The #PPPloans debacle at @BankofAmerica is not an accident. It is a carefully calculated manoeuvre by the top brass at B of A designed specifically to trim lossmaking depository accounts and increase loyalty of accounts that are already revenue-positive.

Thread. 1/20

B of A’s strategy is a confluence of several things. For one, it speaks to the staffing limitations of any banking operation. There simply is not enough capacity at any bank to process all incoming applications given the limited man-hours of its limited staff. 2/20

Related, limited staffing means that existing customers with existing track records of repayment are automatically the most creditworthy. Not only have they already been underwritten but they are also the most profitable, and also the most loyal by default. 3/20

It makes business sense to open applications only to existing debtors, and after the first wave has subsided, open it up to the rest of applicants. 4/20

Second, the strategy enables B of A to use the “market mechanism” to discover the least loyal customers among its unprofitable base. Unprofitable customers are those who do not take out loans or credit cards with the bank. 5/20

Business accounts are expensive for financial institutions to maintain as they require massive amounts of compliance review and, depending on the volume, potentially a lot of manual labour (e.g. tellering). These services are all loss leaders for FIs. 6/20

Financial institutions do not like unprofitable customers. They take up resources, both labourwise and capitalwise, that could be otherwise allocated to finding and exploiting profitable opportunities. 7/20

If a customer is both unprofitable and disloyal (meaning the bank is likely to lose the customer eventually anyway), this market process is perfect to discover them and shed them to other FIs. 8/20

Third, and most importantly, the debacle speaks to the broken mechanisms of the #SBA and the top-heavy parts of government that pushed this particular solution. There are many layers to this. 9/20

For starters, the SBA is not designed to be a bailout mechanism, which is what the #PPPloans programme is. By making the bailout into a loan, the government is attempting to make the SBA lend more than 10x its annual capacity in a week. 10/20

The SBA was not designed to do this. Importantly, neither are any financial institutions. Faced with a flood of requests, triage becomes a necessity. 11/20

In normal times, the SBA is considered to be relatively slow. Like most federal agencies, it is usually understaffed. The automatic nature of the #PPPloan means that the pain point for financial institutions vis a vis SBA will come at the moment of requesting purchase. 12/20

SBA has scheduled earliest purchase seven weeks from now. Given the volume of expected purchase requests, financial institutions are expecting a huge backlog. Most likely FIs will be left holding low-yield loans for at least several extra weeks, if not months. 13/20

This is not an attractive proposition for most FIs, especially banks, who make their money with fees, not with interest. (This is the model pursued by the #PPPloan—fees of up to 5% per loan.) 14/20

The prospect of holding large amounts of debt of uncertain quality for extended periods of time makes banks nervous. Absent regulatory compulsion, they will likely try to minimise this exposure. 15/20

This debt is not only uncertain because the customer is new. It’s also because the SBA completely bungled the rollout of the #PPP. As of today—the day after #PPP rollout—no Standard Operating Procedure (SOP) on the programme has been released. 16/20

SOPs are widely relied on by FIs at the moment of requesting purchase from the SBA. They lay out rules in often painstaking detail regarding what documents are required for purchase. 17/20

Existing borrowers are more likely to already have full documentation of SBA requirements. This means that if they default, the bank can quickly and easily request a purchase from SBA. New customers require SBA vetting that has not yet happened. 18/20

Remember, banks are in business to make money, not to help you. A #PPPloan may be fully secured by SBA, but if SBA rejects a purchase request after disbursal due to missing paperwork, the bank is out of pocket. Everyone is CYA at the moment. 19/20

And @BankofAmerica is nothing but the quintessential bank: calculating, and looking out for number one.

But nothing you didn’t already know.

/end