The CARES Act and Community Banking – An Unexpected Consequence
The CARES Act and Community Banking – An Unexpected Consequence
During 2020, relief measures enacted by Congress through the Coronavirus Aid Relief and Economic Security Act (CARES Act) in response to the strains on the economy and the disruptions to the financial markets as a result of COVID-19 have led to unprecedented growth for many institutions. This includes increases in balance sheet as a result of lending made through the Paycheck Protection Program (PPP) and other related liquidity facility programs offered by the Federal Reserve (the Board) to ease the hardships to many businesses directly impacted by COVID-19. Much of this growth, particularly growth related to PPP lending, is likely temporary and the increase in assets for such an institution may not reflect a change in the institution’s longer-term risk profile. This has given rise to an unexpected consequence, increased reporting burdens for community banks. The Board has proposed in a recent Federal Register, a temporary relief measure by providing a one-year delay for compliance with certain additional reporting requirements for the Call Reports and Community Bank Leverage Ratio (CBLR) Framework.
The Call Report contains various total asset thresholds that are measured annually as of the June 30 report date and trigger additional reporting requirements once exceeded. These thresholds include $100 million, $300 million, $1 billion, $5 billion and $10 billion in total asset threshold within the Call Reports. The Comptroller of the Currency (OCC) the Board and the FDIC (collectively the ‘Agencies’), are especially focused on total asset thresholds, set at $10 billion or less, as these thresholds could impact a significant number of smaller community institutions. Smaller impacted institutions are likely to have fewer resources to implement infrastructural changes and incur transition costs to comply with the additional reporting requirements associated with exceeding one of these thresholds.
Many community institutions may have unexpectedly surpassed these total asset thresholds during 2020 due to participation in CARES Act relief programs, which would trigger additional reporting requirements in the 2021 calendar year. The Agencies expect some of these institutions may fall below the total asset thresholds as of June 30, 2021, after PPP loan forgiveness and redemption of borrowings obtained through the Board’s PPP liquidity facility. The Agencies do not want to create a short-term burden increase on these institutions in order to comply with additional reporting for a single year. As a response to this concern, the Agencies propose to provide additional time to comply for community institutions that remain above the total asset threshold as of June 30, 2021, measurement date, the one-year reporting relief would assist those institutions to remain focused on COVID-19 related activities in the near term while providing additional time to comply with additional reporting requirements in 2022 instead of 2021. This will be achieved by providing an alternative measurement date during 2021 for certain additional data items. Institutions will be able to use the lessor of total assets reported in its Call Report as of December 31, 2019 or June 30, 2020, when determining whether an institution has exceeded a total asset threshold to report additional data items in its Call Reports for the report dates in calendar year 2021. Important to note, the Agencies are not proposing to permit an alternative measurement date for larger total asset thresholds within the Call Reports, as the additional data items required at higher total assets thresholds have increased relevance for agency supervisory monitoring.
The Call Report total asset thresholds that would be impacted by this proposed change in measurement date are:
- FFIEC 041 and FFIEC 051 only, the $100 million threshold to report ‘‘Other borrowed money’’ in Schedule RC–K, item 13.
- FFIEC 041 and FFIEC 051 only, the $300 million threshold 6 to report additional agricultural lending information in Schedule RI, Memorandum item 6; Schedule RI–B, Part I, Memorandum item 3; Schedule RC–C, Memorandum item 1.f.(5); Schedule RC–K, Memorandum item 1; and Schedule RC–N, Memorandum items 1.f.(5) and 4.
- FFIEC 031 and FFIEC 041 only, the $300 million threshold to report certain information on credit card lines in Schedule RC–L, items 1.b.(1) and (2).
- FFIEC 041 only, the $300 million threshold to report cash and balances due from depository institutions in Schedule RC–A; certain derivatives information in Schedule RI, Memorandum item 10, and Schedule RC–N, Memorandum item 6; and certain additional loan information in Schedule RI–B, Part I, Memorandum items 2.a, 2.c, and 2.d; Schedule RC–C, Part I, items 2.a, 2.b, 2.c, 4.a, 4.b, 9.b.(1), 9.b.(2), 10.a, and 10.b, column A; Schedule RC–C, Part I, Memorandum items 1.e.(1), 1.e.(2), and 5; and Schedule RC–N, Memorandum items 1.e.(1), 1.e.(2), and 3.a through 3.d.
- The $1 billion threshold to report components of deposit fee income in Schedule RI, Memorandum items 15.a through 15.d; disaggregated credit loss allowance data in Schedule RI–C; components of transaction and non-transaction savings consumer deposit account products in Schedule RC–E, Memorandum items 6.a, 6.b, 7.a.(1), 7.a.(2), 7.b.(1), and 7.b.(2); and estimated uninsured deposits in Schedule RC–O, Memorandum item 2.
- FFIEC 031 and FFIEC 041 only, the $1 billion threshold to report information on certain income from mutual funds and annuities in Schedule RI, Memorandum item 2; and financial and performance standby letters of credit conveyed to others in Schedule RC–L, items 2.a and 3.a.
- FFIEC 031 and FFIEC 041 only, the $10 billion threshold to report additional information on derivatives in Schedule RI, Memorandum items 9.a and 9.b, and Schedule RC–L, items 16.a and 16.b.(1) through 16.b.(8); holdings of asset-backed securities and structured financial products in Schedule RC–B, Memorandum items 5.a through 5.f and 6.a through 6.g; and securitizations in Schedule RC–S, items 6 and 10, and Memorandum items 3.a.(1), 3.a.(2), 3.b.(1), and 3.b.(2).
- FFIEC 031 only, the $10 billion threshold to report additional information on deposits in foreign offices in Schedule RC–E, Part II.
The agencies have previously adopted rules permitting institutions that meet certain criteria to use the CBLR framework to measure their regulatory capital. The agencies have recently revised these rules to allow institutions that temporarily exceed the $10 billion total asset threshold temporary relief. Institutions that elect to use the CBLR framework under this temporary relief would report CBLR information in Call Report Schedule RC–R, Part I and FR Y-9C Schedule HC-R Part I, except that item 32 (Total assets) should reflect the lesser of the institution’s total assets as of December 31, 2019, or as of the quarter-end report date. This temporary relief measure has been already implemented in both the Call Report and FR Y-9C for the fourth quarter 2020.
In summary, smaller institutions and community banks have been on the forefront of the COVID-19 relief by participating in various Agency sponsored relief programs serving the business sectors and their communities most impacted by COVID-19. This has led to unprecedented growth for many of these institutions through lending via the Paycheck Protection Program (PPP) and other related liquidity facility programs offered by the Board. This has posed a potential short-term increased reporting burden for these institutions who may not have the resources to implement additional reporting requirements and would only divert resources and focus from COVID-19 relief efforts. The Board has proposed a temporary alternative measurement date for certain total asset thresholds $10 billion or lower for the collection of additional data on the Call Reports in 2021, this will give an additional one year for institutions that will remain above the total asset threshold as of June 30, 2021 to comply with any additional reporting requirements.
Katherine Tornarites : Regulatory Product Analyst at VERMEG