity to service debt, increase the potential for financially stressed residential borrowers to keep their homes, and facilitate the institution’s ability to collect on its loans."

The FDIC, along with other regulatory agencies, also announced the favorable Community Reinvestment Act consideration and flexible supervisory and enforcement approach during the pandemic regarding certain consumer communications required by the mortgage servicing rules.

McWilliams stated that the FDIC continues to engage with banks and their customers affected by COVID-19 to address questions and concerns, including contacting all 50 state banking commissioners, numerous members of Congress, consumer groups, and maintaining regular contact with supervised institutions, particularly community banks. She stated that these engagements "have helped us better understand the challenges facing banks and communities across the nation and will remain a critical component of our response to the pandemic."

NCUA priorities and actions. Since their earliest formation, credit unions have provided critical financial assistance to their members, especially those of modest means and limited access to credit and other financial services, according to Hood’s testimony. "Bolstering the credit union system’s liquidity strength now is necessary to ensure that our nation’s credit unions will remain stable and strong, and will keep delivering vital financial services to the millions of members who count on them every day." Hood stated that the NCUA is "working proactively to alleviate potential liquidity strains and to ensure that our maximum response capabilities are in place at the earliest opportunity."

Hood described the NCUA’s three supervisory priorities in response to the COVID-19 pandemic, in order to support enhanced offsite, forward-looking supervision and to timely identify credit unions that are experiencing financial or operational difficulties or will face them in the near future.

  1. Provide assistance to those credit unions with immediate operational or financial needs.
  2. Work with credit unions and state regulators to identify operational and financial challenges. To this end, examiners are periodically contacting each credit union to discuss their individual operational and financial status, including any associated challenges and needs.
  3. Examination staff has been working with credit unions to obtain documentation and complete examination procedures offsite. The NCUA will limit the burden imposed on credit unions so they can focus on providing uninterrupted service to their members.

In response to the coronavirus pandemic, the NCUA adopted an interim final rule amending its regulations to either implement the changes in the CARES Act or augment those changes with new flexibilities. According to Hood, if the need for liquidity advances arises, the agency has taken several steps, together with the enhancements to the CLF’s regulation in the interim final rule, to facilitate both membership applications and expedited loan processes. This includes streamlined membership application forms and simplified or eliminated requirements where possible. The NCUA also made corresponding changes to published instructions on how to join the CLF and how to obtain a liquidity loan.

To support credit union industry participation in the Paycheck Protection Program (PPP), Hood stated that the NCUA has issued several Letters to Credit Unions, press releases, and email messages on the program. The NCUA Board also approved several regulatory changes related to how PPP loans are classified for regulatory capital and commercial underwriting purposes.

Hood also highlighted the increased flexibility and borrowing authority for the NCUA’s Central Liquidity Fund (CLF) that will make it easier for member credit unions to access the CLF if and when the need arises.

MainStory: TopStory CommunityDevelopment Covid19 FederalReserveSystem FinancialStability

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