Agencies Issue Capital Rule Modifications for PPP Lending Facility

The federal banking agencies have issued an interim final rule to allow banking organizations to neutralize the regulatory capital effects of participating in the Federal Reserve Board’s Paycheck Protection Program Lending Facility (PPPLF).  Under the PPPLF, each of the Federal Reserve Banks will extend non-recourse loans to eligible financial institutions to fund loans guaranteed by the SBA under the Paycheck Protection Program (PPP) established by the CARES Act.

PPP covered loans are fully guaranteed by the SBA. PPP covered loans also afford borrowers forgiveness up to the principal amount of the PPP covered loan, if the proceeds are used for certain expenses. The SBA reimburses PPP lenders for any amount of a PPP covered loan that is forgiven.  PPP lenders are not held liable for any representations made by PPP borrowers in connection with a borrower’s request for PPP covered loan forgiveness.

In order to provide liquidity to lenders, each of the Federal Reserve Banks has been authorized to extend credit under the PPPLF. Under the PPPLF, each bank will extend non-recourse loans to institutions that are eligible to make PPP covered loans. Under the PPPLF, only PPP covered loans that are guaranteed by the SBA under the PPP may be pledged as collateral to the banks.

To facilitate the use of the PPPLF, the agencies are adopting the interim final rule, which allows banking organizations to neutralize the regulatory capital effects of loans pledged to the PPPLF.  This relief applies to both risk-based and leverage capital ratios, including the community bank leverage ratio. The interim final rule would permit banking organizations to exclude exposures pledged as collateral to the PPPLF from a banking organization’s total leverage exposure, average total consolidated assets, advanced approaches-total risk-weighted assets, and standardized total risk-weighted assets.

The CARES Act requires banking organizations to apply a zero risk weight to PPP covered loans.  Accordingly, the agencies are amending the capital rules to clarify that PPP covered loans originated by a banking organization under the PPP will receive a zero percent risk weight.

The interim final rule is effective immediately. Comments will be received for 30 days following publication in the Federal Register.