The CARES Act (P.L. 116-136): Provisions Designed to Help Banks and Credit Unions

INSIGHTi
The CARES Act (P.L. 116-136): Provisions
Designed to Help Banks and Credit Unions
Updated January 11, 2021
The economic effects of the coronavirus (COVID-19) pandemic may cause numerous borrowers to miss
loan repayments, potential y leading to distress at banks and credit unions. Because of the importance of
those institutions to the economy, regulators have implemented “safety and soundness” regulations,
including lending, capital, and liquidity rules. Regulators also require the institutions 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 is administered by at the National Credit Union
Administration. This Insight examines those sections. For descriptions of al sections of Title IV of the
CARES Act, see CRS Report R46301, Title IV Provisions of the CARES Act (P.L. 116-136). Sections 540
and 541 of Division N of the Consolidated Appropriations Act, 2021(P.L. 116-260) extended the
expiration of Sections 4013, 4014, and 4016, as discussed in CRS Insight IN11568, CARES Act Bank and
Credit Union Relief: Expirations and Extensions Under P.L. 116-260.
Policymakers have implemented other measures addressing concerns related to financial institutions. The
CARES Act expands the Federal Deposit Insurance Corporation’s authority to guarantee bank liabilities,
as described in CRS Insight IN11307, The CARES Act (P.L. 116-136) Section 4008: FDIC Bank Debt
Guarantee Authority. CRS Insight IN11278, Bank and Credit Union Regulators’ Response to COVID-19,
describes the actions taken by depository regulators under existing 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) general y has relatively narrow authority to
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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 expired on December 31, 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 smal banks can elect to be subject to a single, relatively simple—
but relatively high—capital rule cal ed 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 fal below that level a grace
period to come back into compliance with the CBLR. Section 4012’s mandate expired on December 31,
2020.
The rule issued by bank regulators lowered the CBLR to 8% through the end of 2020 in accordance with
Section 4012. In addition, it raises the CBLR 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
general y consider under normal circumstances. General y 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 al ow 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) the termination date of the COVID-19 national
emergency declared by the President on March 13, 2020, under the National Emergencies Act (P.L. 94-
412) or (2) the end of 2021 (extended from the end of 2020 pursuant to P.L. 116-260).
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 chal enges 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. Al 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 2021 (extended from the end of
2020 pursuant to P.L. 116-260).
On August 26, 2020, the bank regulators finalized an interim rule al owing 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 al ows accumulation of
regulatory capital to meet CECL’s requirements over three years after the initial two-year delay.

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Credit Union Liquidity Facility
Section 4016 temporarily expands access to the CLF for credit unions to meet liquidity needs so 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). Section 4016 provisions
expire at the end of 2021 (extended from the end of 2020 pursuant to P.L. 116-260).


Author Information

David W. Perkins
Darryl E. Getter
Specialist in Macroeconomic Policy
Specialist in Financial Economics


Raj Gnanarajah

Analyst in Financial Economics




Disclaimer
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IN11318 · VERSION 4 · UPDATED

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