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ABA backs bill supporting brokered deposits; Main Street program up and running

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital. Send tips and ideas to polo.rocha@spglobal.com, alison.bennett@spglobal.com, declan.harty@spglobal.com and maria.rafi@spglobal.com

In Congress

The American Bankers Association published a letter June 16 supporting a bill introduced by Sen. Jerry Moran, R-Kan., that would lift restrictions on brokered deposits — a move sought for years by the banking industry, which has argued that the current rules no longer reflect modern times.

The ABA praised Moran for proposing to remove Section 29 of the Federal Deposit Insurance Act, which sharply restricts — and in some cases eliminates — the ability of banks with mid-to-low levels of capitalization to buy brokered deposits. Instead, according to the ABA letter, the measure calls for restrictions on asset growth for such banks.

The Congressional Record announced that the bill (S. 3962) was introduced June 15, but no copies of the text were available online early June 19.

The ABA said Section 29, enacted in 1989, does not align with modern banking due to statutory changes and technological advancements that have "led to an increase in the types of mechanisms that banks use to gather deposits."

In addition, a broader range of deposits are now considered brokered, meaning that "even well-capitalized banks are strongly discouraged from holding an otherwise stable source of funding," the ABA said. Due to Section 29, otherwise healthy banks can face higher deposit insurance assessments and adverse treatment under liquidity and capital rules, among other hurdles, according to the letter.

The ABA letter did not mention a Federal Deposit Insurance Corp. study from 2011 that stated that a number of failed banks during the last financial crisis had large amounts of brokered deposits on their books.

"A number of failures were occurring where there were concentrations in commercial real estate (CRE) and construction and development (C&D) lending funded by large amounts of brokered deposits," the FDIC said in the study.

At the Fed

Fed Chairman Jerome Powell shed some light on the U.S. economic outlook on the first day of his two-day testimony in Congress this week.

On June 16, the chairman told the Senate Banking Committee that although the economy is rebounding — albeit slowly — after experiencing a major shock, recovery to pre-pandemic levels will be a long journey. Though retail activity increased by 17.7% in May after a revised 14.7% dip in April, and the country added 2.5 million jobs last month, more monetary and fiscal actions will probably be needed to support the U.S. economy's revival.

While the Fed chief avoided discussing specifics regarding fiscal policy, he pointed out that lawmakers will probably need to "continue support for workers in some form" given the historically high level of unemployment in the country.

On day two, Powell told the House Financial Service Committee the Fed is aware of the shortage of U.S. coins caused by flow disruptions as businesses have shut down in the wake of the coronavirus pandemic. He added that as a temporary measure, the Fed is coordinating with the Mint to increase supply and is working with its regional reserve banks to ensure the supply is available where it is needed.

The central bank also officially opened the Main Street Lending Program this week for bank registration and encouraged lenders to start making loans to small and medium-sized businesses "immediately." As opposed to the Paycheck Protection Program for small businesses, the five-year loans of between $250,000 and $300 million under the Main Street program will have to be paid back. Principal payments will be deferred for two years, while interest payments will be deferred for one year.

On the same day the Fed allowed banks to register for the Main Street program — June 15 — it also proposed expanding the program to nonprofit organizations and said it was seeking feedback on how to do so. The central bank proposed two separate Main Street loan options for nonprofits: Loans under the Nonprofits New Loan option would need to be between $250,000 and $35 million, while loans under the Nonprofits Expanded Loans option would need to be between $10 million and $300 million.

At the SBA

The U.S. Small Business Administration introduced two new loan forgiveness forms for Paycheck Protection Program borrowers. One form is an "EZ" application that has fewer calculations and less required documentation and is only available for certain borrowers. The other is a revised form for all borrowers that addresses the changes made to the program by the Paycheck Protection Program Flexibility Act, signed into law June 5.

The EZ form is only available for borrowers who are self-employed with no employees, or who did not cut employees' salaries by more than 25% and did not reduce their working hours, or who experienced a decrease in business activity due to the pandemic and still did not cut workers' wages by more than 25%.

The other form is open to all applicants and reflects the new requirement under the PPPFA that employers use 60% of their emergency SBA loans for payroll and 40% for overhead expenses. Additionally, both applications allow borrowers to use either the original eight-week covered period, if the PPP loan was made before June 5, or the extended 24-week covered period put in place under the PPPFA.

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