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
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Previous ArticleCBM Amends Directive on Borrower-Based Measures to Ease COVID Impact
BIS Innovation Hub published the work program for 2021, with focus on suptech and regtech, next-generation financial market infrastructure, central bank digital currencies, open finance, green finance, and cyber security.
In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union.
EBA finalized the two sets of draft regulatory technical standards on the identification of material risk-takers and on the classes of instruments used for remuneration under the Investment Firms Directive (IFD).
EC published, in the Official Journal of the European Union, a notification that the European Court of Auditors (ECA) has published a special report on resolution planning in the Single Resolution Mechanism.
BoE published a scenario against which it will be stress testing banks in 2021, in addition to setting out the key elements of the 2021 stress test, guidance on the 2021 stress test, and the variable paths for the 2021 stress test.
PRA published a consultation paper (CP3/21) proposes rules regarding the timing of identity verification required for eligibility of depositor protection under the Financial Services Compensation Scheme (FSCS).
FSB published the work program for 2021, which reflects a strategic shift in priorities in the COVID-19 environment.
FCA announced that 50% firms have started using the new data collection platform RegData, which is slated to replace the existing platform known Gabriel.
Bundesbank published Version 5.0 of the derivation rules for completeness check at the form level, with respect to the data quality of the European harmonized reporting system.
FED finalized a rule that updates capital planning requirements to reflect the new framework from 2019 that sorts large banks into categories, with requirements that are tailored to the risks of each category.