Regulators Facilitate Favorable Capital Treatment For Banks Participating in the PPP

COVID-19 Update

In the federal government’s ongoing effort to facilitate participation by depository institutions in its signature Paycheck Protection Program (PPP), on April 9, 2020, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Federal Reserve Board (FRB) issued an interim final rule to neutralize the regulatory capital effects for banks participating in the PPP.

The FRB previously authorized each of the Federal Reserve Banks to extend nonrecourse loans (the PPPL Facility) to each institution that is eligible to make PPP-covered loans. Under the PPPL Facility, only PPP-covered loans guaranteed by the Small Business Administration (SBA) may be pledged as collateral to the Federal Reserve Banks. To encourage banks to use the PPPL Facility (and thus facilitate participation in the PPP as a whole), federal banking agencies have jointly determined that it is appropriate to exclude the effects of PPP-covered loans from a bank’s regulatory capital. In particular, the interim final rule excludes the exposures pledged as collateral to the PPPL Facility from the calculation of an institution’s total leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets and standardized total risk-weighted assets, as applicable. In addition, and consistent with the terms of the CARES Act itself, PPP-covered loans will receive a zero percent (0%) regulatory risk weight since those credits are guaranteed by the federal government. 

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