Reed Smith Client Alerts

In solidarity with the national effort to combat the economic challenges of the coronavirus pandemic, the federal banking agencies have issued an immediately effective Interim Final Rule easing regulatory capital requirements and thereby encouraging financial institutions to fully participate in the Paycheck Protection Program (PPP) created by Congress to alleviate the extraordinary budgetary pressures faced by small businesses.

Authors: Maria B. Earley Jonathan L. Levin

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PPP loans are guaranteed by the Small Business Administration (SBA), backed by the full faith and credit of the U.S. Government. In support of the PPP Lending Facility, the Federal Reserve Banks have been authorized to extend non-recourse loans to institutions that are eligible to make PPP loans, including depository institutions subject to the banking agencies’ capital rules.

The current regulatory capital framework is comprised of risk-based and leverage capital requirements, which are expressed as a ratio of regulatory capital to assets and certain other exposures. Making PPP loans will affect the balance sheet of an eligible financial institution, because, as eligible collateral pledged to the Federal Reserve Banks, PPP loans must be originated and held on the institution’s books. However, the agencies believe that the current capital rules do not reflect the substantial protections from risk provided to an institution making PPP loans, namely, the non-recourse nature of the Federal Reserve’s extension of credit shielding the institution from exposure to credit or market risk.