Risks to Banks from the Federal Shutdown

Missed loan payments

Some 800,000 federal workers could potentially miss a paycheck or two, and if that happens many will likely struggle to make their monthly home, car or other loan payments. Some banks say they will make concessions - offering forbearance or letting customers pay interest but not principal, for examplebut they hope it doesn't come to that.Image: Thinkstock

Loan bottlenecks

The Internal Revenue Service is closed for business, so there's no one around to verify the income of consumers who have applied for mortgage loans. Delays in processing mortgages now look to be a given, but if the shutdown lasts too long contracts could be torn up and banks could lose out on loans altogether.Banks can also expect longer-than-usual wait times on requests for loans backed by the Federal Housing Administration. The FHA is open, but it's operating with a "limited staff," according to its commissioner, Carol Galante.Image: Thinkstock

Frustrated business customers

Banks can take applications for Small Business Administration loans but they can't process the government-guaranteed loans until the shutdown ends and the SBA re-opens. Bankers are playing down the impact now but they acknowledge that businesses could really feel the pinch if the shutdown lasts a week or more. On Oct. 1, the SBA eliminated all fees on loans of $150,000 or less, and many business owners waited until that day to apply for loans so they could avoid paying fees. Now they will have to wait even longer.Image: Thinkstock

Frustrated farmers

Similar to the SBA, the Farm Service Agency, an arm of the Department of Agriculture, offers government guarantees on loans made to farmers and ranchers. The agency is already dealing with a roughly $430 million backlog of loans due to a perpetual funding shortage and, with all of its offices closed due to the shutdown, that backlog is sure to grow.Image: Thinkstock

More regulatory delays

The industry's primary regulators are unaffected by the shutdown, but two other agencies involved in rulemaking, the Securities and Exchange Commission and the Commodity Futures Trading Commission are working with skeleton crews. Both agencies are helping to write the Volcker rule, a long-delayed linchpin of the Dodd-Frank Act that will restrict banks' proprietary trading. Regulators had expected to release a final rule by year's end, but they'd be challenged to meet that target if the shutdown drags on. The SEC and CFTC are also involved in writing a host of new derivatives rules that have not yet been finalized.Image: Thinkstock

Economic uncertainty

The idling of 800,000 able-bodied government workers is sure to hit the economy. If they're not getting paid then they're not buying cars or taking trips or dining out. They're also not contributing to retirement plans or taking out loans, and depending on how long the shutdown lasts, many may soon need to start dipping into savings. Also looming large is the Oct. 17 deadline for raising the debt limit. On Wednesday, several top Wall Street executives met with congressional leaders and urged them not to monkey around with the debt ceiling."There's no debate that the seriousness of the U.S. not paying its debts, whether it's Social Security checks, small business loansall the way up to the Treasury notes and bills, is the most serious thing we have," said Brian Moynihan, Bank of America's CEO.Photo: Bloomberg News