Where U.S. banks won and lost in the new pandemic relief package

WASHINGTON (Dec 22) - The U.S. Congress on Monday was scrambling to pass a $900 billion pandemic aid package, following seven months of partisan bickering.

The banking industry aggressively pushed for extra stimulus and a raft of other measures which would help shore up struggling borrowers and ultimately benefit the industry.

Here is what’s in the package for banks:

PPP FUNDS AND FORGIVENESS

The Paycheck Protection Program (PPP) has been the centerpiece of Congress’s efforts to help small businesses weather pandemic lockdowns. To date, banks have dished out $525 billion in PPP loans to be repaid by the government, provided borrowers spent the cash on qualifying expenses.

Monday’s package includes an additional $284 billion for the program and broadens eligible PPP expenses to include items like personal protective equipment for staff and operational costs. It also allows those expenses to qualify for deductions, simplifying tax returns for millions of borrowers.

Smaller companies which suffered a 25% or greater decline in 2020 revenues can seek a second PPP loan of up to $2 million.

And critically for banks, the package includes a streamlined forgiveness process for loans of less than $150,000, requiring borrowers only sign a one-page form attesting that the funds were used as intended. Banks had fretted that the original forgiveness process was too onerous for smaller borrowers.

TROUBLED DEBT RESTRUCTURINGS

Troubled Debt Restructurings (TDRs) are the accounting and regulatory framework for loan modifications, such as deferring the loan, extending it, or reducing monthly repayments.

Banks say TDR accounting is onerous, sometimes incurring additional capital charges, extra operational hassles and generally acting as a drag on banks’ overall asset quality. They say banks should not be penalized for trying to help customers who need temporary relief to keep them afloat until the pandemic passes.

Congress in March suspended the process for TDR accounting through Dec. 31, paving the way for banks to modify loans without fear of penalty. The new package extends that relief to Jan. 1, 2022 after lenders, fearing regulators and investors may fault them for ballooning TDRs, pushed for an extension.

CREDIT LOSS ACCOUNTING RULES

Current Expected Credit Losses or “CECL” is an incoming accounting standard that requires financial institutions to make expected credit loss allowances for the lifetime of a loan.

Banks say the rule adds volatility to the amount of capital they must hold and creates incentives to reduce lending when borrowers need it most. The new relief package gives banks the option of ignoring the new standard until 2022. Banking groups had been pushing to delay implementation until at least 2023.

According to the American Bankers Association, of the institutions required to implement CECL in January 2020, roughly 50 took advantage of a one-year delay granted by CARES Act.

COMMUNITY BANK LEVERAGE RATIO

In 2018, Congress introduced a simple community bank leverage ratio for smaller lenders to reduce their overall capital burden. The law allows regulators to set the required level, based on a leverage ratio, at between 8% and 10%, with regulators opting for 9%, despite community bank protests.

To boost small banks’ ability to lend, the CARES Act brought this ratio down to 8% until Dec. 31. But banking groups failed to get that lower ratio extended indefinitely.

Reuters