Michelle W Bowman: The pandemic's effect on the economy and
banking
Speech (via webcast) by Ms Michelle W Bowman, Member of the Board of Governors of the
Federal Reserve System, at the Kansas Bankers Association CEO and Senior Management
Forum/Annual Meeting, Topeka, Kansas, 26 August 2020.
* * *
Good afternoon. It's great to be with you, and I look forward to our discussion. As you all know,
the COVID-19 pandemic has caused significant disruption and hardship in nearly every aspect of
our lives, and it continues to weigh heavily on our national economy, which is why it will be the
central focus of my remarks here today. Let me set the stage for our discussion by outlining the
economic effects of the pandemic most relevant to the banking sector, describing the Federal
Reserve's response to the crisis, and then making some observations about conditions for
smaller banks.
The Pandemic's Effects on the Economy and Banking
We began this year with the economy in excellent shape-by some measures the strongest in
decades. From my seat as a monetary policymaker, we appeared to be in a good position
regarding both legs of our dual mandate, which are maximum employment and stable prices.
But that picture was dramatically altered with the onset of the COVID-19 pandemic. Efforts to
contain the spread of the virus caused a sudden stop in economic activity during March and April.
While the extent of the closures and shutdowns varied widely throughout the country, the sudden
loss of employment and the contraction in output were like nothing our nation has experienced
before.
The decline in activity was mostly due to temporary business closures, and the economy has
bounced back noticeably in recent months as businesses reopen and fiscal support was
distributed to many Americans. Even so, the economy is still far from back to normal. The future
course and timing of the recovery is still highly uncertain, and its pace and intensity are likely to
vary across areas of the country-heavily influenced by the decisions of state and local
governments. That speaks to another aspect of this episode that is unusual-how the timing and
severity of the pandemic's impact seem to differ greatly from one area to the next.
Among Kansas's major industries, oil and gas production and equipment manufacturing have
been hurt by the worldwide slump in energy demand. Aviation manufacturing has been hit hard
by the downturn and by the uncertainty over the recovery in air travel. Agriculture continues to
face challenges but is faring somewhat better than many sectors of the economy. Ag producers
are still facing tough financial conditions, including the low commodity price environment. While
most indications are that agriculture land prices continue to hold fairly steady, I have seen some
reports that less-productive land has been showing some hints of cracks in valuations.
Turning to employment, nationwide, we know that the initial job losses were heavily concentrated
among the most financially vulnerable, including lower-wage workers, young people, women, and
minority groups. According to the Fed's latest Report on The Economic Well-Being of U.S.
Households, 20 percent of people surveyed in April reported a recent job loss. Among those
surveyed who live in households with annual incomes below $40,000, the reported job loss was
1
nearly double that, at around 40 percent. That said, both of those figures are likely to include a
number of layoffs due to pandemic-related shutdowns of businesses that were hopefully only
temporary.
Households were in a generally strong financial position at the beginning of this year, but the
restrictions implemented to fight COVID-19 resulted in an unprecedented spike in
unemployment, which likely led to a number of families finding it difficult to keep up with their
payment obligations. That is especially true for lower-income households, which may have had
much less of a financial cushion before the onset of the crisis. Along with our monetary policy
actions, stimulus checks and enhanced unemployment benefits provided in the CARES Act have
been a substantial and timely source of financial support to households during this difficult time.
Understanding the financial stress this could place on many borrowers, the Fed and other federal
regulators implemented guidance to encourage banks to work with their borrowers. By mid-July,
only around 8 percent of outstanding residential mortgage loans were in forbearance, well below
what many industry observers had feared. It remains possible that the economic challenges will
persist beyond the forbearance time period provided in the CARES Act, and if so, we would
almost certainly see some of these loans transition into longer-term delinquency status or enter
into renewed deferment periods. Thus far, however, the data have been encouraging.
Turning to the impact on businesses, we know the effects have been most severe in the
services sector, especially travel, leisure, and hospitality. To give some sense of the losses,
employment in the leisure and hospitality sectors nationwide was down nearly 40 percent in the
12 months through May and still down about 25 percent through July. Retail employment fell 15
percent over March and April, though it has recovered substantially since then, and in July it was
6 percent below the pre-COVID level.
It is encouraging to see that even those sectors most heavily affected by the crisis are finding
ways to innovate. Stores are adjusting hours and ramping up delivery, restaurants are changing
menus and creating outdoor space, distilleries shifted from making bourbon to hand sanitizers,
and independent businesses that hadn't previously relied heavily on technology are now using it
to stay connected to customers and regulate workflow.
Timely and supportive fiscal and monetary policy measures also have helped, but with the
progress of the recovery still tentative, I expect that many businesses will continue to fight for
survival in the months ahead, with the support of their lenders and communities.
Looking ahead, the economic outlook will continue to evolve quickly. We experienced a
pronounced and very welcome bounceback in national retail spending and housing activity over
the early summer months. We also saw positive news on progress toward a vaccine and in the
effective treatment of patients. Even so, positive cases and hospitalizations have risen in some
areas and continue to weigh on some regions and the overall economy. As Chair Powell has
noted, the timeline for the recovery is highly uncertain and will depend heavily on the course of
the pandemic. We must therefore recognize that progress toward a full recovery in economic
activity may well be slow and uneven
The Fed's Response to the Pandemic
Now let me turn to the Federal Reserve's role in the government's response to the pandemic.
During the initial phase of the crisis, we took a number of actions to stabilize financial markets
that came under intense stress, including purchasing sizable amounts of Treasury and
mortgage-backed securities. To support households and businesses, the Fed quickly lowered
our target for the federal funds rate, which has helped to lower borrowing costs but created a
different challenge for financial institutions-depressed net interest margins. The Fed has also
supported actions by Congress and the administration by creating a number of new emergency
lending programs. These programs were designed to restore and sustain proper functioning in
certain financial markets that had seized up in March and to facilitate the continued flow of credit
from banks to households and businesses.
One federal stimulus program that relied heavily on the participation and expertise of community
bankers is the Paycheck Protection Program (PPP). Working through banks, the PPP program
has delivered more than $500 billion to small businesses to help them weather the storm.
Community bankers played a crucial role in getting these funds to businesses that needed it,
showing once again how essential community banks are to the customers they serve. And in
response to feedback we received from a number of community bankers, the Fed created the
PPP lending facility to alleviate balance-sheet capacity issues for banks that otherwise would not
have been able to provide PPP loans to their small-business customers.
The PPP was created to help small businesses keep their employees on staff, and the Main
Street Lending program is designed to support lending to mid-sized businesses through the
recovery. The Federal Reserve has not engaged in lending directly to businesses before, but it
was a step that seemed appropriate considering the breadth and depth of the challenges we
face. We continue to solicit feedback and make adjustments to the program based on the
suggestions received from bankers and other stakeholders, and we continue to welcome your
thoughts and ideas on how we can make Main Street more effective. I would be interested to visit
with those who may already have experience with this new loan program, and I would also be
interested to hear about how you plan to use it to meet the needs of your business customers.
Together, these policy actions have helped stabilize financial markets, boost consumer and
business sentiment, and assist millions of households and thousands of businesses harmed by
the response to the pandemic. Credit markets, which had seized up earlier this year, have
resumed functioning.
In our other role as a prudential regulator and bank supervisor, the Federal Reserve took several
steps intended to reduce burden on banks and help them focus on the needs of their customers
and communities.
Together, with our fellow federal regulators, we delayed the impact of the CECL accounting
standard in our capital rules and temporarily eased the leverage ratio requirement for community
banks. We also delayed reporting dates for Call Reports and other data collections. In addition, to
address concerns about real estate appraisal delays, we provided temporary relief from certain
appraisal requirements.
From a supervisory perspective, beginning in late March the Fed paused examinations for most
small banks and took steps to lengthen remediation timeframes for outstanding issues. We
considered the exam pause an important step to provide bankers time to adjust operations to
protect the health of customers and employees, to prioritize the financial needs of their
customers and communities, and to play an essential and vital role in implementing critical relief
programs like the PPP.
As we continue to support the recovery and work to ensure that supervision and examination is
as effective and efficient as possible, I think it's important to hear directly from you, who are
actually working in the economy, about the conditions facing your communities and any
challenges impeding your ability to meet the needs of your customers. In addition to my regular
outreach to community banks, I am currently engaged in an effort to speak with every CEO of the
more than 650 community banks supervised by the Fed. I want to hear directly from bankers
about what you are seeing and your thoughts and ideas about the recovery. These conversations
are incredibly valuable to me as a bank regulator and policymaker. They give context to the
mountains of data we analyze and a unique perspective with real-world local examples to a
complex and dynamic economic picture. For those of you from Fed member banks who I have
not yet had the opportunity to meet or speak with by phone in these times of COVID, I look
forward to our conversation. Your local Reserve Bank will be in contact to find a convenient time
for us to meet.
Conditions for Smaller Banks
This audience knows better than most that smaller banks entered the pandemic in strong
condition. At the end of 2019, over 95 percent of community and regional banks supervised by
the Fed were rated a 1 or 2 under the CAMELS rating system. After coming through the last
financial crisis in generally stronger condition than larger banks, smaller institutions had
strengthened their capital positions and substantially improved asset quality in the years since,
leaving them better positioned to deal with the current stress related to the pandemic. Likewise,
credit concentrations, especially in construction and commercial real estate, were lower for
smaller banks than at the outset of the last financial crisis, and risk management of
concentrations improved over the last decade. Smaller banks also entered the pandemic with
high levels of liquidity, and this liquidity has further improved with deposit inflows associated with
pandemic-related stimulus programs.
Overall, community and regional banks remain well positioned to continue to extend credit and
play an essential role in supporting our nation's recovery from the effects of COVID-19.
With this in mind, on June 15 the Federal Reserve announced our plan to resume bank
examinations. We recognize the unique and challenging conditions under which the industry has
been operating, and we will certainly consider that as we resume examinations. Our initial focus
will be to assess higher risk banks, particularly those with credit concentrations in higher risk or
stressed industries. Finally, we will continue to be sensitive to the capacity of each bank to
participate in examinations and strive to prevent undue burden on banks struggling with
crisisrelated operational challenges.
The Road Ahead
Like many native Kansans, I am an eternal optimist, so let me end my formal remarks on a
hopeful note. While the road ahead is highly uncertain, and we don't yet know when the economy
will return to its previous strength, America will recover from this crisis, as it has from all of our
past challenges. Our economic fundamentals are strong, and we have the solid foundation of the
entrepreneurial spirit and resiliency of the American people. For its part, the Federal Reserve will
continue to monitor progress and respond promptly and flexibly to support the recovery. We will
closely watch economic and financial conditions, and we will use our monetary policy tools to
respond as appropriate to pursue our dual mandate of maximum employment and price stability.
We will also remain open to further adjustments to supervisory schedules and expectations, as
needed.
Thank you for the opportunity to speak with you today. I look forward to our discussion.
1
Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in
2019 - May 2020 (Washington: Board of Governors, May 2020).