Yesterday, on Sunday, March 15, 2020, in response to the COVID-19 pandemic’s impact on U.S. and global economic activity, the Federal Reserve’s Federal Open Market Committee (“FOMC”) cut the target range of the federal funds rate to 0 to 1/4 percent until such time as the FOMC is “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Together with announcing the rate cut, the Federal Reserve took a series of extraordinary actions to support financial markets and promote the flow of credit to households and businesses. The Federal Reserve’s actions followed announcements by other federal financial regulators intended to ease the impact of COVID-19 on the U.S. economy.
Federal Reserve Actions to Support Financial Markets and the Flow of CreditIn addition to the FOMC’s interest rate cut, the Federal Reserve announced the following actions on Sunday:
- Fed Balance Sheet Expansion: The FOMC announced that over the coming months, it will (1) increase its holdings of Treasury securities by at least $500 billion, (2) increase its holdings of agency mortgage-backed securities (“MBS”) by at least $200 billion, and (3) reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.
- U.S. Dollar Liquidity Swap Lines: The Federal Reserve maintains standing swap lines with foreign central banks to help provide liquidity in U.S. dollars to overseas markets. Yesterday, together with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, the Federal Reserve agreed to lower the pricing on standing U.S. dollar liquidity swap lines by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points. The foreign central banks with regular U.S. dollar liquidity operations also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These steps were intended to enhance the provision of U.S. dollar liquidity in those overseas markets. According to the central banks, the new pricing and maturity offerings will remain in place “as long as appropriate to support the smooth functioning of U.S. dollar funding markets.”
- Discount Window: The Federal Reserve took two steps to “encourage depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time.” First, the Federal Reserve lowered the primary credit rate by 150 basis points to 0.25 percent. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range. Second, the Federal Reserve announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
- Bank Capital and Liquidity Buffers: The Federal Reserve announced that it “supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.” The OCC and FDIC have not announced similar policies with respect to banks that they supervise.
- Reserve Requirements: Effective March 26, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent. Currently, net transaction account balances in excess of $16.9 million but less than $127.5 million are subject to reserve requirement ratios of 3 percent, and balances in excess of $127.5 million are subject to reserve requirement ratios of 10 percent. Eliminating reserve requirements should boost banks’ Liquidity Coverage Ratios (“LCRs”), as excess reserves held at a Federal Reserve Bank are Level 1 High Quality Liquid Assets (HQLAs) under the LCR.
- Intraday Credit: The Federal Reserve announced that it “encourages” depository institutions to utilize intraday credit extended by Reserve Banks to support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.
Treasury Secretary Comments on Emergency Powers
Hours before the Federal Reserve issued its announcement, U.S. Secretary of the Treasury Steven Mnuchin said in televised interviews that he would ask Congress to reinstate powers that regulators used to support the economy during the 2008-09 financial crisis but were eliminated as part of the Dodd-Frank Act. Secretary Mnuchin did not clarify which specific powers he would ask to be restored. The Dodd-Frank Act rescinded or restricted several tools used by federal agencies to restore market confidence during that crisis. For instance, Dodd-Frank amended section 13(3) of the Federal Reserve Act to require prior approval of the Treasury Secretary to establish an emergency lending program under that authority, and to require such a program to have broad-based eligibility so that it can no longer be used to provide exclusive, tailored assistance to specific firms on an ad hoc basis.
OCC and FDIC Guidance
The Federal Reserve’s extraordinary actions also followed the issuance of guidance last Friday, March 13, 2020, by the OCC and FDIC addressing, among other things, how banks should work with their customers affected by COVID-19 issues. The OCC and FDIC statements both emphasize that prudent efforts to modify the terms on existing loans for affected customers should not be subject to examiner criticism, and that loan modifications should not all result in a troubled debt restructuring (or adverse classification). The statements further provide that the OCC and FDIC support and generally will not criticize efforts to accommodate customers in a safe and sound manner. The OCC statement also noted that the OCC will consider the unusual circumstances that banks experiencing higher levels of delinquent and nonperforming loans as a result of COVID-19 face when reviewing a bank’s financial condition and determining any supervisory response.
The FDIC statement provides that the FDIC will not assess penalties or take other supervisory action against banks that take reasonable and prudent steps to comply with regulatory reporting requirements if those banks are unable to fully satisfy those requirements because of the effects of COVID-19, while the OCC statement encourages banks that are encountering difficulties filing timely regulatory reports to contact the supervisory office to discuss the situation.
Both statements express the agencies’ understanding that banks may need to temporarily close or otherwise reduce access to a facility to take precautionary measures or because of staffing issues. The FDIC statement further notes that the FDIC, working with a bank’s state regulator, will expedite any request to operate temporary facilities to provide more convenient availability of services, and that in most cases a bank can begin the approval process with a telephone call to the FDIC, followed by a written notification.
Similarly, last Monday, March 9, 2020, the Federal Reserve, OCC, FDIC, CFPB, NCUA, and Conference of State Banking Supervisors issued a statement encouraging financial institutions to meet the financial needs of customers and members affected by COVID-19. The interagency statement notes that prudent efforts to support borrowers and other customers in affected communities that are consistent with safe and sound lending practices should not be subject to examiner criticism. The statement also notes that if financial institutions have persistent staffing and other operational challenges, regulators will expedite any request to provide more convenient availability of services in affected communities.