Fed: Banks Are the ‘Shock Absorbers’ of Real Economy as Pandemic Continues

The nation’s banks have been the “shock absorbers” for the real economy as the pandemic causes turmoil in financial markets, the Federal Reserve said in its supervision and regulation report released today. The Fed noted that banking organizations have been a source of strength, rather than strain, to the economy, entering the pandemic with substantial capital and liquidity and improved risk management and operational resiliency since the 2008 crisis.

The Fed highlighted that banks have provided access to lines of credit for corporate borrowers and played a significant role in supporting small businesses via the Paycheck Protection Program. The report noted that banks took a number of actions to maintain financial and operational resiliency and as a result, capital levels remain robust—“indeed, they have actually increased during the COVID event”—aided by timely policy response and capital preservation measures.

“Despite a great deal of turmoil in financial markets, the solvency of the banking system has not been in question. Banks have increased lending, absorbed a surge of deposits, and worked constructively with borrowers,” the Fed said in the report, adding that “despite operational challenges, both banks and examiners have generally transitioned to a largely remote work environment without significant disruption to the provision of financial services. Bank branches have begun to reopen in line with local conditions and relevant guidelines.”