What bankers need to know about a government shutdown

December 20, 2024 12:25 PM

Rep. Marie Gluesenkamp Perez, D-Wash., shown in September 2023, was one of two Democrats who voted for a measure to extend federal funding through mid-March. The other was Rep. Kathy Castor, D-Fla. Thirty-eight Republicans voted against the measure, which failed 235-174.

WASHINGTON — As Congress hurtles toward yet another government shutdown, this one precipitated by a social media post from President-elect Donald Trump's megadonor Elon Musk, there are a few programs affecting bankers that might be on Washington's chopping block.

Typically, government shutdowns leave financial institutions, sans those that largely serve government employees, alone.

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 next 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 Friday at midnight. Here's what bankers should know about the state of Washington, D.C., and its effect on the financial industry.

A church in Swannanoa, North Carolina, was destroyed after Hurricane Helene swept through the area in late September 2024.

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Flood insurance

A vital — but often overlooked — flood insurance program is set to lapse alongside the government shutdown, 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. 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 would eventually run out of money to cover losses due to floods. Homeland Security Secretary Alejandro Mayorkas warned in October that the agency doesn't have enough funding to make it through hurricane season after back-to-back disasters.

"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 and CEO Robert Broeksmit, in a note to members last year when the issue surfaced in the last potential government shutdown crisis. "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 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 list 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 Jan. 10, and the Consumer Price Index is set for Jan. 15.

Agency funding

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

The Treasury Department would be partially affected, and the Mortgage Bankers Association said the Department of Housing and Urban Development would 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 taxpayer phone calls would go unanswered, taxpayer assistance centers would close and most refunds would not be processed.

Awards to Community Development Financial Institutions would be put on hold. The Small Dollar Loan Program, which helps people in low-income communities avoid payday lenders, would have funding delayed, and funding for CDFIs would also be pushed back. The new CDFI Certification Application would not be available for new groups waiting to apply.

Tightened credit markets

The Small Business Administration would shut down. The agency's disaster relief programs, which have seen increased usage in the wake of Hurricane Helene, would technically remain open, but the program was counting on the continuing resolution to replenish its lending capacity.

There's other knock-on effects to the economy and banks. As the federal government shuts down, it will stop purchasing its typical goods, and federal workers would 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 or credit cards could have a more difficult time.

Social Security payments continue during a shutdown, but NAP and WIC payments stop once they run out of reserves, which is often quick, according to a note from Jaret Seiberg, a managing director at TD Cowen.

"In addition, government employees including the military are not paid," he wrote. "Banks will be pressed to offer forbearance on credit card and mortgage debt."