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Align with CARES Act Guidelines

Get an overview of CARES Act guidelines, its impacts on banks, and Oracle Financial Services recommended approach for addressing them.

About CARES Act

The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a $2.2 trillion economic stimulus bill passed by the US Congress and signed into law on March 2020 in response to the US economic fallout of the pandemic. The spending for this bill mainly includes $300 billion in one-time cash payments to individual Americans, $260 billion in increased unemployment benefits, forgivable loans to small businesses with $669 billion in funding under the Paycheck Protection Program, $500 billion in aid for large corporations, and $339.8 billion to state and local government.

Key Aspects of CARES Act for Banks

The IFRS 17 Simulation Studio can interpret new accounting standards and help you gain functional insights from identifying data gaps and understanding disclosures and reports. It can also seamlessly integrate with the business and help you to take an agile approach to accelerate your program and parallel run time.

1. Paycheck Protection Program (PPP)

  • The Small Business Administration (SBA) guaranteed loans for small businesses of up to $10 million, with a maximum interest rate of 4%, towards employee salaries, medical leave, insurance premiums, mortgage, rent, and utility payments.
  • Deferral of payments of principal, interest, and fees for up to one year.
  • Limited loan forgiveness on loans for amounts spent on payroll costs, rent and utilities payments, and interest payments on mortgages for borrowers that apply.

2. Other financial measures for depository institutions to promote lending activities

  • SBA to pay principal, interest, and any associated fees that are owed on existing section 7(a) loans, section 504 loans, microloan products, or loans on deferment for a six-month period.
  • Paycheck Protection Program liquidity facility (PPPLF) to provide liquidity through nonrecourse loans to fund PPP loans pledged to the PPPLF.
  • Money Market Mutual Fund Liquidity Facility (MMLF) to provide liquidity against eligible money market mutual fund assets pledged as collateral.
  • Increased access to Central Liquidity Facility for credit unions until the end of the year.
  • FDIC to guarantee debt of solvent insured depository institutions and depository institution holding companies until end of year.

3. Regulatory relief for depository institutions

  • 0% regulatory capital risk weight for SBA-guaranteed loans under PPP.
  • Exclusion of PPP loans pledged to PPPLF and, exposures to MMLF from regulatory capital requirements and leverage ratio.
  • Exclusion of PPP loans extended to executive officers, directors, and principal shareholders from limitations of Regulation-O.
  • Temporary relief from reporting of modified loans from Troubled Debt Restructuring (TDR) disclosure
  • Exclusion of US Treasury Securities (Treasuries) and deposits at Federal Reserve Banks from total leverage exposure for supplementary leverage ratio computation through March 31, 2021.
  • Revised criteria for computation of eligible retained income to indirectly promote lending activities.
  • Option to elect for five-year current expected credit Loss (CECL) transition under the new rule in place of three-year transition as per 2019 rule.
  • Community bank leverage ratio reduction from 9 percent to 8 percent for qualifying community banks.
Visualization of the CARES Act

Impact to Bank’s Functions and Operations

Various provisions of CARES act directly or indirectly have the following impact on banks:

  • Asset Modification: Payment deferrals, fee waivers, term extensions, effective rates reduction and interest waivers will have short-term adverse impact on net profit margin and liquidity.
  • Regulation/reporting changes: Additional items in the existing reports or revised reports capturing the impact of the Act to be submitted.
  • Income tax reporting: Revised assessment of reserves, interest accruals and impairments will impact the related tax accounting for financial institutions.
  • Onboarding, Know your customer (KYC) and customer due diligence (CDD): Increased volume in new customers and existing customer loan applications.
  • Transaction monitoring: Adapting programs for changes to customer and transaction profiles.
  • Investigations: Increased volume of investigations and SAR filing.
Impact to Bank’s Functions and Operations

Evaluation of Changes on Banking Functions

Liquidity management
Banking institutions will face a direct impact on their liquidity from the deferment of payments on principal, interest, and fees with the introduction of the CARES Act. Banks will have to make provisions as cash flows will not be in line with the contractual terms. There will be an increase in number of delinquent payments and hence a need to model such delays to get the right estimate on liquidity position. Acquiring the contractual estimates is critical from the perspective of regulatory reports, such as the FR2052a report, which uses the cash flows as an input to measure the overall liquidity profile of an institution.

Capital computation
Capital requirements of banks under the Basel regulations will change. On the credit side, banks should expect a jump in the total capital required as there will be an increase in the delinquency of retail customers. Probability of Default (PD) estimates will have to be done quickly as the default rates will be changing drastically, increasing the Risk Weighted Assets (RWA) numbers. With the introduction of the CARES Act, capital requirements have changed for some portfolios to 0%, such as SBA guaranteed loans; on an overall basis, both the trading and banking book will negatively impact capital requirements.

Allowance and provisioning computation
Past due reports are of great significance for banks to set aside appropriate provisions for all future credit losses. Banks will have to look at newer indicators that help them correctly estimate performance of accounts in the COVID-19 scenario. Banks must rethink how to classify their existing portfolios to a Stage 2 category and modify the existing trigger conditions under IFRS9 and CECL requirements. When considering both the CARES Act and delay in payment patterns, banking organizations need to re-evaluate their current IFRS 9 Stage Migration logics.

In addition, Expected Credit Loss (ECL) calculations will be impacted from the newly modeled PD estimates that incorporate new market scenarios, specific to the conditions of the pandemic. However, the CARES Act has given some amount of positive relief to banks by delaying the adoption of CECL from January 2020 to December 2020, or until the national declaration for COVID-19 is lifted, whichever comes first.

Regulatory reporting
Call Reports (FFIEC 031, FFIEC 041, and FFIEC 051), Consolidated Financial Statements (FR Y-9C), FFIEC 002/002S, FFIEC 101 have been revised to meet updated reporting requirements. e.g. new items in schedules RC-C/HC-C for reporting section 4013 loans, and schedules RC-M/HC-M for reporting of PPP, PPPLF and MMLF exposures.

Data provisioning
Banks will have to internally work on their data strategy so that they can capture additional data attributes for identification of affected loans by the CARES Act. Clear identification of impacted accounts under different provisions of act will be critical for appropriate downstream capital and regulatory reporting.

Onboarding, KYC, and CDD
Increased demand for disaster relief loans through the PPP program, standard SBA 7(a) and Express loans put additional pressure towards on-boarding and KYC functions. Those looking to profit through fraud schemes will look to take advantage of any vulnerabilities in these functions. Per FinCEN guidance, compliance with BSA regulation is still critical to prevent illegal activity and banks should continue to take a risk-based approach for meeting their obligations.

Transaction monitoring
FinCEN has released several advisories alerting financial institutions to trends of increased fraud and money laundering (for example: imposter scams, money mule schemes). In addition, the economic impact of the pandemic has caused changes to customer behaviour and transaction volume profiles. Banks play a critical role in helping identify suspicious activity and will need to review their current transaction monitoring processes against red flags being highlighted by FinCEN and their current thresholds for monitoring behavior.

Investigations and suspicious activity reporting
Historically, whenever a disaster caused disruptions to the economy, support systems, and processes, criminals have taken advantage of those situations for illicit purposes. Identifying and reporting suspicious transactions will play a critical role in protecting financial institutions and their customers. In a recent press release regarding CARES Act and PPP related fraud, the Department of Justice highlighted the importance of partnership with financial institutions in the detection and investigation process and eventual recovery of defrauded funds.

Recommendation from Oracle Financial Services

Below outlines the steps and solutions Oracle Financial Services customers can use to address the guidelines prescribed in the CARES Act.

CARES Act–Impact

Oracle Financial Services Recommended Approach

Asset modifications

Asset liability management

  • Account level attributes can be modified to generate revised contractual cash flows based on the provisions of CARES Act
  • Stressed cash flows can also be generated capturing the fallout of the Act

Liquidity risk management

  • Any payment deferral, waiver etc. can easily be achieved through business assumption framework in LRS application
  • The business assumptions can be applied on both Principal and Interest cash flows separately
  • The business assumptions can be applied based on any data attribute such as product, 2052a reporting line, etc.
  • Copies of existing processes can be created to meet the requirement and to save time and effort

Loan loss forecasting and provisioning

  • Updated logics using rules framework can easily be introduced for identification of accounts in different stages of default (Stage Determination)
  • New rules can be introduced to modify the banks Stage Migration logic

Regulatory reporting

Liquidity risk management

  • Business assumptions can be leveraged to modify the cashflows to reflect CARES Act provisions, which can be used to report 2052a

Basel regulatory capital

  • 0% risk weight treatment could be easily configured through run rules framework for specific portfolios
  • Exclusion of PPP loans pledged to PPPLF and, exposures to MMLF from regulatory capital and supplementary leverage ratio computations, can be applied
  • Revised supplementary leverage ratio can be computed through configuration, with ability to switch back to original computation method

Market risk measurement and management

  • Revised supplementary leverage ratio can be computed through configuration, with ability to switch back to original computation method

Regulatory reporting for US Federal Reserve

  • Data model updated to identify, and report loans covered under section 4013 and configurations updated to report same in Call Reports (RC-C), Consolidated Financial Statements FRY-9C (HC-C)
  • Data model and configurations updated to identify and report PPP loans, PPP loans pledged to PPPLF and assets purchased under MMLF in Call Reports (RC-M) and FR Y-9C (HC-M)
  • Revised regulatory capital and supplementary leverage ratio computed in Basel application can be reported in Call Reports (RC-R), FR Y-9C (HC-R) and FFIEC 101
  • Updated reporting of Regulation-D revisions in Call Reports (RC-E), FR Y-9C (HC-E), FR 2900, FFIEC 002

Onboarding, KYC, and CDD

Know your customer (KYC)

  • Integration features of the application can be leveraged to streamline bank’s on-boarding solutions and enable processing of additional on-boarding and CDD volumes more efficiently without exposing themselves to greater risk.
  • Integrate with customer on-boarding system for real time risk assessment and data collection through questionnaires
  • Leverage real time and batch interfaces to integrate with third-party data providers for identity verification and negative news
  • Pre-configured integration to Oracle Financial Services (OFS) Customer Screening and Enterprise Case Management

Customer screening

  • Sophisticated matching algorithms, with over 450 standard match rules can assist in matching existing and potential customers with current public and private sanctions lists

Enterprise case management (ECM)

  • ECM’s RPA integration capability can be used to automate routine tasks freeing up resources to focus on more complex and critical analysis tasks

Transaction monitoring

Anti-money laundering (AML)

  • FinCEN Advisory FIN-2020-A003highlights a rise in consumer fraud related to COVID relief programs and key typologies to monitor include imposter scams and money mule schemes. Several of the red flags described can be mapped to existing pattern-based rules available in the behavior detection library (change in behavior, escalation in inactive accounts, rapid movement of funds, etc.)
  • Revisit thresholds set for existing monitoring rules and align them with changes in customer behavior and transaction volume changes. The threshold editor can be used to modify and test threshold settings to determine what changes may be required
  • Scenario Wizard can be used to quickly develop and deploy new rules based on emerging trends in fraud and money laundering behavior

Investigations and suspicious activity reporting

Enterprise compliance management (ECM)

  • Seamless integration with OFS KYC, CS and AML applications enable a consolidated view of the customer from a risk scoring, sanctions and transaction monitoring perspective
  • ECM can also absorb events from other systems in order to view events generated by the many different systems a bank may have deployed to

Compliance Regulatory Reporting (CRR) - for US SAR

  • Action taken on a case can submit the case for SAR filing
  • Data from the case is automatically transferred to the draft SAR report
  • The batch filing capability enables submitting many SARs at once to FinCEN as part of a daily or weekly process