Are Banks Affected by a Government Shutdown?

A government shutdown occurs when Congress fails to pass the necessary appropriations bills to fund federal government operations for the upcoming fiscal year, or when a temporary funding measure expires without a new one in place. This lapse in funding requires many federal agencies to cease non-essential functions and furlough a significant portion of their workforce. This article clarifies how such a scenario can affect the banking sector and its customers.

How Government Shutdowns Affect Banking Operations

During a government shutdown, the operational status of federal financial regulatory bodies is maintained. Agencies like the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Federal Reserve are funded independently of annual appropriations, remaining open for core operations. Essential functions related to bank supervision, such as maintaining oversight for safety and soundness, proceed without interruption. However, non-essential activities, like routine bank examinations or approvals for new bank charters, might experience delays or operate with reduced capacity.

Federal lending programs can face significant disruptions during a shutdown. Programs from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Small Business Administration (SBA) rely on government funding and personnel to process new loan applications and provide guarantees. New FHA loan commitments may be delayed, and processing of new VA and SBA loans can be significantly slowed or halted entirely as relevant government agencies may not be fully operational. This impacts banks’ ability to originate these government-backed loans, leading to a backlog of applications once operations resume.

Direct Impact on Individual Bank Customers

Individual bank customers may experience varying effects depending on their financial interactions with the federal government. Federal employees deemed non-essential are furloughed and will not receive paychecks during a shutdown, though a 2019 law ensures they receive back pay once funding is restored. Essential employees, while continuing to work, also face delayed pay. Banks do not withhold these funds; rather, the source of the payment from the federal payroll is interrupted.

Social Security, Medicare, and other federal benefit payments are mandatory spending programs, funded independently of annual appropriations. Direct deposits for these benefits to bank accounts usually continue without interruption. While benefit payments are safeguarded, administrative services like obtaining a replacement Social Security card or processing new Medicare applications may experience delays due to reduced staffing at relevant agencies.

Customers applying for new federal loans (FHA, VA, SBA) are likely to face delays. While private lenders originate these loans, government approvals and guarantees can be stalled due to agency closures or limited staff. This means closing on a new home or securing a business loan might be postponed until agencies resume full operations. Existing loan payments to banks generally continue as scheduled.

Broader Economic Effects on the Banking Sector

A government shutdown can introduce economic uncertainties that indirectly affect the banking sector. Reduced consumer spending, particularly by unpaid federal workers, can lead to a slowdown in various sectors, including retail and services. This slowdown can impact the ability of individuals and businesses to make timely loan repayments, potentially affecting banks’ asset quality.

Business confidence and investment may decline during periods of government uncertainty. Businesses might become hesitant to take out new loans or undertake expansion projects, leading to decreased demand for bank services like commercial lending. This can translate into reduced loan origination volumes.

A prolonged shutdown can increase the risk of loan defaults. Federal employees without pay may struggle to meet financial obligations, including mortgage and car loan payments. Businesses heavily reliant on government contracts may also face liquidity issues, increasing their default risk and impacting banks’ profitability through higher loan loss provisions.

Safeguards and Bank Stability

The U.S. banking system is equipped with safeguards to maintain stability during government disruption. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to specified limits. Deposits are insured up to $250,000 per depositor, per insured bank, for each ownership category. This coverage applies regardless of a shutdown, providing assurance to account holders.

The FDIC is funded through insurance premiums paid by member banks and operates independently of annual appropriations. This independent funding allows the FDIC to continue operations, including resolving failed banks and protecting depositors, even during a shutdown. The overall resilience and capital strength of U.S. banks are routinely assessed through stress tests, which ensure they can withstand economic shocks.

While a government shutdown can affect specific federal services and loan programs, core banking functions remain operational. Individuals can continue to access accounts, make deposits and withdrawals, and conduct transfers and payments. Banks are generally prepared to manage disruptions and often work with customers who might face temporary financial hardship due to a shutdown.