Federal Financial Analytics, Inc.

Paycheck Protection Program Pandemonium: Policy Implications

April 29, 2020

The PPP’s second life began with even more pandemonium than its first launch in early April. Its problems compound political risk born of all the financial hardships for American households and small businesses. A culprit will be sought and that culprit could be “Wall Street.” It won’t be drawn and quartered in the current political construct, although near-term risks are significant. Going forward, the nature of the 2020 election and its outcome could lead to legislation making Dodd-Frank look toothless.

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As of this writing, SBA systems are faltering, accusations are flying, and at least four Congressional subpoenas to the largest banks are on their way. It seems certain that, when Congress resumes hearings sometime next month, banks will face heavy, bipartisan fire. Community banks will deflect much of it successfully back to the SBA, but the largest banks will be excoriated for actions real and alleged sure to infuriate populists and progressives. As Karen Petrou noted, the PPP’s problems are easily understood by aggrieved borrowers and many households already angered by mortgage-servicing problems, credit-card bills, and overall challenges making ends meet. With populists and progressives already primed to demand big-bank structural reform, this case could well prove a lightning rod for changes many in the sector would find destructive to established business models.

Risks already on the horizon include:

  • increased legal and reputational risk resulting from claims of credit discrimination. On April 28, the Bureau of Consumer Financial Protection in fact put lenders on notice to expect borrower complaints followed by formal investigations;
  • political opposition of unprecedented proportions to any M&A efforts by large banks. Big mergers are already a progressive target, and big bank deals require regulatory approval, making them easy political causes. No large deals in the ordinary course of business are likely under current conditions, but regulators will surely look to large banks to acquire troubled servicers, P2P lenders, and other financial entities with large enough customer bases to make a macroeconomic difference. These transactions may reduce taxpayer risk, but now will come at high political cost if they come at all;
  • better odds for success as bigtech firms seek access to COVID-relief facilities, positioning these firms for access to the payment system and additional inroads into financial intermediation; and
  • higher-profile demands by Democrats now and both sides during the 2020 campaign renewing demands to deconstruct “megabanks,” put the Postal Service into the financial system, and speed U.S. development of central bank digital currency. Republicans will be far more hesitant to support public-sector advances into private-sector finance, but President Trump could well renew his populist demands to break up big banks if he feels he is taking political heat due to the PPP’s problems.

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Karen Petrou’s latest column can be found here

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A proprietary think-tank for its clients, Federal Financial Analytics reviews critical federal and global policy developments in banking, insurance, asset management, and mortgage finance. We analyze strategic actions in great depth. Then, we advise clients on whether what they want can be made to work for them, within the policy environment and for the financial system. The firm’s practice is a unique blend of strategic advice and policy analysis serving as a thought leadership resource for boards of directors and senior management seeking a forward looking assessment of risks, opportunities, governance and other matters critical to success.

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