PPP Loans, PPLF, and Your Capital Ratios

Over the past week, we have been fielding numerous questions regarding the impact of Paycheck Protection Program (PPP) loans and borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (PPPLF) on financial institution capital ratios. As a result, we have provided a summary on both the impact of PPP loans, as well as borrowings from the PPPLF.

How Do I Treat PPP Loans for Capital Purposes?

Based on section 1102 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, PPP loans carry a 0% risk weighting for capital purposes. However, unless the loan is pledged as collateral under the PPPLF, the loan will be included in a bank’s average total consolidated assets for purposes of calculating the leverage ratio requirement. This leverage ratio requirement includes the Community Bank Leverage Ratio (CBLR).

How Do I Treat PPPLF Borrowings for Capital Purposes?

The PPPLF was established by the Federal Reserve to provide lenders with non-resource loans from the Federal Reserve to fund PPP lending. On April 7, 2020, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve and the Office of the Comptroller of the Currency (OCC) issued an interim final rule to neutralize the impact of PPPLF participation by allowing the exclusion of loans pledged as collateral to the PPPLF from the bank’s leverage exposure, average total consolidated assets, advanced approaches total risk-weighted assets, and standardized total risk-weighted assets. This exclusion also applies to banks that have opted to use the CBLR.

If you have further questions regarding PPP lending, as well as its impact on your capital ratios, please reach out to your Elliott Davis Financial Services Group representative.