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Business Unplugged™
This blog features Carol Roth's tough love on business and entrepreneurship, as well as insights from Carol's community of contributors.

Is PPP the Future of Traditional Banking?

Written By: Niles Costello | Comments Off on Is PPP the Future of Traditional Banking?

COVID-19 has transformed so much of our daily life – maybe you’ve heard.

One industry primed for permanent transformation is traditional banking, the sleepy but critical business of taking deposits and making loans. Don’t be surprised if the Paycheck Protection Program (PPP) remains a permanent piece of the traditional banking landscape.*

To recap, the federal government’s response to COVID-19 has been massive and multifaceted. Using a football analogy, we went on defense with lockdowns, masks, and social distancing. On offense, Operation Warp Speed provided a high risk, high reward downfield passing attack, and PPP a grinding running game.

Here’s how PPP works:

  • Banks use their capital to make loans they otherwise would not make in a million years. Banks are (were?) not in the business of lending money to businesses that are not operating, especially on an unsecured and nonrecourse basis, and at miniscule interest rates. There are regulations against such things!
  • The federal government guarantees full repayment to the banks – borrowers are secondary sources of repayment. Full repayment is subject to loan funds being used for an eligible purpose – this is taxpayer money after all! Eligible purposes include primarily payroll, but also rent, utilities, and other items.
  • For their trouble, banks receive a fee for processing the loans on the front end and the forgiveness applications on the back end. The fee is variable depending on individual loan size, between 1% and 3% of the funded amount.
  • The business community then uses the funds (consistent with the directives of the federal government).

Propriety of federal intervention into the economy on such massive scale aside, there is something about the program that, uh, sort of made sense in the context of COVID circa March 2020.

Remember, we were initially looking at “two weeks to flatten the curve.” With PPP funds, companies retained employees in the interim, targeted at 10 weeks. Efficiencies were actually realized when case counts dropped in the summer and many companies quickly resumed operations.

Of importance: banks were not making regular loans at this time. PPP provided an alternative use of dormant capital at little risk of loss to the lenders. Much more efficient than firing up the federal printing press! What’s not to like?

Well, for one, the effective impact of PPP has been a federal takeover of wages, as laundered through individual businesses via the financial sector. This is not a stretch and is eerily similar to the manner in which other highly regulated industries like healthcare and retirement savings are laundered through individual businesses via the financial sector.

Then there’s regulatory permanence. The Federal Reserve was established in 1913 as a response to severe recent banking crises. Twenty years later during the Great Depression, the Federal Deposit Insurance Corporation (FDIC) was established as a response to, let me see here, where are my notes, ah, there it is… severe recent banking crises.

Let’s not forget regulatory creep. Perpetual PPP provides (PPPPP?) strong similarities to the Alternative Minimum Tax (AMT). Enacted in 1969 with the extremely targeted purpose of preventing 155 taxpayers from “exploiting loopholes” (an exquisitely redundant concept) the AMT is projected to impact 7 million U.S. taxpayers in 2025.

Finally, there’s logic. Permanent PPP provides the potential (Px6?) for offshoring political issues such as unemployment and minimum wage concerns, along with entitlements such as Medicare, Medicaid, and Social Security. This appears irresistible. We are now on round three of PPP (the first round was actually two as initial funding was quickly oversubscribed).

Raise your hands if you think an ordinary 0.2% increase in unemployment will not require an URGENT RESPONSE NOW, regardless of the political party in power.

What does this mean for the business community? That’s a separate discussion and more to come, but in brief it could mean:

  • New business models such as processing companies (already happening)
  • Tightening credit standards leading to increased “non-bank” lending, leading to effective normalizing of “actual” prevailing interest rates throughout the marketplace
  • Increased automation leading to full-blown AI

Truly a potential revolution, but don’t worry, savers will continue to get crushed.

It’s nice that in these uncertain times some things never change.

 

* The author’s opinions don’t necessarily reflect those of Carol Roth or Intercap Merchant Partners, LLC

Article written by
Niles Costello is a veteran banker with extensive experience working with small- to medium-sized businesses and commercial real estate investors.