Johnson Talks on Pandemic Response Webinar Series

April 20, 2020

Atlanta Fed executive vice president Michael Johnson spoke about the Federal Reserve's stance on banking supervision, recent actions to support credit flows, and more on the webinar's April 20 episode.


Julie Kornegay: Good morning and thank you for joining us today for the second episode of the Federal Reserve Bank of Atlanta's webinar series examining recent actions and continued response to the COVID-19 pandemic. My name is Julie Kornegay, and I'll be your moderator. We are excited to have Mike Johnson, executive vice president of Supervision, Regulation and Credit with us. Mike will take a few moments to explain the Federal Reserve's posture related to banking supervision and recent actions to support credit flows and liquidity. We will then transition to our Q and A segment where we will answer questions that were submitted at registration. So with that, I'll turn it over to Mike. Thank you for joining us today.

Mike Johnson: Thank you, Julie, very much appreciate you having me today, and thank you everyone for joining. As Julie mentioned, my name is Mike Johnson. I'm the officer in charge of our Supervision, Regulation and Credit division with the Federal Reserve Bank of Atlanta. I thought I would do a few things in terms of opening comments today, and then obviously the big important piece of this segment is to answer your questions. But from an agenda standpoint, I thought I might cover—we do two things within our division, so I thought I might cover the supervisory response, how we as supervisors of the banking industry have been responding to the pandemic events in the banks we supervise, and then also obviously a discussion of our credit and risk function and some of our liquidity facilities. Again, with the goal of teeing up your questions. But first, before I do that, [here's] just kind of a quick overview from a supervision perspective within the Federal Reserve, then the Federal Reserve Bank of Atlanta specifically. So we supervise all bank holding companies nationally and for us, that's within the Sixth District. That's essentially any company that owns a bank. We also supervise state member banks, so it's state-chartered banks that choose to be members of the Federal Reserve. So we have direct supervision of banks at that level, which includes a wide swath of community banks, regional banks, and some of the largest banks within the Atlanta district. And then in addition to that, we supervise foreign banks that have operations in the U.S. For us in the Sixth District, that's primarily banks with operations out of Miami.

The mission of our supervision function and our credit and risk function is to promote a safe and sound and efficient banking and financial system, and a fair and transparent consumer financial services market that supports the growth and stability of the U.S. economy. That's a mouthful, and that's a big mission. And as you can imagine, that mission has been jeopardized in today's environment by the national pandemic and realizing that the appropriate response to that is having an economic impact. So that said, part of our mission is directly being impacted today, and so I think and hope you will agree that we've taken a very aggressive response to that.

So why don't we just then jump into the agenda. And as I had mentioned, the first thing that I thought I would cover is our immediate supervisory response. Well, the first thing that we had to do is realize that this is a completely different scenario than we dealt with in the last financial crisis. That's probably easy to understand at its outset, but it was really important for us as supervisors to make that acknowledgement because our supervisory response needs to be completely different, and that has flowed through and colored everything that we've done since then.

So, again, recognizing this is a health crisis that the response to which is creating an economic crisis and the banking system that is part of the solution to supporting the economy during this troubled time [was important], as opposed to the last crisis where it was a financial-driven crisis and our supervisory response to that needed to be completely different.

That was an important thing for us to recognize that and to acknowledge that and then to onboard that as we developed our response, which began with a list of what are our priorities in this type of environment. Some of these are probably going to seem very obvious to you, and they were obvious to us as well, but we needed to articulate them, put them on paper, and then allow those priorities to color everything that we've done today.

So just to give you a sense of some of those priorities, obviously with every organization, the health and safety of our staff, but not just the health and safety of our staff, [but also] the health and safety of the bank employees and bank customers and for the institutions that we supervise had to be No. 1, and you'll see how that has impacted some of our response in just a second.

We also realized that we needed to immediately shift our resources into an information gathering and monitoring type of mode as opposed to our normal examination institution-by-institution supervisory function. We needed to know what's going on on the ground in the banks that we're supervising and what are the impediments that are in place from them ensuring that credit is flowing into the economy, because our next priority was to support the financial services industry in their critical role in supporting the economy.

So, we developed that framework pretty much from Day One and then made a number of decisions to better design to support those priorities. For example, when I mentioned health and safety, one of the immediate things that we did was postpone most all examination activities; these are activities that we undertake to make sure that individual banks are both safe and sound and compliant with consumer laws and regulation. We decided that for health and safety reasons, but also [as] part of our shift to information gathering that we would postpone most all of those, and then the key high priority items are all being conducted offsite, in other words, remotely.

We also immediately were ramped up, what I had mentioned earlier, about information gathering and routine contact with the banks that we supervise as we gathered those insights. And of course part of those insights which are really important to hear from banks [is] what are the impediments that are in the way of them meeting the immediate and important credit needs of their borrowers and their customers. And we worked diligently to remove those. So for example, one of the things that we often do when there's a national disaster such as a hurricane [is] we declare a disaster response and encourage banks to work with troubled borrowers. So we did that on a national level.

I won't get into some of the more arcane types of accounting scenarios, but we addressed things like troubled debt restructurings, which are really important for our banks as they worked with their borrowers to understand how we're approaching the accounting and the capital implications of those, and we tried to remove those impediments. We also wanted to make sure that our banks understood that working with their borrowers, particularly their low and moderate-income borrowers, was something consistent with the Community and Reinvestment Act and that they would get credit for that.

So those are just a couple of examples. And then the most important thing that we did was engage in a significant amount of industry outreach because as you can imagine, particularly in the Southeast, banks coming through the prior financial crisis were somewhat concerned about how supervisors would be responding to them, working with borrowers, extending maturities, and things of that nature. So we wanted to make sure that we had a robust communications and outreach effort working with various state banking commissioners to make sure that we were on the same page, banking trade associations, banks, and in any way we can. And a key important piece of that and a segue into our discount window response, was also having a lengthy discussion to try and encourage borrowing from the Federal Reserve and removing as much stigma that is inhibiting that type of borrowing response.

So I'm going to move to the next segment, which was our response from a discount window standpoint. One of the things we did on the liquidity side is address our primary credit facilities. So if you're not otherwise aware, generally borrowing from the discount window is on an overnight basis. So just one day at a time, if you will. Well, early on we realized that that was insufficient to meet the liquidity needs of our banks, so we added up to a 90-day term. So banks can borrow from the discount window, not just overnight, but in any maturity they would prefer up to 90 days.

The stigma question that I mentioned, just to give you another example of some of the things that we did, typically borrowing from the discount window with no names that are published on a weekly basis, the amount that is borrowed and the amount that's borrowed by each Federal Reserve district. There are some concerns that we've heard from the industry that if a large bank in a district borrowed, that would become evident by how we publish that information. So we shifted to publishing it, which is a requirement that we publish it, but it's not required to be published by district, so we've aggregated that and published it on an aggregate basis, so it would harder to make that linkage to a specific institution.

Obviously, I think as most everyone is aware, we've also added what I refer to as an alphabet soup of lending programs. Many of those—in fact most of those—are managed by the Federal Reserve Bank of New York. There's a couple of programs that I thought I would mention quickly in addition to primary credit that I already covered that I think are particularly relevant. So again, most of those are designed to support market functioning, but the two that I'll cover quickly are the PPPLF—it's hard to say real fast—is the Paycheck Protection Program Liquidity Facility, and then our Main Street Lending Facility. Let me make sure that I offer a quick distinction between the two.

The PPPLF—and if you'd like to say that three times real fast, it's a little bit of a challenge—is actually operational, it's up and running. The Main Street Lending facilities—there's actually two different types of those—they are not currently operational. We are working diligently to operationalize those and get them up and running, because, in fact, last week they published term sheets on the outlines of those structures.

So the PPPLF is designed to promote liquidity for banks and eventually not on banks, we hope to get there shortly we're working on that, who participated in the Paycheck Protection Program. Now you're probably wondering, so why can't they just borrow from their regular discount window? They actually can. They can pledge these loans for primary credit with that up to a 90-day term that I already mentioned.

So what distinguishes the PPPLF from primary credit? Number 1, in the Primary Credit Facility, a haircut is typically a five. In other words, a 5 percent haircut. So you pledge $100, we'll lend $95. That does not apply under the PPPLF. Also there's an ability, not ability, a requirement, under PPPLF that we match maturities. The Paycheck Protection Program loans are for up to a two-year maturity. So borrowing at 90 days is insufficient for the liquidity associated with those programs. So under the new liquidity facility, it allows for that and requires that maturity match, and we've also clarified that there's zero capital treatment, no capital impact, for advances under the new Liquidity Facility, the PPPLF.

So it was operationalized just toward the end of last week. Within the Atlanta Fed, we've made 38 advances for $167 million over just a couple of days. System wide, 182 advances for $1.26 billion. So we're off to a good start, and we expect that those numbers will spike dramatically this week. So real quick on the Main Street facilities and then I'll turn it over to Julie to manage the questions. As I said, it's not operationalized yet, but we have two facilities there. One is a term facility and the other is an Expanded Loan Facility. The simple difference is these loans are targeted for small- to medium-size businesses to a larger segment than the Paycheck Protection Program—institutions up to 10,000 employees and two and a half billion dollars in revenue.

The New Loan Facility is just that. It's a four-year term loan under which principal and interest is deferred in the first year. The way the facility works is the bank extends the credit and we will have a special purpose-built vehicle that will be set up, funded in part by Treasury—the capital part funded by Treasury—with loans from the Fed that will purchase 95 percent of the loan; so the bank retains only 5 percent of the credit risk of the loan.

The Expanded Loan Facility is essentially the same thing except it's for customers that have pre-existing credit with the bank, credit under an existing loan. The existing loan has to be established as of April 8th, and we'll allow additional funding under that credit facility for very similar terms. So I thought that might be an important topic to cover those real quick. If you want more information, the term sheets are actually posted to our website and the board's website, and they're available and we hope to have those facilities up and running shortly.

So Julie, with that as a quick overview, why don't we see what kind of questions we have.

Kornegay: Great, that sounds great. Thank you. That was really good information. Before I ask the first question, I just want to remind everyone that Mike will be answering the questions that were submitted at registration. So with that, our first question today is how are the Paycheck Protection Program and other Small business administration loans going to have an effect on the economy?

Johnson: Well that's a great question, and I certainly hope they have a positive effect on the economy; otherwise, there's about $350 billion that is not being spent wisely. So that's the goal.

First, let me start with the purpose of the PPP. It's to help small businesses retain their employees at or near their current base pay and also meet some operational expenses. If the terms are actually met for loan forgiveness, essentially these become a grant. I'm not going to go into the terms just in the interest of time, but if those conditions are met over the initial eight-week period, again, the loan essentially becomes a grant. Ultimately, as you all know, the demand for $349 billion, the specific amount was phenomenal, and the fund ran out of money, so hopefully Congress will be able to authorize additional funds to continue the program.

But it is a core piece of what the goal is for the Federal Reserve and I think for all of us in general. The economy was in good condition going into and before the national pandemic. Our goal is to do everything humanly possible so that when we come out on the other side, the economy will be as close possible in a similarly situated condition. Now, I realize that will not be the case and that that goal is aspirational, but the PPP is a key part of that bridge from one economy into our recovery economy, so it plays a hugely important role.

Kornegay: All right. Let's see. Next question. Things have been overwhelmed by the requests for SBA loans and requests for more than half of the money available have already been submitted in a week. How is the Fed supporting banks in this process to diminish the operational lag?

Johnson: Yeah, again, great question and probably a little timing lag on the question because we've actually exhausted all of the funds by now. You can read in the press, I'm sure everyone knows all the operational challenges, both on the SBA side, but also the Herculean challenges associated with banks to get this program up and running from their side as well. There's not a lot that we can specifically do at the Fed to support that. Again, because it's an SBA, it's a Treasury SBA program that is implemented at the bank level. But I covered our priorities earlier, so a big piece that we're trying to do is actually get out of the way. So the mere fact that we're not conducting any exams allows banks to focus on their operational piece, but also the discussion we just had about the PPPLF is an important piece that we can do to support the overall program.

And I've mentioned no capital impact is some of the other advantages, but a key advantage of this for banks is they're actually positioned to take advantage of the power of leverage to continue to make loans. So our hope is to lend under PPP, pledge those as collateral, borrow from the Fed, have those additional funds that they can continue to participate in the next round of the program or in other lending activities. So that's the most important support that we can provide.

Kornegay: All right. Next question. Should nonbank banks who can't utilize the Paycheck Protection Program or the Economic Injury Disaster loans be given access to the Fed's discount window?

Johnson: Okay, well that's a policy question, and I am not a member of Congress and that is a question for Congress, because under our primary credit facilities, they currently are not allowed to access the discount window. I'm sure everyone knows that and that was actually the basis for the question. So I'm going to exercise my judgment and not address the policy question around that, but simply indicate that Congress did provide hurricane three authority in the Federal Reserve Act amended to where with consultation and agreement from the Treasury Secretary that we can create emergency facilities... that are designed to support broad market functioning, not just banks, and the benefits flow through to many nonbanks.

And then even at a smaller, I'll say more Main Street level, that's really the purpose of a lot of the new facilities that we're proposing and including the PPPLF. So, the goal here is the support market functioning that benefits all and provide support for banks who are also then lending to nonbanks. So it's that indirect support. So I think there's a lot that we're actually doing, and I'll leave the broader policy question up to the politicians.

Kornegay: Probably a smart idea.

Johnson: I have a smart idea on occasion.

Kornegay: All right. So our next question. When businesses apply for the Paycheck Protection Program through approved lenders, what measures are in place to make sure that there is equitable access to the funds?

Johnson: Yeah, that's a great question, because I'm sure the questioner realizes that no guidance was given by SBA to banks on kind of how to effectively manage the queue, if you will. And there's been lots of different approaches, you know, approaches from your traditional kind of accounting FIFO, first in first out. Other approaches focused on existing customers, which is actually pretty reasonable because the program still requires some "know your customer" due diligence, which for existing customers over new customers is obviously an advantage. There are issues with if you submit your application but the bank has to go back to work on documentation, does that start you over from the queue or do you jump back in, et cetera. You can imagine a wide variety of approaches, many of which are actually blended and so on. So there's not a lot that we can do specifically at the Fed other than to remind banks around their obligations related to fair lending. So to make sure whatever approach they take does not inadvertently disadvantage a protected class. Now we've been encouraging our banks to ensure that you have a reasonable, a consistent—and that's really important—consistent and defensible approach that's documented. Now, the consistency piece, obviously you don't want to advantage one class over another. But I'll say that again: reasonable, consistent, defensible, and documented approach.

Now we've been thinking about, and we haven't issued guidance on this yet, but we've been talking with other agencies as well on whether some more specific guidance related to fair lending would be a good idea. So those are things that are kind of in our queue. But again, it's a great question, and we've been trying to consult with our banks just to make sure that they're doing it in an appropriate manner.

Kornegay: All right, now we have about five minutes left, so this'll be our last question. Can you confirm for the Main Street Expanded Lending Facility, does an eligible borrower need a term loan outstanding to participate? The press release and the term sheet are a bit confusing on the question of whether an eligible borrower can get a new term loan with or without having one currently.

Johnson: Yeah, so again, great question. So let's go back to what I said earlier. So there is the Expanded Lending Facility and then there is the New Loan Facility. So for purposes of the Expanded Lending Facility, you do in fact need to be an existing customer and have an existing loan with the bank. However, that's why we also have the New Loan Facility. So you do not have to have an existing lending relationship for that facility. And again, it's a four-year term with principal and interest deferral for the first year, and we've done everything we can to structure it in a way that minimizes the credit risk for the bank with the idea that it should be relatively widely available. So yes under one program, but because of recognizing the limitations of that, clearly no under the other Main Street New Loan Facility.

Kornegay: All right, well that's all the time we have today. Mike, I thank you for participating, and on behalf of everyone here at the Fed, I'd like to thank you for joining us. We will continue to host these webinars and highlight additional actions the Fed is taking to support our communities during these uncertain times.

If you know someone that would find this session valuable, an audio file and transcript will be archived on our website at For the most up-to-date information, I encourage you to subscribe to our weekly digest newsletter by texting "FRBA" to 33777.

And finally, be sure to join us for our next event on Monday, April 27, at 11 Eastern. We will have Cheryl Venable, executive vice president and product manager of the Federal Reserve's Retail Payments Office, along with Jeff Devine, senior vice president of Operations and Administrative Services, as our guest speakers. They will discuss what the Fed is doing during these unique times to ensure cash operations and financial services continue to operate. So be sure to register and submit your questions. With that, I'll officially bring the session to a close. Thank you for joining us. Take care and stay safe.