Federal Reserve Releases an Interim Final Rule on Paycheck Protection Program Facility

Yesterday, the Federal Reserve, OCC, and FDIC also released an interim final rule (IFR) on the Paycheck Protection Program Facility. According to the agencies, the IFR “modifies the agencies' capital rules to neutralize the regulatory capital effects of participating in the Federal Reserve's PPP facility because there is no credit or market risk in association with PPP loans pledged to the facility. Consistent with the agencies' current capital rules and the CARES Act requirements, the interim final rule also clarifies that a zero percent risk weight applies to loans covered by the PPP for capital purposes.” View here

According to the press release, “The rule is effective immediately and comments will be accepted for 30 days after publication in the Federal Register.” Id. In general, however, rules cannot take effect until they are actually published in the Register, and this rule has not yet been published, nor has it appeared on the Register’s Public Inspection Desk, which typically occurs at least 24 hours before publication. The text of the rule itself confirms, “The interim final rule is effective [INSERT DATE OF PUBLICATION IN THE FEDERAL REGISTER].” IFR at 2.

It appears the core provisions of the rule may be found at pages 9 – 11, which are excerpted below, not including the footnoted text.

A. Regulatory capital treatment of PPPL Facility exposures

The agencies’ capital rules require banking organizations to comply with risk-based and leverage capital requirements, which are expressed as a ratio of regulatory capital to assets and certain other exposures. Risk-based capital requirements are based on risk-weighted assets, whereas leverage capital requirements are based on a measure of average total consolidated assets or total leverage exposure. Participation in the PPPL Facility will affect the balance sheet of an eligible banking organization because, as a function of participating in the PPPL Facility, the banking organization must originate and hold PPP covered loans (that is, assets that are eligible collateral pledged to the Federal Reserve Banks) on its balance sheet.6 As a result, an eligible banking organization that participates in the PPPL Facility could potentially be subject to increased regulatory capital requirements. The agencies believe that the regulatory capital requirements for PPP covered loans pledged by a banking organization to a Federal Reserve Bank as part of the PPPL Facility do not reflect the substantial protections from risk provided to the banking organization by the facility. Because of the non-recourse nature of the Federal Reserve’s extension of credit to the banking organization, the banking organization is not exposed to credit or market risk from the pledged PPP covered loans. Therefore, the agencies believe that it would be appropriate to exclude the effects of these pledged PPP covered loans from the banking organization’s regulatory capital.7

Specifically, the interim final rule would permit banking organizations to exclude exposures pledged as collateral to the PPPL Facility from a banking organization’s total leverage exposure, average total consolidated assets, advanced approaches-total risk-weighted assets, and standardized total risk-weighted assets, as applicable.8

Question 1: The agencies invite comment on the advantages and disadvantages of neutralizing the effects of participating in the PPPL Facility on regulatory capital requirements. How does the approach in the interim final rule support the objectives of the facility? What other steps could be taken to support the objectives of the facility? What safety and soundness concerns should the agencies consider in connection with the approach in the interim final rule?

B. Regulatory capital treatment of PPP covered loans

The agencies’ regulatory capital rule requires a banking organization to apply a zero percent risk weight to the portion of exposures that is guaranteed by a U.S. government agency for purposes of the banking organization’s risk-based capital requirements.9 Section 1102 of the CARES Act requires banking organizations to apply a zero percent risk weight to PPP covered loans. Accordingly, and consistent with Section 1102 of the CARES Act, the agencies are amending sections 32 and 131 of the capital rule to clarify that PPP covered loans originated by a banking organization under the Paycheck Protection Program will receive a zero percent risk weight.

The agencies seek comment on all aspects of the interim final rule.

As you can see, the agencies are very open to public input on the rule, and we welcome the opportunity to partner with you in providing that input.