OCC sounded a warning about the effects of COVID-19 lockdowns on the banking system. In a letter to the National League of Cities, the U.S. Conference of Mayors, and the National Association of Governors, the Acting Comptroller Brian Brooks highlighted that requiring businesses to remain closed decreases the ability to service their debt, thus increasing default risk in the banking system. During a period of double-digit unemployment and stresses caused by local responses to COVID-19 to the previously safe and sound business and commercial real estate portfolios, actions that exacerbate that risk may prolong and worsen an economic downturn, reduce the availability of credit and capital that would support recovery, and result in safety and soundness issues that are especially significant for smaller community and regional banks with business concentrations in these areas.
Banks are a major source of commercial real estate finance in the United States. Cutting off utilities to commercial buildings can impair their condition, structural integrity, and value, thus impairing the collateral that secures real estate loans. Consequently, the recent news reports about certain cities’ initiatives to cut off water, electric, or other utilities to businesses that are operating or serving customers in violation of local lockdown orders highlight an important risk to the banking system. Commercial real estate loan collateral is also put at risk by lengthy property vacancies that result from extended stay-at-home orders. The extended lockdown orders impair the ability of businesses, particularly small businesses, to generate the revenue needed to pay their loan obligations.
Banks lend to customers based in part on their assessment of customers’ current and expected future income, which largely determine their ability to repay the debt. Federal law expressly authorizes national banks to make loan determinations based on banks’ assessment of current and expected income and current and expected cash flows. Yet, we now have anecdotal reports of banks that are experiencing small-business loan delinquency rates in the mid-double-digits on loan books that reflected strong cash flow expectations and pristine credit quality at the time of origination, prior to local lockdown orders. Such high delinquency rates have the potential to threaten the community and mid-size banks that are the economic lifeblood of local communities.
Mr. Brooks urged mayors and governors in the country to consider the adverse impact of long-term regional economic shutdown on the nation's banks when making their decisions. "National banks and federal savings associations entered the COVID-19 crisis extremely well-capitalized and with strong liquidity," Mr. Brooks wrote. "The President and Congress have relied on a strong banking system to deliver many of the elements of the CARES Act and other relief to support the nation during this difficult period. I ask that your members carefully consider the impact of their lockdown orders on the health and function of our shared national financial infrastructure as they implement the President's guidance to determine when and how to unwind those orders."
Keywords: Americas, US, Banking, COVID-19, CRE, Credit Risk, SME, CARES Act, Commercial Real Estate, OCC
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