Double down on community banks and PPP loans
With the general election behind us and Congress seemingly at a standstill on economic relief measures, the United States must unite around helping small businesses brave a long winter with rising COVID-19 caseloads. The best way to do this would be through a new version of the Paycheck Protection Program.
Since the onset of the novel coronavirus, Americans and U.S. business owners have demonstrated incredible resilience. The quickly-enacted Paycheck Protection Program played a crucial role in saving millions of jobs as it provided for nearly 4.9 million loans. While some decried the PPP as a handout to big banks and corporations, in fact 86 percent of the $521 billion in loans made under the program were for less than $150,000, and 82 percent of the lenders participating in the program were community banks having less than $1 billion in assets.*
Clearly the collaboration between community banks and small business was key to the survival of countless businesses and jobs. Small firms employ over half of the private sector workforce in the U.S. and created nearly two-thirds of the nation’s net new jobs over the past decade.
However, the successful PPP program expired in August, leaving businesses without this vital financial support, at a time when infection rates are now running at more than 150,000 new cases a day. Under these conditions, economic recovery will remain elusive, particularly for the already decimated hospitality industry — restaurants, bars, entertainment venues, hotels, travel — which employ millions of Americans.
President-elect Biden has indicated he will rely on proven tactics — masks, social distancing, contact tracing — to counter the virus when he takes office. That discipline, coupled with the efforts to develop a vaccine and therapies, should have a positive impact on the economy.
But it will take time, likely well into 2021 even with the new vaccines. Small businesses and the millions of people they employ cannot wait that long.
Biden must quickly find a way to break congressional gridlock and enact a new round of stimulus that includes robust business assistance and loan programs. While a new legislative package has stalled, there is significant consensus on both sides of the aisle on the need, giving hope that a way forward can be hammered out.
As we saw, the success of the first PPP relied heavily on the effectiveness of banks, particularly community banks, in partnership with regulators in the early months of the pandemic. In stark contrast to the 2008 financial crisis — when banks were the focus of a strong backlash — today, banks have earned back the public’s trust. Research conducted by FTI Consulting found that 47 percent of the U.S. population views financial service companies more favorably than before the pandemic as a result of their strong, positive actions amid the crisis.
Key to the successful performance by financial institutions was regulators working seamlessly with banks to provide the guidance that allowed them to quickly provide fresh capital to businesses. Additionally, in recognition of the critical financial condition of small businesses, regulators altered some lending/borrowing regulations and permitted banks to give forbearances and favorable terms on small business loans made independently of the PPP program.
The need for a new stimulus and businesses assistance loan program is obvious.
America’s nearly 5,000 community banks are under stress. In the past two decades the number of banks with assets of less than $500 million declined by about 70 percent. Consolidation, regulatory issues and compliance costs have played a role, but their value, across the country, particularly in underserved areas, small towns and rural regions, cannot be underestimated. Community banks are an essential component of America’s financial success given their unique community knowledge and relationships that allow programs like PPP to succeed.
Only a few years ago many experts said community banks were “the walking dead,” obsolete and too small to survive. This pandemic has proven how wrong those pronouncements were.
A relief package must come quickly, and with an evolved and improved PPP program. Community banks have proven invaluable in this time of crisis, and it is now time to ensure they are supported and healthy for the long term.
*NOTE: At the time of posting of this contributed view, the percentages exemplified were the only available data reflecting PPP program numbers through August 2020. Subsequent government data released after this posting reflect more up-to-date percentages.
Noor Menai is President and CEO of CTBC Bank USA and a member of the FDIC Subcommittee on Supervision Modernization.