Sector Update

April 6, 2020

The big news last week, on the heels of the passage of the $2 Trillion CARES Act, was a provision aimed at helping small business. Called the Paycheck Protection Program (PPP), it establishes a pool of funds totaling approximately $349 Billion in loans (which are forgivable under certain circumstances) and is administered under the Small Business Administration’s 7(a) program. We wrote a Strategic Insight that featured the PPP as well as other ways for depositories to defend their bottom lines moving forward. Below I’ve continued a (hopefully) helpful list of links to resources.

ICBA: Detailing the Community Bank Provisions of the CARES Act

SBA: Coronavirus (COVID-19): Small Business Guidance & Loan Resources

SBA: Paycheck Protection Program

FDIC: The FDIC Announces a 30-Day Grace Period for the Call Report for the First Quarter of 2020

Federal Reserve: Agencies announce changes to the community bank leverage ratio (CBLR)

The general mood in markets this morning is one of optimism. So far today, U.S. equity indices have already earned back last week’s losses and tacked on some gains. Treasury yields are up 2-6 bps across the curve. I am certain that as a country we will conquer and rebound from this pandemic but I think it may take longer than we all hope for though for a couple reasons. First, the “cure” for what ails (social distancing) will likely cause continued and probable further economic slowdowns. Second, have we already forgotten the two back-to-back “chart breaking” initial jobless claims numbers? Last week’s 6.6 Million is roughly 10 times that of the previous weekly high during the Financial Crisis. True, continuing claims (3 Million) are “only” 45% of the previous peak of 6.6 Million but it’s safe to assume we’re headed back that direction. Like most businesses, many Americans’ “balance sheets” are not designed to absorb a sudden and totally unexpected loss of revenue. Record stimulus measures will no doubt help ease these burdens, but it takes time and time is of the essence for many Americans.

Upcoming Webinar – Click to Register Below

Tuesday (4/7): 2020 Quarterly Economic Outlook Webinar

Tuesday (4/14): Banks: Balance Sheet Management and Your Loan Portfolio

Thursday (4/16): Credit Unions: Loan Participation Market Overview

Food for Thought

• The Fed absolutely sees and hears about these figures and there is serious talk (and the ability) for the Fed to also intervene in the Muni market.
• As was the case in March, spreads this wide on high-quality assets is a symptom of illiquidity.
• The Fed will want to cure illiquidity and quash spreads in the process.
• I’m not certain they can be as effective in Muis as they have been in RMBS and CMBS.
• I wouldn’t want to bet against their balance sheet capacity though.

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (March) | Monthly, 5^th business day

SBA Prepay Commentary (March) | Monthly, 10^th business day

Vining Sparks: Defending Your Bottom Line – Phase II: Wholesale Borrowings and Leverage

In terms of depositories defending their bottom lines, Phase I of deploying excess cash seems to be winding down. This Strategic Insight addresses different ways to fund leverages (traditional and otherwise) and uses of those proceeds. Notably, the Paycheck Protection Program (PPP) to be operated under the SBA 7(a) umbrella.

Vining Sparks – Interest Rate Products: Hedging Short-Term or Floating Rate Funding

Here is a presentation explaining a short-term funding hedge strategy. The current dislocation in LIBOR results in a negative funding cost for the first 3-month period (assuming we use 3-month FHLB advances as the borrowing source). Those executing this strategy should expect their funding cost to approximate the fixed rate on the swap plus/minus the normal spread between 3-month LIBOR and their borrowing source. Normal spreads can be seen in the presentation. The presentation also includes information on the accounting for this transaction. Of course we provide all the accounting support.

WSJ: Struggling Borrowers Want to Pause Their Mortgage Payments. It Hasn’t Been Easy.

“That has proved daunting to the companies, many of which are nonbanks and don’t have deposits or other business lines to cushion them. Nonbank lenders originate about 60% of U.S. mortgages.”

WSJ: How the Muni Market Became the Epicenter of the Liquidity Crisis

“Calmed by Congress, muni selling has slowed for now, according to MSRB data. But with a vast chunk of the market sitting in mutual and exchange-traded funds that investors can easily exit, another shock could provoke further outflows, causing prices to plummet again, analysts and money managers said.”

Vining Sparks: Coronavirus Chartbooks

PowerPoint: Coronavirus Chartbook (PWPT)  

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates