The COVID-19 pandemic brought many changes for financial institutions, especially banks. These changes came in the form of stimulus packages, government programs, excess liquidity on balance sheets, and more. But there’s another important program surfacing that’s important to know about—let’s talk about The Emergency Capital Investment Program (ECIP).
The Problem at Hand
Simply put: The more capital a bank has, the more deposits it can take on. With the influx of deposits from stimulus checks amid a global pandemic, however, it has become especially important for banks to ensure their capital ratios remain in check.
Why is Capital Important for Banks?
So, the U.S. government is attempting to remedy the flood of deposits and excess liquidity on banks’ balance sheets in response to the global pandemic. Although deposits have flooded balance sheets, the bank’s capital remains the same.
Why is capital important for banks? Capital acts as a safety cushion for financial institutions. If your bank does not meet their regulatorily required capital ratios, they will likely be exposed to additional regulatory scrutiny and guidelines you will have to abide by.
With the ample amount of liquidity on bank balance sheets, the Treasury aimed to support financial institutions with a program called ECIP. The ECIP aims to solve the capital problem by allowing banks to take on additional capital through their program.
The ECIP is designed to put money on the balance sheet in the form of capital. The second round of stimulus checks is continuing to expand the asset base, while capital stays the same, bringing the overall capital ratio down. The inflow of funding from this program can help bring your capital ratio to between seven and 14%. Thus, you can grow exponentially!
The sheer value of this program cannot be overstated. Banks have been looking for ways to decrease the size of their balance sheets since the first round of stimulus started. This program could alleviate a tremendous amount of that pressure.
Banks that participate in this program will be better suited to handle excess deposit flow onto their balance sheets than they would be without the program.
More About the Program and Who It Benefits
The Emergency Capital Investment Program, administered by the U.S. Department of Treasury, seeks to aid “financial institutions to augment their efforts to support small businesses and consumers in their communities.” For community banks, this means providing nine billion dollars in funding.
According to the U.S. Department of Treasury, this program was designed with the intent of supporting “low- and moderate-income communities, minority communities, rural communities, underserved areas, consumers, small businesses, and nonprofit organizations.”
When reviewing applications, the treasury will decide what institutions are eligible based on available program funds. Funds distributed can be expected to support small or minority-owned businesses and consumers who were inordinately affected by the economic downturn due to the global COVID-19 pandemic. As such, qualification for favorable rates will depend on documented results benefiting those groups.
The ECIP comes with benefits beyond just funding. Those who qualify for ECIP will not pay interest on the capital investment for 2 years. After the initial 2 year period, they will pay interest at a rate determined by achieving certain qualified lending growth targets. Depending on how they do relative to those targets, the rate after year 2 could range from less than 0.50% up to 2% per year. By the 15th year, the investment must be repaid in full.
In order to qualify, however, your bank must increase its lending to minority economic areas by 400%.
The deadline to apply for The Emergency Capital Investment Program has been extended to July 6, 2021. For more information, contact your trusted advisors here at Newcleus Bank Advisors.
At Newcleus, we understand your operational responsibility and desire to provide maximum impact. As a result, we aim to provide foundational support that is meaningful and ensures you and your organization’s ongoing success. Contact us today to see how we can help.