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For release on delivery
12:30 p.m. EDT (11:30 a.m. CDT)
August 26, 2020

The Pandemic’s Effect on the Economy and Banking

Remarks by
Michelle W. Bowman
Board of Governors of the Federal Reserve System
Kansas Bankers Association
CEO and Senior Management Forum/Annual Meeting

Topeka, Kansas
(via webcast)

August 26, 2020

-2Good afternoon. It’s great to be with you, and I look forward to our discussion.
As you all know, the COVID-19 pandemic has caused significant disruption and hardship
in nearly every aspect of our lives, and it continues to weigh heavily on our national
economy, which is why it will be the central focus of my remarks here today. Let me set
the stage for our discussion by outlining the economic effects of the pandemic most
relevant to the banking sector, describing the Federal Reserve’s response to the crisis, and
then making some observations about conditions for smaller banks.
The Pandemic’s Effects on the Economy and Banking
We began this year with the economy in excellent shape—by some measures the
strongest in decades. From my seat as a monetary policymaker, we appeared to be in a
good position regarding both legs of our dual mandate, which are maximum
employment and stable prices.
But that picture was dramatically altered with the onset of the COVID-19
pandemic. Efforts to contain the spread of the virus caused a sudden stop in economic
activity during March and April. While the extent of the closures and shutdowns varied
widely throughout the country, the sudden loss of employment and the contraction in
output were like nothing our nation has experienced before.
The decline in activity was mostly due to temporary business closures, and the
economy has bounced back noticeably in recent months as businesses reopen and fiscal
support was distributed to many Americans. Even so, the economy is still far from back
to normal. The future course and timing of the recovery is still highly uncertain, and its
pace and intensity are likely to vary across areas of the country—heavily influenced by
the decisions of state and local governments. That speaks to another aspect of this
episode that is unusual—how the timing and severity of the pandemic’s impact seem to
differ greatly from one area to the next.
Among Kansas’s major industries, oil and gas production and equipment

-3manufacturing have been hurt by the worldwide slump in energy demand. Aviation
manufacturing has been hit hard by the downturn and by the uncertainty over the
recovery in air travel. Agriculture continues to face challenges but is faring somewhat
better than many sectors of the economy. Ag producers are still facing tough financial
conditions, including the low commodity price environment. While most indications are
that agriculture land prices continue to hold fairly steady, I have seen some reports that
less-productive land has been showing some hints of cracks in valuations.
Turning to employment, nationwide, we know that the initial job losses were
heavily concentrated among the most financially vulnerable, including lower-wage
workers, young people, women, and minority groups. According to the Fed’s latest
Report on The Economic Well-Being of U.S. Households, 20 percent of people surveyed
in April reported a recent job loss. Among those surveyed who live in households with
annual incomes below $40,000, the reported job loss was nearly double that, at around
40 percent. 1 That said, both of those figures are likely to include a number of layoffs
due to pandemic-related shutdowns of businesses that were hopefully only temporary.
Households were in a generally strong financial position at the beginning of this
year, but the restrictions implemented to fight COVID-19 resulted in an unprecedented
spike in unemployment, which likely led to a number of families finding it difficult to
keep up with their payment obligations. That is especially true for lower-income
households, which may have had much less of a financial cushion before the onset of the
crisis. Along with our monetary policy actions, stimulus checks and enhanced
unemployment benefits provided in the CARES Act have been a substantial and timely
source of financial support to households during this difficult time.

Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households
in 2019 - May 2020 (Washington: Board of Governors, May 2020),

-4Understanding the financial stress this could place on many borrowers, the Fed
and other federal regulators implemented guidance to encourage banks to work with their
borrowers. By mid-July, only around 8 percent of outstanding residential mortgage loans
were in forbearance, well below what many industry observers had feared. It remains
possible that the economic challenges will persist beyond the forbearance time period
provided in the CARES Act, and if so, we would almost certainly see some of these loans
transition into longer-term delinquency status or enter into renewed deferment periods.
Thus far, however, the data have been encouraging.
Turning to the impact on businesses, we know the effects have been most severe
in the services sector, especially travel, leisure, and hospitality. To give some sense of
the losses, employment in the leisure and hospitality sectors nationwide was down
nearly 40 percent in the 12 months through May and still down about 25 percent
through July. Retail employment fell 15 percent over March and April, though it has
recovered substantially since then, and in July it was 6 percent below the pre-COVID
It is encouraging to see that even those sectors most heavily affected by the
crisis are finding ways to innovate. Stores are adjusting hours and ramping up delivery,
restaurants are changing menus and creating outdoor space, distilleries shifted from
making bourbon to hand sanitizers, and independent businesses that hadn’t previously
relied heavily on technology are now using it to stay connected to customers and
regulate workflow.
Timely and supportive fiscal and monetary policy measures also have helped, but
with the progress of the recovery still tentative, I expect that many businesses will
continue to fight for survival in the months ahead, with the support of their lenders and
Looking ahead, the economic outlook will continue to evolve quickly. We

-5experienced a pronounced and very welcome bounceback in national retail spending and
housing activity over the early summer months. We also saw positive news on progress
toward a vaccine and in the effective treatment of patients. Even so, positive cases and
hospitalizations have risen in some areas and continue to weigh on some regions and the
overall economy. As Chair Powell has noted, the timeline for the recovery is highly
uncertain and will depend heavily on the course of the pandemic. We must therefore
recognize that progress toward a full recovery in economic activity may well be slow
and uneven
The Fed’s Response to the Pandemic
Now let me turn to the Federal Reserve’s role in the government’s response to the
pandemic. During the initial phase of the crisis, we took a number of actions to stabilize
financial markets that came under intense stress, including purchasing sizable amounts of
Treasury and mortgage-backed securities. To support households and businesses, the
Fed quickly lowered our target for the federal funds rate, which has helped to lower
borrowing costs but created a different challenge for financial institutions—depressed
net interest margins. The Fed has also supported actions by Congress and the
administration by creating a number of new emergency lending programs. These
programs were designed to restore and sustain proper functioning in certain financial
markets that had seized up in March and to facilitate the continued flow of credit from
banks to households and businesses.
One federal stimulus program that relied heavily on the participation and
expertise of community bankers is the Paycheck Protection Program (PPP). Working
through banks, the PPP program has delivered more than $500 billion to small businesses
to help them weather the storm. Community bankers played a crucial role in getting
these funds to businesses that needed it, showing once again how essential community
banks are to the customers they serve. And in response to feedback we received from a

-6number of community bankers, the Fed created the PPP lending facility to alleviate
balance-sheet capacity issues for banks that otherwise would not have been able to
provide PPP loans to their small-business customers.
The PPP was created to help small businesses keep their employees on staff, and
the Main Street Lending program is designed to support lending to mid-sized businesses
through the recovery. The Federal Reserve has not engaged in lending directly to
businesses before, but it was a step that seemed appropriate considering the breadth and
depth of the challenges we face. We continue to solicit feedback and make adjustments
to the program based on the suggestions received from bankers and other stakeholders,
and we continue to welcome your thoughts and ideas on how we can make Main Street
more effective. I would be interested to visit with those who may already have
experience with this new loan program, and I would also be interested to hear about how
you plan to use it to meet the needs of your business customers.
Together, these policy actions have helped stabilize financial markets, boost
consumer and business sentiment, and assist millions of households and thousands of
businesses harmed by the response to the pandemic. Credit markets, which had seized up
earlier this year, have resumed functioning.
In our other role as a prudential regulator and bank supervisor, the Federal
Reserve took several steps intended to reduce burden on banks and help them focus on
the needs of their customers and communities.
Together, with our fellow federal regulators, we delayed the impact of the CECL
accounting standard in our capital rules and temporarily eased the leverage ratio
requirement for community banks. We also delayed reporting dates for Call Reports and
other data collections. In addition, to address concerns about real estate appraisal delays,
we provided temporary relief from certain appraisal requirements.
From a supervisory perspective, beginning in late March the Fed paused

-7examinations for most small banks and took steps to lengthen remediation timeframes for
outstanding issues. We considered the exam pause an important step to provide bankers
time to adjust operations to protect the health of customers and employees, to prioritize
the financial needs of their customers and communities, and to play an essential and vital
role in implementing critical relief programs like the PPP.
As we continue to support the recovery and work to ensure that supervision and
examination is as effective and efficient as possible, I think it’s important to hear directly
from you, who are actually working in the economy, about the conditions facing your
communities and any challenges impeding your ability to meet the needs of your
customers. In addition to my regular outreach to community banks, I am currently
engaged in an effort to speak with every CEO of the more than 650 community banks
supervised by the Fed. I want to hear directly from bankers about what you are seeing
and your thoughts and ideas about the recovery. These conversations are incredibly
valuable to me as a bank regulator and policymaker. They give context to the mountains
of data we analyze and a unique perspective with real-world local examples to a complex
and dynamic economic picture. For those of you from Fed member banks who I have
not yet had the opportunity to meet or speak with by phone in these times of COVID, I
look forward to our conversation. Your local Reserve Bank will be in contact to find a
convenient time for us to meet.
Conditions for Smaller Banks
This audience knows better than most that smaller banks entered the pandemic in
strong condition. At the end of 2019, over 95 percent of community and regional banks
supervised by the Fed were rated a 1 or 2 under the CAMELS rating system. After
coming through the last financial crisis in generally stronger condition than larger banks,
smaller institutions had strengthened their capital positions and substantially improved
asset quality in the years since, leaving them better positioned to deal with the current

-8stress related to the pandemic. Likewise, credit concentrations, especially in
construction and commercial real estate, were lower for smaller banks than at the outset
of the last financial crisis, and risk management of concentrations improved over the last
decade. Smaller banks also entered the pandemic with high levels of liquidity, and this
liquidity has further improved with deposit inflows associated with pandemic-related
stimulus programs.
Overall, community and regional banks remain well positioned to continue to
extend credit and play an essential role in supporting our nation’s recovery from the
effects of COVID-19.
With this in mind, on June 15 the Federal Reserve announced our plan to resume
bank examinations. We recognize the unique and challenging conditions under which the
industry has been operating, and we will certainly consider that as we resume
examinations. Our initial focus will be to assess higher risk banks, particularly those with
credit concentrations in higher risk or stressed industries. Finally, we will continue to be
sensitive to the capacity of each bank to participate in examinations and strive to prevent
undue burden on banks struggling with crisis-related operational challenges.
The Road Ahead
Like many native Kansans, I am an eternal optimist, so let me end my formal
remarks on a hopeful note. While the road ahead is highly uncertain, and we don’t yet
know when the economy will return to its previous strength, America will recover from
this crisis, as it has from all of our past challenges. Our economic fundamentals are
strong, and we have the solid foundation of the entrepreneurial spirit and resiliency of
the American people. For its part, the Federal Reserve will continue to monitor progress
and respond promptly and flexibly to support the recovery. We will closely watch
economic and financial conditions, and we will use our monetary policy tools to respond
as appropriate to pursue our dual mandate of maximum employment and price stability.

-9We will also remain open to further adjustments to supervisory schedules and
expectations, as needed.
Thank you for the opportunity to speak with you today. I look forward to our