Banks will play a critical role as they face pressure on two fronts: stabilizing the economy while helping to shield consumers, businesses and other financial firms from a wave of economic pain that has already begun to hit.
Why it matters: As economists predict the COVID-19 shock will trigger a global recession, local lenders must have enough liquidity to handle an already-massive rise in statewide unemployment and crippling revenue losses for local businesses.
• The federal stimulus package will also give banks $349 billion in loans to dole out to cash-strapped small businesses, placing them on the front lines.
The good news: Banks have more capital on hand than they did before the 2008 financial crisis, which will allow them to better absorb loans gone bad.
• U.S. regulators have moved to make it easier for banks to help borrowers: If banks modify loans for borrowers hurt by COVID-19, they don’t need to report them as “troubled debt restructurings,” a designation that carries higher capital charges for lenders.
• Some local lenders say they haven’t seen borrowers pulling out large sums of cash from their accounts, but most banks have ordered extra cash in an effort to accommodate such occurrences.
Big banks will be tested: Though not the root of today’s problem, the nation’s biggest banks—including JPMorgan Chase and Capital One, which together comprise nearly 50% of the local market share—must prove to borrowers that, since the 2008 financial crisis, they’ve prepared for a global economic shock.
• If a lot of companies default on their debt, it could backfire not only directly on banks, but also other lenders and investors that do business with them.
• Corporate debt could also grow; this time, however, collateralized loan obligations—bundles of loans given to highly indebted companies—are more transparent and conservatively structured than the mortgage-backed securities that helped fuel the 2008 combustion.
• Big banks are preparing to defer payments from small businesses and people who might be late on mortgage or credit card payments, with some announcing rate reductions on loans for vulnerable borrowers.
Community banks could take a hit: As businesses begin to fail, Capital Region banks with less than $10 billion in total assets—a key source of credit for many small businesses—will be forced to swallow revenue losses, which will be more difficult for them to recoup because of low interest rates.
• Furthermore, the federal relief package loosens the rules around community banks’ leverage ratios, which bankers say will help them free up resources during the pandemic; however, it also increases the fragility of the community bank sector and makes it less likely that it can withstand another economic shock.
• Stay-at-home orders also deprive community banks of the face-to-face interactions they often tout. Investar Bank and Citizens Bank & Trust have limited their branch access to drive-thru only, while others—including b1Bank, First Guaranty Bank and BancorpSouth—are additionally accepting some clients in lobbies by appointment only. Meanwhile, Red River Bank is keeping its lobby open, but asking customers to use its drive-thru or mobile banking services if they can.
• Given that the number of community banks in Baton Rouge has already been declining for decades, some smaller banks may not survive the economic fallout.
• However, others say they’re well-equipped for the challenges. Two months ago, Investar Bank raised $30 million in additional capital, says President and CEO John D’Angelo, noting the bank is also deferring loan payments and promoting a fully automated cash management program called Assured Checking. Also, b1Bank will continue its planned merger with Pedestal Bank while offering its customers loan payment relief options, fee relief and ATM reimbursements.
“We’re confident we’ll figure out the right way to do that. [The coronavirus] is an exogenous event and there were no structural problems, so it’s an opportunity for us to prove our worth.”
—JUDE MELVILLE, president, b1Bank
Meanwhile, regional banks are bucking up:
• Among other assistance services, Hancock Whitney and Regions Bank are offering penalty-free CD withdrawals, as well as waived fees for excessive withdrawals on all savings and money market accounts and other deposit accounts based on client needs, while IberiaBank is granting deferment requests from current SBA clients that are experiencing temporary cash flow problems.
What’s next: Local banks of all sizes are bracing for an onslaught of small business loan applications, which many will administer as part of the $2.2 trillion CARES relief package.
• As the first point of contact in the loan application process, local banks will submit applications to the U.S. Small Business Administration on behalf of clients and get payments into the hands of business owners.
• Local lenders expect to stay busy amid the blitz of applications, but remain confident they can handle the heavy workload.
• However, with little information from the feds thus far, bankers are left with many questions about how exactly the administration of the loan program will work. Chief among them: Who will be in charge of determining whether the loans will be repaid or if they can be transitioned into forgivable grants—local lenders, or the SBA? Moreover, even if Baton Rouge’s banks are technically suited to handle the expected crush of small business loan applications, will the SBA’s IT systems be able to accommodate them?
• Additionally, bankers warn of a rise in fraud during the pandemic.
Big picture: While the banking system is in a better place than it was in 2008, only time will tell how long Baton Rouge’s banks can weather the impending storm.
• “We’re confident we’ll figure out the right way to do that. [The coronavirus] is an exogenous event and there were no structural problems, so it’s an opportunity for us to prove our worth,” says Jude Melville, president of b1Bank. “We’re certainly feeling pressure to prepare, but we feel like there’s a general agreement that banks and regulators are all going to work together to get it done.”