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Law360 (May 6, 2020, 6:57 PM EDT) -- Federal bank regulators have implemented a new rule that will allow lenders issuing COVID-19-related relief to small businesses to access two government liquidity programs without adverse impacts on their liquidity coverage ratios.
The new rule applies to banks accessing the government's liquidity program backing the Paycheck Protection Program small business lending program as well as the Money Market Mutual Fund Liquidity Facility, through which the Federal Reserve Bank of Boston is making loans secured by assets purchased from money market mutual funds.
It aims to free up cash for households and small businesses by allowing the banks to cancel out the effects of the advances made through the liquidity programs.
"After these loans are extended and upon their maturity, the associated inflows and outflows could unnecessarily contribute to volatility in LCRs," according to the Federal Reserve, which announced the interim rule on Tuesday with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp.
Without the rule, which is effective immediately, the application of the facility loans to LCR calculations "would not be consistent across transactions or facilities and would not accurately reflect the liquidity risk associated with funding exposures through these facilities," they added.
The rule will exclude the loans banks get through the two facilities from the calculation of LCRs, which would otherwise recognize outflows for the loans with a remaining maturity of 30 days or less, as well as inflows for certain assets securing the loans, according to the agencies.
The agencies noted that the banks are not exposed to credit or market risk from the loans as they are nonrecourse, making their inclusion in the LCR calculations unnecessary. This means banks won't need to account for the loans on their balance sheets.
The agencies said the new rule will ultimately allow the banks to get much-needed funds out to small businesses as they deal with ongoing business closures and other measures to curb the virus's impacts.
"Continued access to financing will be crucial for small businesses to weather economic disruptions caused by the containment measures adopted in response to the public health concerns and, ultimately, to help restore economic activity," they said.
The agencies issued rules on March 19 and April 9 providing similar relief by excluding loans from the money market facility and the PPP facility, respectively, from banks' leverage risk ratios, with the same intended effect of freeing up financing for households and small businesses.
A Fed spokesperson declined to comment further.
--Editing by John Campbell.
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