The Office of the Comptroller of the Currency (OCC) and the Federal Reserve are reportedly weighing changes that would encourage banks to make short-term loans to riskier businesses by easing liquidity standards.
The proposals are being developed as turbulence caused by the novel coronavirus outbreak continues to rock stock indexes in the U.S. and globally. Stock futures tied to the Dow Jones Industrial Average were down almost 6% early Wednesday, erasing a rally late Tuesday that had sent stocks back up by more than 5% after a spate of record plunges wiped away trillions of dollars in wealth.
As regulators weigh easing bank rules, the Trump administration and leaders in Congress are racing to put together a massive package that would jolt the economy by providing direct payments to people hit hard by travel bans and business closures intended to slow the spread of the outbreak.
The size of the stimulus packages under development range from $750 billion in a proposal being put together by Senate Minority Leader Chuck Schumer, D-NY, to $1 trillion in the Trump administration’s proposal.
Details of the proposals are still being worked out, but the administration's plan is expected to send to people cash payments of up to $500 billion in two tranches, the first before the end of April. That tranche would be means-tested to ensure money went to the most needy, The Wall Street Journal reported. The plan also envisions direct payments to small businesses. The airline industry, reeling from travel restrictions, would get $50 billion.
The stimulus, in whatever form it passes, would come on top of an $8.3 billion package enacted in early March to help health care providers cope with the demands the outbreak is placing on them by getting them some resources and making it easier to share information.
Another legislative package, which passed the House last week and is awaiting action in the Senate, would give unemployment and sick leave benefits to workers who are laid off or ill, although critics say the scope doesn’t match the need. President Donald Trump has signaled his support for the approach. Senate Republicans want to make changes before moving on it.
Eased bank rules
The easing of liquidity rules that the Fed and OCC are weighing focus on short-term bank lending to companies, hard hit by the economic upheaval, that are considered risky. Travel and energy companies are among those that might benefit.
The OCC is looking at easing rules put in place in 2013, including supplemental leverage ratio standards, that some analysts credit with helping put the banks in the strong financial position they were in going into the coronavirus crisis, according to a report by CNBC.
The OCC also might delay current expected credit loss (CECL) accounting rules for smaller banks and credit unions. The standards, which took effect for big banks at the end of last year, require banks to make an upfront estimate of all of the losses a loan will generate over its life, replacing the incurred-loss standard banks were using. The new standard could discourage lending because it could require banks to hold more in reserves to account for the losses. Small banks and credit unions were scheduled to start using the new standard at the end of this year.
The Federal Reserve is considering relaxing leverage ratios on loans to travel and energy companies, among others, considered risky in today’s environment, according to the CNBC report.
That would follow other initiatives the Fed released this week to get more credit out, including the launch of a Primary Dealer Credit Facility that will offer lenders overnight and term funding with maturities up to 90 days. Loans can be collateralized by commercial paper, municipal bonds and some equity securities. The interest rate will be at the discount rate charged by the Federal Reserve Bank of New York.
The Fed also set up a facility to encourage money market mutual funds and other investors to keep buying commercial loans. The facility provides a liquidity backstop to issuers of commercial paper through a special purpose vehicle that will purchase unsecured and asset-backed commercial paper rated A1/P1, which is the S&P rating for relatively secure, prime credit quality investment assets.