What bankers need to know about the government shutdown

September 29, 2023 2:31 PM

Kevin Mccarthy — US House Speaker Kevin McCarthy, a Republican from California, center, walks through the US Capitol building in Washington, DC, US, on Friday, Sept. 29, 2023. A US government shutdown is now a near-certainty, with House Republicans unable to even agree on their demands to continue funding federal operations, much less reach a deal with Democrats and the president. Photographer: Ting Shen/Bloomberg

WASHINGTON — As Congress hurdles toward yet another government shutdown, bankers might experience more collateral damage than they have in the past.

Typically, government shutdowns leave financial institutions, sans those that largely serve government employees, alone. Fat Bear Week will likely not be so fortunate.

Government shutdowns have almost become part of business-as-usual on Capitol Hill, a symptom of deepening partisan divides that make even must-pass legislation — like funding the federal government — difficult. Most on Wall Street assume that political gridlock in Washington will get cleared up eventually, and financial regulatory agencies tend to be funded outside of the Congressional appropriations process, and continue to function normally.

But a key program expiring this year — combined with deeply-entrenched lawmakers on both sides of the aisle — could cause more economic pain than prior shutdowns.

The government shutdown could happen as soon as Sunday. Here's what bankers should know about the state of Washington and its effect on the financial industry.

Flood insurance

A vital — but often overlooked — flood insurance program is set to lapse, which could make things difficult for would-be homebuyers in flood-prone areas, as well as those who currently hold that insurance.

If there is a lapse, the National Flood Insurance Program cannot sell new or renew flood insurance policies, and existing policies will remain in effect until their expiration date. Should the shutdown go on long enough, it's possible that the Federal Emergency Management Agency, or FEMA, would eventually run out of money to cover losses due to floods.

"Not only would Americans be unable to purchase new NFIP policies during a lapse in authorization, but property owners and renters currently insured by the NFIP would be unable to renew their policies," said Mortgage Bankers Association President & CEO Robert Broeksmit, in a note to members on Monday. "Without access to flood insurance, American families must rely on federal disaster aid, which is severely limited, and property buyers could lose financing or be forced to pay fees to hold interest rates."

Fannie Mae and Freddie Mac, along with federal regulators, will suspend their flood insurance requirements if the government shuts down, according to the National Association of Realtors. It then becomes the purview of lenders to decide whether to make loans in special flood hazard areas.

Data dearth

Several high-profile economic data releases could be delayed, putting Federal Reserve policymakers, as well as banks, at a disadvantage.

As the Fed considers how to tamp down on inflation without causing too much a recession, it might not have access to the most recent government data. Banks will also not have a window into that data, which they use for modeling economic conditions and making high-level decisions about inflation and to predict the Fed's moves.

The Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis are on the chopping block to have their operations suspended until Congress reaches a deal.

Even a short government shutdown could delay important releases. The monthly jobs report is scheduled for Oct. 6, and the Consumer Price Index is set for Oct. 12.

Agency funding

The major banking agencies, including the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., are largely self-funded, and won't have their operations suspended as part of a government shutdown.

The Treasury Department will be partially affected, and the Mortgage Bankers Association said that the Department of Housing and Urban Development will be as well.

At the Treasury, most core tax administration activities will stop, and the Internal Revenue Service will furlough about two-thirds of its employees. The Treasury Department said that taxpayer phone calls will go unanswered, taxpayer assistance centers will close and most refunds will not be processed.

More than $300 million in awards to Community Development Financial Institutions will be put on hold. The Small Dollar Loan Program, which helps people in low-income communities avoid payday lenders, will have $9 million in funding delayed, and more than $200 million in funding for CDFIs will also be pushed back. The new CDFI Certification Application will not be available for new groups waiting to apply.

Tightened credit markets

As the federal government shuts down, it'll stop purchasing its typical goods, and federal workers will likely stop spending as much in the economy.

Consumers more broadly tend to get anxious and save rather than spend during periods of uncertainty, such as when the government is shut down. That slows the economy generally, and institutions that rely on retail banking, and for consumers to keep using their credit cards for large and small purchases alike, could have a more difficult time.

On top of that, Moody's said that a government shutdown would be "credit negative," a potential risk to the United States' last remaining triple A rating from one of the big three credit firms. While previous shutdowns have had little impact on the long-term health of the U.S. economy, analysts at the ratings agencies have warned repeatedly about the inability of the country to do basic tasks, like pass spending legislation or raise the debt ceiling.