OCC: Lockdowns Could Challenge Stability Of Banking System

Brian P. Brooks, Acting Comptroller of the Currency, said in a series of letters that some states’ long-term efforts to curb the coronavirus could lead to reduced real estate values and debt payments.

The closures, Brooks said, were seemingly “indefinite” in some states, a press release from the Office of the Comptroller of the Currency (OCC) said. Brooks has only just taken office as of the beginning of June, after his predecessor Joseph Otting stepped down May 29.

“Certain aspects of these local orders,” Brooks wrote in letters to the National League of Cities, the U.S. Conference of Mayors, and the National Association of Governors, “potentially threaten the stability and orderly functioning of the financial system the OCC is charged by law to protect.”

Brooks said forcing businesses to remain closed could reduce companies’ ability to pay debts, which would lead to increasing default in the banking system. The closures of businesses could also result in lootings and vandalisms to empty storefronts, thereby letting the value of collateral in commercial real estate fall. Some cities have been turning off water or electricity services for businesses refusing to close, according to the press release, and those cases could deteriorate physical loan collateral and expose banks to higher loss severities, the release says.

Due to the double-digit unemployment numbers currently in place in the U.S., the OCC release posited that further enforcement of lockdown orders might harm the long-term economy and plummet it into worse turmoil.

Brooks hoped local governments would take into account financial health while making decisions in the coming weeks.

“The President and Congress have relied on a strong banking system to deliver many of the elements of the CARES Act and other relief to support the nation during this difficult period,” Brooks said, according to the release. “I ask that your members carefully consider the impact of their lockdown orders on the health and function of our shared national financial infrastructure as they implement the President’s guidance to determine when and how to unwind those orders.”