INSIGHTi
The CARES Act (P.L. 116-136): Provisions
Designed to Help Banks and Credit Unions
Updated September 18, 2020
The economic effects of the coronavirus (COVID-19) pandemic may cause numerous borrowers to miss
loan repayments, potentially leading to distress at banks and credit unions. Because of the importance of
banking to the economy, federal depository regulators have implemented “safety and soundness”
regulations, including lending, capital, and liquidity rules. Regulators also have the authority to supervise
banks, which includes requiring banks to report financial information.
As part of Congress’s response to COVID-19, the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act; P.L. 116-136) includes four sections—4011, 4012, 4013, and 4014—that temporarily relax
some of the regulations banks face. Section 4016 expands access to the Central Liquidity Facility (CLF),
which is a liquidity facility for credit unions that exists at the National Credit Union Administration
(NCUA). This Insight examines those sections. For descriptions of all sections of Title IV of the CARES
Act, see CRS Report R46301, Title IV Provisions of the CARES Act (P.L. 116-136), coordinated by
Andrew P. Scott.
Policy makers have implemented other measures addressing concerns related to financial institutions. The
CARES Act expands the Federal Deposit Insurance Corporation’s (FDIC’s) authority to guarantee bank
liabilities, which is the subject of CRS Insight IN11307, The CARES Act (P.L. 116-136) Section 4008:
FDIC Bank Debt Guarantee Authority, by David W. Perkins. CRS Insight IN11278, Bank and Credit
Union Regulators’ Response to COVID-19, describes the actions taken by depository regulators under
exiting authority to address issues in the banking industry. CRS Insight IN11259, Federal Reserve:
Recent Actions in Response to COVID-19, discusses the programs the Federal Reserve has set up to
provide liquidity to financial markets.
OCC Lending Limit Waiver
National banks are subject to limits on how much they can lend to a single borrower relative to their
capital and their portfolio characteristics, unless the loan qualifies for an exception enumerated by statute.
The Office of the Comptroller of the Currency (OCC) generally has relatively narrow authority to
approve certain loans for an exception to the limit. Section 4011 grants the OCC broad authority to
exempt loans when it is “in the public interest.” This authority terminates the earlier of (1) the termination
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date of the COVID-19 national emergency declared by the President on March 13, 2020, under the
National Emergencies Act (P.L. 94-412)—hereinafter referred to as “the national emergency termination
date”—or (2) the end of 2020.
Small Bank Capital Relief
Banks face a variety of requirements regarding how much capital they must hold to protect against
possible losses. Capital is a relatively expensive source of funding, and so requiring higher levels can
reduce the amount banks lend. Certain small banks can elect to be subject to a single, relatively simple—
but relatively high—capital rule called the Community Bank Leverage Ratio (CBLR). Bank regulators are
authorized to set the ratio between 8% and 10%. Prior to the enactment of the CARES Act, it was set at
9%. Section 4012 directs regulators to lower it to 8% and to give banks that fall below that level a grace
period to come back into compliance with the CBLR. This relief expires the earlier of (1) the national
emergency termination date or (2) the end of 2020.
On August 26, 2020, the bank regulators (the OCC, the Federal Reserve, and the FDIC) finalized an
interim rule that lowered the CBLR to 8% through the end of 2020 in accordance with Section 4012. In
addition, the rule raises the CBLR in increments to 8.5% in 2021 before returning it to 9% on January 1,
2022.
Accounting for Troubled Debt Restructuring
A Troubled Debt Restructuring (TDR) is a concession by a lender to a troubled borrower that it would not
generally consider under normal circumstances. Generally Accepted Accounting Principles (GAAP)
require the lender to reflect in its financial records any potential loss as a result of a TDR. Recording of
such losses could negatively impact the lender’s ability to meet regulatory requirements. Section 4013
requires federal bank and credit union regulators to allow lenders to determine if they should suspend the
GAAP requirements for recognizing any potential COVID-related losses from a TDR related to a loan
modification. This relief expires the earlier of (1) 60 days after the national emergency termination date or
(2) the end of 2020.
Accounting for Expected Loan Losses
Credit loss reserves help mitigate the income overstatement on loans and other assets by adjusting for
potential future losses on related loans and other assets. In response to banks’ financial challenges during
and after the 2007-2009 financial crisis, the Financial Accounting Standards Board promulgated a new
credit loss standard—Current Expected Credit Loss (CECL)—in June 2016. CECL requires early
recognition of losses as compared to the current methodology. All public companies were required to
issue financial statements that incorporated CECL for reporting periods beginning December 15, 2019.
Section 4014 gives banks and credit unions the option to temporarily delay CECL implementation until
the earlier of (1) the national emergency termination date or (2) the end of 2020.
On August 26, 2020, the bank regulators finalized an interim rule allowing banks to delay CECL’s
adoption for up to two years (longer than the section 4014 mandate). The new CECL rule also delays the
accumulation of regulatory capital by two years. As before, the new CECL rule allows accumulation of
regulatory capital to meet CECL’s requirements over three years after the initial two-year delay.
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Credit Union Relief
Section 4016 temporarily enhances access to the CLF for credit unions to meet liquidity needs as long as
credit unions first made reasonable efforts to use primary sources of liquidity, such as their balance sheets
and market funding sources. Section 4016 also increases resources available to meet liquidity needs
through the facility by temporarily expanding the ability to borrow up to a value 16 times the CLF’s
subscribed capital stock and surplus (up from the statutory limit of 12 times). The increase in the CLF
borrowing threshold expires December 31, 2020. On April 29, 2020, the NCUA issued an interim final
rule implementing these changes.
Author Information
David W. Perkins
Darryl E. Getter
Specialist in Macroeconomic Policy
Specialist in Financial Economics
Raj Gnanarajah
Analyst in Financial Economics
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
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information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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IN11318 · VERSION 3 · UPDATED