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The thing here is the bank isn’t taking any risk here. All the loans are guaranteed by the government. So banks are really just a middle man that is transferrin
by tempsy 7y ago
The thing here is the bank isn’t taking any risk here. All the loans are guaranteed by the government. So banks are really just a middle man that is transferring money from the SBA to a small business’s bank account and taking on zero credit risk.
The government has the ability to send funds directly to people obviously...that’s how they are sending the stimulus checks and send tax refunds.
Banks are basically being compensated for doing paperwork.
- agilebyte 7y agoPaperwork AND doing due diligence on the companies more effectively than the government can right now.
- tempsy 7y agoThe point is the amount they are earning is overly generous for the work completed. Most banks are only working with existing customers, so the DD is 99% complete. Few are reviewing applications from brand new clients.
- _curious_ 7y agoNot to mention that the banks are biased and giving no risk handouts to their most valuable clients (those at greatest risk of defaulting on obligations to the bank).
- asah 7y ago"existing customer" due diligence seems like fair profit...
- cm2187 7y agoEven then, SME clients don't do operations (like loan applications) with their banks every month, so that doesn't mean the DD is up to date (bank regulations change almost on a weekly basis).
- agilebyte 7y agoYes, but the point is DD was done (last year or today). Effectively the government is paying the banks for the work they've done creating a relationship with the clients, which includes DD.
- stri8ed 7y agoWhat incentive does bank have to actually do due diligence, when the loans are all guaranteed by government?
- deleted 7y ago[deleted]
- _curious_ 7y agoBecause they are giving the corporate handouts to customers who are at the greatest risk of defaulting on loans to their own bank - that's their incentive.
- MiroF 7y agoI don't follow, this seems like even less of an incentive to do due diligence.
- kingaillas 7y agoAgain, since the loans are guaranteed by the government, what risk are the banks taking, exactly?
- agilebyte 7y agoThe loans are guaranteed but you can still pay $ sanctions for not doing the work right. From Matt Levine: > Big banks that paid billions of dollars in sanctions after the 2008 financial crisis for flaws or omissions in loan applications -- in that case, mortgages -- assumed paperwork submitted to the SBA would need to meet high standards, or they would risk getting in trouble again. Wells Fargo has been under particular pressure to show that it overhauled its internal controls. Now that wasn't in the end the case as: > Some were floored when the SBA posted a notice on its website on Tuesday, confirming that’s necessary but saying that “lenders who did not understand that these steps are required” didn’t need to withdraw applications already submitted. That essentially gave an edge to lenders that had skipped that time-intensive step to get their customers’ applications in first. But that was (some of the) banks' view.
- Klinky 7y agoRobosigning and NINA loans of the past lead me to be skeptical.
- agilebyte 7y agoBanks paid sanctions for failing to do due diligence on loan applications, that's what the banks want to avoid this time round.
- Klinky 7y agoWouldn't their value add here be that they can quickly do due diligence and expedite these loans given their expertise in the field? Seems you're extolling their ability to perform quickly, while also excusing away their inability to perform quickly.
- agilebyte 7y agoThey perform faster than the government and have the expertise to deal with businesses. Compared to 2008, I see their role as "good guys" this time round.
- Spooky23 7y agoBanks do that for many programs. For many different services, banks function as a less efficient and more expensive bureaucracy than the government itself.
- malkuth23 7y agoMy understanding is there is actually some risk. If they do the paperwork wrong, or if the regulations change randomly (which they have a bunch of times already), the bank could theoretically be on the hook. Some of this reportedly happened in the last recession/bailout, so the banks are a bit gun shy. I am not a banker, so this is all second hand information I have read on r/smallbusiness and other forums while trying to figure out my own stuff. Don't get me wrong, I think they are getting paid a ton, probably too much, but it is not zero risk.
- tempsy 7y agoSure there’s probably some compliance risk here but that’s why most businesses are only working with existing clients. Very few are approving applications from brand new customers they’ve never had a relationship with.
- tobyjsullivan 7y agoThe banks considered that risk and said they wouldn't participate unless it was eliminated.[0] I can't find any follow-up article covering if or how that resolved but I notice most banks seem to have participated in the end. [0] https://www.reuters.com/article/us-health-coronavirus-stimulus-banks-exc/exclusive-top-u-s-banks-may-shun-small-business-rescue-plan-on-liability-worries-sources-idUSKBN21K075 https://www.reuters.com/article/us-health-coronavirus-stimul...
- ksdale 7y agoEveryone said they weren't taking any risk, but all the money was distributed and now they're getting sued by people who didn't get some.
- elliekelly 7y agoTo be fair that’s a risk created by the financial institutions in the way they chose to implement & process the loans, not a risk inherent in the structure of the Paycheck Protection Program. A bank that processed these loan applications fairly and in the order they were received doesn’t really need to worry. (Whether such a bank exists at all is a different story.) But even the banks who blatantly processed the applications in an unfair or discriminatory manner probably aren’t losing much sleep. The clients with the resources & connections to make a stink are the clients who got approved. Funny how that works.
- ksdale 7y agoI disagree, I think regardless of the implementation, there are so many businesses that didn't get money, that banks are getting sued anyway. I also agree that a lot of banks probably aren't losing much sleep, but that's different than saying this whole thing is risk free to the banks.
- ashtonkem 7y agoPlus there is a non-trivial amount of pressure to keep government out of things that the private sector could do, both politically speaking and from the private sectors that stand to profit.
- zarkov99 7y agoNot only they are not taking risk, they get to pick who gets the funding so they further optimize their bottom line, by say favoring bigger loans or loans to their most indebted customers. I hope there is a reckoning but I am pretty sure there will be bonuses to the CEO's instead.
- tossAfterUsing 7y agowell.. we could occupy zuccotti park again, except now it's illegal to have more than 100 people in the same place together. sincerely, "the civil liberties lobby"
- mywittyname 7y agoMaybe someone can get a class action lawsuit together on this.
- snowwrestler 7y agoHow can we say that banks are not taking any risk, but then imagine a class action law suit against them? Wouldn't the possibility of getting deluged with lawsuits count as a risk?
- nnvvhh 7y agoThe article mentions that a law firm is currently pursuing this.
- onetimemanytime 7y ago>>Banks are basically being compensated for doing paperwork. They're really being compensated for having the network to do what the government wanted to. No one else has the capacity to give money to small (and some large) businesses in a record amount of time. I'd pay 5% to get the stimulus cash a few days after the bill is passed...and I guess the same for the government /taxpayers. Corona loans that go out in October are no good, so you pay a fee for performance. Call that $10B a Bank Stimulus Act
- Saaster 7y agoThe IRS has the capability to put money directly into business bank accounts, or require businesses to sign up for EFTPS.
- onetimemanytime 7y agohow about handling their applications, eligibility? They don't. It's not like every business for $500K each so let's deposit it
- tempsy 7y agoLike I said they are being compensated for doing paperwork. But the compensation appears to far exceed the effort required especially if most customers are applying through an existing banking relationship.
- Saaster 7y agoAt the end of each PPP application with your bank, you get the same SBA PPP form to sign as the SBA has publicized on their web page. You then have to sign and pinkie swear that the funds are necessary and going to payroll. The banks are doing jack shit in terms of useful work except shoveling application's SBA's way, with the SBA being the ultimate approver of the loan anyway! Bank are just in middle and limiting applications to their existing customers for no good reason whatsoever.
- jermaustin1 7y ago
- sailfast 7y agoThe bank is taking all of the AML / KYC risk for all of these loans by law, which is costlier / riskier than you’d expect. Further, they’re taking a giant risk that they did paperwork in line with a massive government program that was rolled out extremely quickly without guidance or details. $10B seems like a pretty low number for this risk plus the cost of servicing the loans over time.
- tempsy 7y agoThat’s why most banks are only approving loans for their existing customers. All of that onboarding work is already done in that case.
- cm2187 7y agoI believe it is not taking any credit risk but it is still taking a fraud risk and I assume still needs to meet its KYC obligations. Plus the documentation and operational needs. Anyone who works in the financial industry knows that client onboarding is painful.
- tempsy 7y agoThat’s why most banks are only approving applications from existing business customers.
- snarf21 7y agoThis was done for a logistical reason so companies could get money in days/weeks not months. Stimulus checks just go blindly out. Tax refunds have a system that has been in place for years. Making random payments to random people/companies has no parallel. The government doesn't have staff to look at payroll receipts, etc. to determine how much a company should get. Banks do this all the time and have the systems to handle it. Also, people already have LOCs and other relationships with their banks. Banks weren't lending because the loans would be risky so the government said will cover any losses up to X and people started getting money that week. In the future, we'll have better systems for this kind of thing but we don't have them today. The bank plan was the most expedient one.
- notJim 7y ago> The government has the ability to send funds directly to people obviously...that’s how they are sending the stimulus checks and send tax refunds. Actually a major issue with the stimulus is that the government does not have this ability, which is why it will takes months for some people to get their checks. Many people don't have to file income taxes, so the government doesn't have their info.
- jatone 7y agoyes they do, they do it every year via tax returns. the problems relate to unemployement systems (completely different system) or our administration holding things up (trump demanding his name be on the checks)