Financial Services

Treasury and Federal Reserve Coordinate to Boost Investments in MDIs and CDFIs

In early March, a series of programs were announced by the U.S. Department of the Treasury, and the Federal Reserve subsequently announced rules changes to leverage the impact of the programs.  The largest program announced, dollar-wise, by the Treasury Department was the creation and funding of the Emergency Capital Investment Program (ECIP).  The program was designed by Treasury officials “to support access to capital in communities traditionally excluded from the financial system and that have struggled the most during the COVID-19 crisis.”  ECIP will invest $9 billion in Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) to leverage their efforts to provide financial products for small and minority-owned businesses and consumers in low-income and underserved communities.  The application process was created immediately after the funding of the program and investments will be made starting in April.

Smaller institutions will benefit from ECIP as $2 billion was designated for participating institutions with less than $500 million in assets.  An additional $2 billion was reserved for mid-sized institutions with $500 million to $2 billion in total assets.  The Treasury’s investments will have no dividends or interest payable or accruing during the first 24 months after issuance.  In effect, “free money” for two years.  Thereafter, funds distributed will have a capped low-cost dividend or interest rate.  After the announcement, the Treasury announced they are developing additional “deep impact” metrics to further incentivize targeted investments by participants in those communities most in need of capital.

In addition to the creation and funding of ECIP, the US Treasury also created two other investment programs that are complementary to ECIP.  These are:

  • CDFI Rapid Response Program: a $1.25 billion program of grants for depository and non-depository CDFIs intended to respond to the economic impact of the COVID-19 pandemic.  Funding, provided by Treasury, will be distributed to recipient institutions by a formula allocation.  Monies will provide grants for a variety of needs in response to the pandemic. The funding round was opened prior to ECIP on February 25, 2021.
  • Emergency Support and Minority Lending Program: a $1.75 billion program to expand lending, grant making, or investment activity in low/moderate-income minority communities.  Program funding will provide a combination of grant capital and technical assistance that target communities impacted by the COVID-19 pandemic.  Eligible participants include depository and non-depository CDFIs, including a $1.2 billion set aside for a new category of CDFIs, “Minority Lending Institutions” or (MLIs).  The ESMLP will not be open until June 2021.
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Each of the three Treasury programs was created under the Consolidated Appropriations Act, 2021.  That congressional act directed the US Treasury Department to take aggressive action to address the impacts of the ongoing COVID-19 pandemic while promoting an equitable economic recovery.

To complement ECIP, the Federal Reserve announced they will alter their capital calculation rules so that Treasury’s investments under the program qualify as regulatory capital of insured depository institutions and holding companies so that the investment can be multiplied by the inverse of the institution’s capital reserve.  For instance, an institution maintaining a 10% capital reserve with a $1 billion interest and dividend-free investment could create $10 billion of loans or other assets.

Per all rules, the Federal Reserve rule will be effective immediately upon publication in the Federal Register.

About the Author

Carl is certified in the Scaled Agile Framework (SAFe), a Scrum Master, and a Six Sigma Green Belt project manager with more than 25 years of experience in financial services overseeing large-scale development global, multi-currency accounting, regulatory reporting, and financial reporting software platforms. He has hands-on experience completing, reviewing, and filing Federal Reserve, FFIEC, and IRS reports, including Call Reports, Y9C reports, 2900 reports, TIC reports, and arbitrage rebate reports.

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