Signed into law on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act is an economic stimulus bill that was designed as a response to the economic fallout that the COVID-19 pandemic has caused in the United States. The bill came about after a sharp decline in economic activity, which was followed by bailout requests and predictions of significant losses and unemployment rates from various trade groups.
Amounting to US$ 2.2 trillion or about 10% of the total gross domestic product, the CARES Act is the largest rescue package in the history of the United States. It was used to fund loans for small businesses, provide aid to large corporations, assist state and local governments, implement one-time cash payments to individual Americans, and boost unemployment benefits.
The Impact of the CARES Act on Financial Institutions
The effect of the bill extends beyond its direct beneficiaries; financial institutions have also felt the impact of the CARES Act, as these organizations play a significant role in some of the programs supported by the stimulus bill. In particular, banks are key to implementing the Paycheck Protection Program (PPP), a small-business loan program that’s worth US$ 669 billion—the largest allocation in the CARES Act. In line with this role, financial institutions are expected to promote their lending programs and provide regulatory relief for depository organizations. These responsibilities directly impact a bank’s operations and have prompted many financial organizations to run the numbers on their profitability analysis software, just to determine exactly how they should modify their processes to accommodate the changes brought about by the CARES Act.
Here are some of the key challenges and changes posed by the implementation of the PPP:
- Influx of applications for loan products – A lot of affected businesses applied for loan products under the terms afforded by the PPP. Regardless of the sudden growth in the number of customers, banks are still expected to do their due diligence prior to approving each customer and the loan product they applied for. At the same time, they must also be able to accommodate the larger volumes of transactions that they should monitor.
- Changes in regulatory and reporting rules – The reports that were being conducted prior to the enactment of the stimulus package must be revised to reflect the impact of the PPP on the bank. This also applies to the financial institution’s tax accounting.
- Implementation of asset modifications – Many consumers are also eager to make the most of the opportunity to apply for payment deferrals, term extensions, fee waivers, and other benefits that come with the PPP. Banks should be prepared to update their records accordingly and determine how these changes will affect their liquidity and net profit margin.
Considering these, it’s prudent for financial organizations to implement the following strategies in anticipation of the CARES Act.
Influx of Applications
It’s a must for banks and other financial institutions to strengthen their customer screening process even before the volume of applications and transactions increases. To retain the effectiveness of their screening process, they must enable real-time risk assessment capabilities for incoming and existing customers, batch processing of applications, and using third-party data to cross-check each applicant, as well as advance algorithms that are capable of catching similarities between customers and the entities listed in private and public sanctions lists.
Revisiting the organization’s existing monitoring rules even before there’s a marked increase in the volume of transactions is also a smart move. Doing so will enable the bank to check if there are thresholds they should adjust so that the monitoring system they use can remain effective in singling out suspicious activities and entities.
Changes in Regulatory Reporting
Using data models and configurations will make it much easier for a financial institution to identify and report loans that are covered by different programs under the CARES Act. Classifying which loans should be under which program early on and the provisions that each is subjected to will enable the financial institution to quickly apply adjustments to the reports that they are putting together.
Implementing Asset Modifications
Special attention must be given to maintaining the bank’s liquidity. A liquidity risk solution (LRS) should be employed to record and analyze the assets that have undergone modifications under the PPP, and this should make it much faster and easier for the bank to see how these changes have affected its liquidity. This, in turn, will allow the bank to make the right adjustments in its reports.
About a quarter of the total allocation for the CARES Act each went to households, small businesses, and large businesses. The remaining quarter was distributed between health providers, states and municipalities, the airline industry, FEMA, and other beneficiaries. The bill provided much-needed relief to both individuals and organizations and extended a lifeline to many struggling businesses and households, and banks played an important role in the smooth rollout of the program. To play this role effectively in such a crucial time, banks must not hesitate to employ the latest digital solutions and technologies at their disposal.