The “stability and orderly functioning of the financial system” is potentially threatened by local orders of mayors and governors, the acting top federal regulator of national banks said Monday.
In letters to groups representing state and local governments, Acting Comptroller of the Currency Brian P. Brooks said adverse effects of regional and local responses to the banking system – which “the OCC is charged by law to protect” – should be considered when local leaders impose the so-called “lockdowns.”
“National banks and federal savings associations entered the COVID-19 crisis extremely well capitalized and with strong liquidity,” Brooks wrote. “The President and Congress have relied on a strong banking system to deliver many of the elements of the CARES Act and other relief to support the nation during this difficult period.”
Brooks said he asked that members of the groups – which included the National League of Cities, the U.S. Conference of Mayors, and the National Association of Governors – “carefully consider the impact of their lockdown orders on the health and function of our shared national financial infrastructure as they implement the President’s guidance to determine when and how to unwind those orders.”
According to the OCC, the letter intends to “raise awareness” among the state and local officials of risks closely associated with “essentially indefinite” business closures.
The OCC said that requiring businesses to remain closed decreases businesses’ ability to service their debt, thus increasing default risk in the banking system. “Lengthy business closures also reduce the value of collateral securing commercial real estate because of increases in burglaries and vandalism of vacant strip malls, storefronts, and the like; in those cities considering cutting off electric, water, and other utilities to businesses that choose to remain open notwithstanding lockdown orders, the degradation of the physical loan collateral exposes banks to higher loss severities,” the OCC said.
“During a period of double-digit unemployment and stresses caused by local responses to COVID-19 to previously safe and sound business and commercial real estate portfolios, actions that exacerbate that risk may prolong and worsen an economic downturn, reduce the availability of credit and capital that would support recovery, and result in safety and soundness issues that are especially significant for smaller community and regional banks with business concentrations in these areas,” the OCC said.