Regional Fed CEO Wants To See Higher-Risk Activity From Banks

One of the top fiscal policy setters in the country said one of the actions he wants to see taken in the near future is "bold and perhaps higher-risk activity" from banks.

Federal Reserve Bank of Atlanta President and CEO Raphael Bostic, speaking at a webinar last week, emphasized that the Fed would do whatever it could to revive the economy in the wake of the coronavirus pandemic. Bostic is currently an alternate member of the 12-person committee that sets federal monetary policy.

Bostic spoke during a webinar presented by the South Florida Business Council, where he was interviewed by Jack Seiler, the former mayor of Fort Lauderdale. Bostic said to keep in mind how unprecedented the pandemic is.

"Usually when we have sort of an economic slowdown, there's been a buildup of excessive risk,” he said. “We see fundamentals that used to be sound starting to break down because of the risk-taking behavior."

This economic crisis is far different, he said. Stresses in cash flow for businesses and families could turn into stresses in credit.

"If everyone goes to the credit markets, then those credit markets might collapse as well,” he said. “So there is this potential for a spillover which is pretty significant.”

Prior to the pandemic, the economy had been working well before and its fundamentals were largely solid, he said. That has signaled to him that the Fed’s goal should be to try to return the economy to how it was, rather than try to impose fiscal austerity measures to fix a structural issue.

The Fed's having lowered interest rates to "effectively zero" was "sending a signal that that we were going to have our policy stance be as stimulative as possible," he said.

In the wake of the 2008 financial crisis, the Fed used its emergency powers to open up six credit facilities to make loans to failing markets, according to American Banker. This time, it has opened up 11 (nine of which are operational), including facilities for federal funds, money market mutual funds, municipal bonds, corporate bond markets and dollar swap markets.

“The municipal facility is not something we've done before. Getting into corporate debt markets is not something we've done before,” Bostic said. ”But I think you've heard from the chair, and I would share his view in this context, it's really a whatever-it-takes scenario. So whatever we have in our arsenal, we're going to deploy to make sure that as much relief gets out into the marketplace as possible."

In exchange for liquidity relief, Bostic said he wants banks to be more active. That hasn’t played out in the marketplace yet as lenders, including national banks like TD Bank and Wells Fargo, are still uncomfortable making deals.

“We’re going to have to just wait and see. We’ve never been through anything like this,” TD Bank Executive Vice President and Head of U.S. Commercial Real Estate Lending Gregg Gerken told Bisnow last week. “It is pretty hard as a lender to underwrite a project when you don’t know what that rent roll will look like.” 

As states open their economies cautiously, it remains to be seen how well businesses are able to recover and unemployment drops. 

Already, lenders have pulled back on jumbo fixed-rate mortgages, cash-out refinances and home equity lines of credit. As for commercial real estate loans, Trepp in March predicted an 8% default rate, not as bad as the Great Recession.

"We want banks to make sure that their capital is deployed to maximum effect to provide support and relieve burden, reduce burden,” Bostic said.

To that end, the Fed has encouraged banks to maximize their lending, and even changed some of the regulatory expectations on credit requirements. Banks have been encouraged to modify loans and defer payments, even though many are wary that the Fed will do an about-face later and penalize banks for playing it too loose, he said.

“We've really stood up and [tried] to be as clear as possible that we understand this is a crisis time, we expect some bold — and perhaps higher-risk — activity and more creative activity in response to the crisis, and we won't penalize you for that,” Bostic said. “And what I've heard from banks is they've appreciated that recognition, and every banker I've talked to has really said that they're going to do all they can, they're going to work as much as they possibly can with their customers, and even with folks who haven't been their customers, moving forward. "

Bostic said that recovery is dependent upon employment and how fast people ramp up discretionary spending. In the meantime, the Fed will exercise its powers — lending, bank regulation and oversight — and work with policymakers for additional solutions. He emphasized that the Fed relies on outreach to gauge what is needed. 

"If you get a call from the Federal Reserve, please take it," he said. "Talk to us."

Fed Chair Jerome Powell on Wednesday morning promised to use the central bank’s power as needed, and called on Congress for additional fiscal spending to stem the economic fallout from the coronavirus.

"We're going to do whatever it takes to get to the other side,” Bostic said.