Name: Why the banks were ready for the financial impact of coronavirus
Uploaded: 2020-04-16
Duration: 5 min 10 s
Description: And how they'll capitalize on Washington's stimulus plan.

[ BLANK_AUDIO ] Going back to 2008 2011 was a crisis period there was lots of new restrictive legislation that was imposed on the banks and the big one, of course was the Dodd Frank bill that put restrictions on the kinds of. Trading that Wall Street firms could do they shrank their leverage way down. And it also put restrictions on banks insisting that they have a lot more capital on their balance sheets as a buffer against bad loans. So the way that the Federal Reserve enforced these new rules was to put the banks under stress test and these stress tests were tough. They essentially replicated all the problems that hit in the financial crisis and said you got to be able to survive another financial crisis or even slightly worse. So we're talking about 10 % unemployment. We're talking about an 8 % drop in GDP. These are numbers that most people in the industry including Alice on Wall Street didn't think it would ever happen. Well it just happened. This afternoon I also signed into law $ 2. 2 trillion in urgently needed relief for our nation's families, workers, businesses and Americans of every race, color, religion and creed The banks were the problem in 2008 Now the banks are part of the solution because the government has chosen to make all of these loans through the banks. Now these are Big banks, these are Community Banks, this is the JP Morgan's, Wells Fargo's, Bank of America Citigroup, and they're also the smaller Community Banks. The Cares act has the PPP Which can apply to as many as 17 million small businesses in America that have up to 500 employees actually 500 or fewer employees. And these companies are eligible to get essentially grants that begin as long as but if they keep the same number of people on the payroll at the same total pay At the end of eight weeks, in other words, eight weeks from the date when they get the loan. Then the loans are forgiven. The long programs don't apply just to small businesses under the PPP. They also apply to medium sized businesses under a different program, which is called the Main Street Lending Programme This program applies to medium sized businesses. So we're talking about at least $ 600 billion, if not much more in loans are going to be available to middle sized businesses. Now when you add those two together, small business plus medium sized business, these two programs are gonna be covering about 70 %, potentially of the workers in America because 70 % of the workers work for small or medium sized businesses up to 10, 000 employees. [ MUSIC ] The PPP banks are getting fees pretty good fees on loans of up to 350, 000 5 %. Between 350, 000 and 2 million they're getting 3 % From the backers that I've talked to, those fees are pretty good. They make these loans profitable even though the larger loans are maybe marginal in terms of profitability. So it's a good thing for the banks in terms of getting more business, potentially serving clients, trying to take clients away from each other, costs and competition in the market. [ SOUND ] So the best banks are going to end up as the winners in this case. And it doesn't really have any credit risk to these banks because all the loans are guaranteed by the government so the banks will take no risk and at the same time, it bridges their customers. Through this very difficult time, so the customer is going to be less likely to default on their loans. Now the other program, the Mainstreet lending program also is run by the banks and the banks there have somewhat more credit exposure because they have to keep 5 % of these loans on their own books. So they got to look at these companies and they feel very risky. Maybe say, no. Maybe tell the government don't loan to this company. Now that's not much credit risk. We're not gonna do that a lot. But for extremely risky companies, they might have some losses potentially, which they're gonna try to guard against by very carefully Underwriting these loans in the cases of extremely over leveraged risky clients. The larger danger to the banks is that their existing clients borrow money. But they gotta pay back, cuz these are not grants, as they are under the PPP, and that they take on too much debt because this is easy to get loans, the government guarantees, they'll be given out very readily. And then a year or two from now, these companies are not gonna be able to pay the money back, and they have to pay it back. So then the government can come in and force these companies into bankruptcy for some to liquidate assets. And then who's stuck with the bad credits the remaining credits that they gave prior to this crime Prices when things look pretty good, but the banks [ BLANK_AUDIO ]

Why the banks were ready for the financial impact of coronavirus

Finance

And how they'll capitalize on Washington's stimulus plan.