Pandemic Planning: Keeping the Bank Off the Critical List
Gary Crum

Regulatory agencies now require banks to integrate a pandemic emergency plan throughout the organization. We offer some guidance to make sure your bank is a survivor.

This past December, the Federal Financial Institutions Examination Council (FFIEC) issued guidance regarding financial institution preparedness for a pandemic. The new guidance was a result of information learned from running a simulated pandemic exercise in the fall of 2007 involving more than 2,775 organizations, of which 62% were banks and credit unions with securities firms, insurance companies, and government agencies comprising the remainder. This exercise was sponsored jointly by the U.S. Treasury and the Securities Industry and Financial Markets Association. The exercise was conducted by the Financial and Banking Information Infrastructure Committee (FBIIC) and the Financial Services Sector Coordinating Council (FSSCC).

As a result of the findings from the exercise, financial institutions will be expected to update their business continuity plans to reflect the additional risk of pandemics.

“We expect institutions to operate in a safe and sound manner. That requires a business continuity plan. We look at it from a risk focus standpoint,” says Stephen R. Malphrus, staff director for management at the Federal Reserve Board. “With pandemics, the risk is different because the scale could be worldwide and because the duration is so long. The Spanish flu pandemic of 1918 lasted more than 18 months.”

Malphrus also cites the “doctrine of social isolation” indicating health authorities would recommend public assemblies be limited. Understanding state and local policies will be critical to any successful plan. “Work with local health and safety authorities,” says Malphrus and “understand their plans for school closings, quarantines, and isolation.”

The guidance states, “Experts believe the most significant challenge may be the severe staffing shortages that will likely result from pandemic outbreaks.” Under a severe outbreak scenario, people will stay home not only because of their own sickness, but also due to fear of becoming ill, illness of family members, and school closings. As a result of the exercise, 90% of the participants reported school closings as having either some or a significant impact on their organizations.

Absenteeism was a greater problem for large banks. “Larger institutions had more difficulty,” said Mary Frances Monroe, manager for supervisory policy and guidance in the FRB Division of Banking Supervision and Regulation. “Coordinating the large numbers of absentee replacement was a problem.”

Planning for this absenteeism is a key part of any business continuation plan (BCP) but is especially critical under a pandemic plan. “Financial institutions should look at pandemic plans in terms of robustness, management succession, and cross training,” says Malphrus. Dr. Pat McConnell, a visiting fellow at Macquarie University Applied Finance Centre in Sydney, Australia, teaches courses in operational risk, systems risk, and enterprise risk management. He offers three key points in pandemic planning:

Don’t panic: While pandemic risk is very real, it is currently a possibility rather than a probability; there is still time to think through the impact thoroughly.

Technology will work: Provided that attention is paid to operating and maintaining a firm’s technology, it should not fail in a pandemic. People are the biggest risk.

There is no competitive advantage in disasters: Boards should seek whenever possible to cooperate with others in the industry to minimize the disruption caused by a pandemic; the key is continuing as an industry to serve the community.

Malphrus also finds strength in the work-sharing approach. “Banks are encouraged to consider buddy bank operations. This system worked well during Katrina. Essential services were still provided.”

“A lot of community banks outsource back-office work to the same third-party vendors, making sharing easier,” continues Malphrus. “We work with these servicers as well. A benefit of outsourcing is the vendors are usually working in multiple geographic locations and have sophisticated methods for assuring continuity.”

Dr. McConnell suggests the following exercise for a board to get a handle on minimal required staffing:

“If the board is attempting to prioritize its activities, it should first ask: ‘Who was working over the Thanksgiving holidays?’ That will give good insight into what is absolutely necessary to run the business in survival mode. In other words, treat the disruption as a prolonged holiday.

“Then it should ask: What if 30% to 40% of those ‘essential’ staff were absent from work, who would replace them? Most boards will be surprised at the numbers and level of staff required just to keep the business running.

“The next question should be: Who can we send home if we did nothing but basic operations for six months? In all banks, there are lots of functions that are concerned with the future rather than the present: sales/marketing, systems development, strategy, policy development, etc. Those employees can be sent home.

“Finally, consider this: What businesses will slow down naturally when a pandemic occurs? For example, in a flight to quality, trading in some markets will dry up, new business loans will halt, even mortgage lending will slow down if not stop altogether. These businesses can be considered ‘on life support’ during a pandemic, and the staff sent home.”

It is important to identify those who can be sent home since they will become the pool of resources for cross training. Once those personnel are identified, it becomes essential to establish realistic training goals within firm time lines. Periodic retraining is also necessary to keep everyone current in policy and technology and to account for turnover.”

The new guidance specifies that cross training should be a part of the financial institution’s overall BCP and business impact analysis (BIA). According to the guidance, the BIA should “assess cross training conducted for key business positions and processes.”

Financial institutions seem to be doing pretty well with cross training. The exercise report indicated that during the height of the simulated pandemic, a substantial majority of organizations across the sector reported they had a sufficient number of cross-trained employees to conduct essential operations and to meet increased online customer demand.

“Cross training also makes your current operations more efficient,” explains David B. Opton, chief executive officer and founder of ExecuNet, a career and business network and advisory firm for high-level executives. “With cross training, the customer is going to receive better service during normal times.”

Recruiting new permanent employees during a pandemic crisis is probably not realistic. Demand will quickly overtake supply, and providers of such help would have their own staffing issues to overcome. In fact, several temporary and permanent recruiting firms contacted reported they had no special pandemic business continuation programs set up for either their company or for clients.

Opton’s advice is to look within your institution. “Bank alumni might provide a source of skilled personnel. Retirees and former employees offer a pool of potential replacements,” offers Opton. “If employees were managed effectively while they worked at the bank, there is a much better chance of getting them back to work. Keeping absent employees in the loop with frequent updates on what’s going on will also help get them back to work.”

In addition, a well-developed management succession plan is critical during times of crisis. “Bank directors will want to engage management to assure they have a plan in place that is well thought out, thorough, and updated periodically,” says Malphrus.

“Succession planning is also an important part of management retention during normal times,” adds Opton. “A stable workforce before a crisis is going to be a great strength during a crisis. We do a survey every year to report on management retention. We find that most organizations understand that retention is a problem, but they are seldom effective in doing anything about it.”

To keep from spreading the disease, many experts also suggest eliminating as much face-to-face contact as possible, and holding meetings by telephone. While this may work for meetings, it is perhaps wishful thinking that many jobs can be converted to telecommuting jobs.

The guidance issued by regulators cautions that even the best preparations for telecommuting could encounter problems in the event of a pandemic. Specifically, it warns that increased use of the Internet by at-home workers and bored Web stay-at-homes would likely reduce residential service Internet speeds by 50%.

In addition to raising concerns about performance problems for telecommuters, the report reconsiders the importance of telecommuting’s role during a pandemic.

For instance, many organizations said in the questionnaire that telecommuting isn’t feasible for some employees because their jobs cannot be done remotely. This would include tellers and other customer service personnel as well as back-office staff who rely on special equipment or work with onsite computer systems. Some also said that they don’t have the necessary IT equipment to support telecommuting or that they’re concerned about security issues. Yet, banks will have to find a way to deal with these issues in order to present a picture of preparedness.

“Bank examiners will look for pandemic planning as an addition to the bank’s current business continuation plan,” says Malphrus. “The next version of examination procedures will be modified to include pandemics.” In the meantime, he suggests banks build an addendum to their present business continuation plan that includes provisions for dealing with manpower shortages during the long period of time associated with a pandemic.

And beyond that? “It wouldn’t hurt to include a plan for dealing with a second wave,” adds Monroe.

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