How small banks can help small companies get through coronavirus

The coronavirus has brought together a badly divided country in a way almost never seen.

With an invisible enemy uniting the nation, the vibrant network of more than 5,000 local banking institutions, if properly harnessed, can be a crucial weapon. There is no better vehicle available to stabilize the nation’s economy than the banks rooted in their local communities.

These banks are closely connected to individual and small-business borrowers, with loans usually secured by residential and commercial real estate, farmland and automobiles in cities, suburbs and towns across the country. While all banks, their customers and the communities they serve will benefit from the CARE Act recently adopted by Congress, more help specifically for smaller banks and middle America is necessary.

The 2008 Troubled Asset Relief Program enacted in response to the last financial crisis primarily helped major financial institutions in metro cities recover. In this new crisis, Congress and federal banking agencies need to encourage community banks with assets of less than $10 billion, and with satisfactory ratings from their federal regulators, to provide immediate temporary relief to the borrowers most adversely by the economic downturn amid COVID-19.

Community banks provide roughly half of the business loans in the country, and they must be enlisted to help their communities and borrowers. The current legislation provides that new SBA- guaranteed loans can be offered by banks. The problem is that community banks also need help to protect themselves and the individual, agricultural and small-business borrowers with existing loans.

The federal government needs a plan that will yield enormous and immediate benefits for qualified small businesses and individual borrowers. Modest residential, farm and small-business borrowers could be offered six months of forbearance on principal, interest, real estate taxes and insurance.

These borrowers would not need to make loan payments for six months and could instead use their scarce funds for taking care of their families and maintaining their businesses. This is the quickest way to put meaningful cash into the hands of these borrowers.

This relief would be offered by community banks that hold the loans in their portfolios and service these borrowers directly.

The six months of payment forbearance (the amount not received by the lender) would also have a federal guarantee. This guarantee would encourage community banks to provide relief to as broad a swath of covered borrowers as possible.

Additionally, community banks could monetize the guaranteed amount of the forbearance by drawing equivalent funds from either the Federal Reserve Bank or the Federal Home Loan Bank System (depending upon to which organization the bank belongs). The community bank would receive cash in the full amount of the forbearance, which could be devoted to new lending in the bank’s community, and offset the cost of the bank’s six-month forbearance.

Banks would pay a nominal cost of funds for this money — say the one-month Treasury bill rate — which could be waived if the funds were deployed for new lending in the bank’s community.

Although certain governors are seeking to address the issue of forbearance at the state level, federally chartered community banks might be overlooked. A uniform federal approach would be preferable to ensure across-the-board participation by all community banks.

This program would not be costly. Only quality banks and borrowers would be included in the program. Because these loans already exist in the portfolios of community banks, the loan forbearances extended to borrowers will nearly always be secured by good collateral, and the loans will likely perform well.

By empowering community banks to implement this program, the executive branch’s objective to support borrowers in need would be achieved quickly and efficiently. Implementing a program along these lines through the nation’s community banks will be the best means for getting support to those people and businesses that have been neglected for too long.

Finally, this plan will strengthen community banks, which are vital to the health of towns and smaller cities throughout the United States.