Extraordinary times require extraordinary measures.
I don’t know about you, but that phrase is growing more fatiguing by the day. I think it’s safe to say we all are acutely aware of the extraordinary measures that lie in front of us.
This past week we saw the roll out of the government’s SBA Payment Protection Program to assist our small businesses in staying afloat and keep people employed.
The speed with which this legislation was enacted was like nothing I’ve seen in my 30 years as a regulator, banker and consultant, which included both the S&L crisis and the Great Recession. Changes were being made to loan terms, forms, definitions well into the night before its roll out.
Given the speed with which things were evolving, many financial institutions decided to pause the acceptance of applications until they could not only get their arms around the changes to the written legislation but the systems and processes with which they would have to underwrite, book and monitor these loans.
In my last blog I discussed the importance of a contingency funding plan. I also said that we should all step up and help those in need. The financial institutions I spoke with this week have echoed that sentiment. They want to get the money into the hands of those that need it most.
Community bankers, who might not ordinarily do SBA lending, can now jump into the fray and start making these loans. They are best positioned to perform triage on their customer base, and many have indicated that given sheer volume they would have to concentrate on their customers first. While one hopes these loans are short-term in nature, there is still the need, in the near term, to fund them.
The jury is still out on how efficiently the money will flow back to the financial institutions as these loans are forgiven, it is a monumental government program after all. Now more than ever an effective strategy to manage funding is necessary.
Call it the contingency funding plan on steroids.
The stress testing financial institutions perform on a regular basis, which has previously seemed like just an academic exercise, is even more important now as they assess how much they can really handle. Stressors to cash flows are coming from all angles and financial institutions who may not have previously considered funding sources other than normal balance sheet funding are now considering alternative sources. The haste with which the legislation was enacted and stress currently on financial institutions to address mortgage refinances and loan modifications may make this step seem like added work. However, like any endeavor managing this particular crisis will be more effective with the proper strategy, and without modeling this exact situation any strategy may prove reactionary with real consequences for the future.
Financial institutions have the tools at their disposal to model this current crisis and evaluate the stress to liquidity and ultimately capital within their asset/liability management programs. The current level of sophistication in these tools make the development of a thoughtful strategy relatively easy to complete and effectively move forward to help those in need. It will also identify the areas of potential weakness in the bigger picture.
Funding sources traditionally come from the balance sheet in the form of core deposits and unencumbered liquid assets but when those sources are not sufficient to meet the liquidity requirements financial institutions are tasked to find alternative sources.
In speaking with various financial institutions over the last week many of them indicated they certainly didn’t anticipate the level of loan demand being driven by the SBA program coupled with the slowing loan payments and increased cash needs of clients. It will require a new strategy to be able to match the funding with the demand.
The following are some actions to consider if you haven’t explored alternative funding sources:
- Look to the Fed.The Federal Reserve announced this week that it will provide a facility to purchase the SBA PPP loans from banks and other lenders to free up additional cash to issue more loans.
- If you haven’t signed up for QwickRate or similar, now might be the time to do so.
- Work with your correspondent financial institution about secured Fed Funds lines or ask them to consider increasing your unsecured line.
- Talk to your FHLB to identify which loans/investments can be pledged that aren’t currently being pledged.
- Consider letters of credit for municipal deposits rather than investments.
- Give a call to the brokers that have been calling you for years.
- Evaluate your rate structure on your CD products and rates on nonmaturity deposits as well. It may be worthwhile to consider a marketing plan to keep them happy.
- If you have not considered CDARs (Certificate of Deposit Account Registry Service) in the past, that is another option.
- Above all, TALK to your financial institution colleagues and collaborate.
We are in this together and they may have capacity where you don’t and vice versa. Together we are stronger.
Remember, create the strategy and manage the situation before the lack of strategy manages you.