The Covid-19 pandemic has introduced unprecedented strains to the economy, enhancing concerns about credit risk and pressuring lenders’ ability to serve their borrowers.
Cybersecurity and other risk environments have also evolved, following government-mandated work from home models. These shifts are prompting bank leaders to evaluate their business continuity plans and pandemic planning initiatives to ensure they’re putting safety and efficiency first.
Bank Director’s 2020 Risk Survey, sponsored by Moss Adams, was conducted in January before the U.S. economy felt the full effect of the coronavirus. Yet, insights derived from this annual survey of bank executives and board members help paint a picture of how the industry will move forward in a challenging operating environment.
Most community banks have issued loans through the Paycheck Protection Program (PPP), the Small Business Administration’s loan created under the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in late March. These loans, which may be forgiven if borrowers meet specified conditions, allowed small businesses to retain staff, pay rent and cover identified operating expenses.
However, it’s likely that businesses will seek additional credit sources as the economy restarts. The lapse in business revenue generation will pose significant underwriting challenges for banks.
More than half of respondents in the 2020 Risk Survey revealed enhanced concerns around credit risk over the past year, while 67% believed that competing banks and credit unions had eased underwriting standards.
While there’s no way to determine what the future holds, near-term lending decisions will likely occur amid an uncertain economic recovery. There are some important questions institutions should consider when determining their lending approach:
- How will our organization evaluate lending to businesses that have been closed due to the coronavirus?
- Should a pandemic-related operational gap be treated as an anomaly, or should lenders consider this as they underwrite commercial loans?
- What other factors should be considered in the current environment?
- How much bank capital are we willing to put at risk?
Directors and executives who responded to the survey consistently indicate that cybersecurity is a key risk concern. In this year’s survey, 77% revealed their bank had placed significant emphasis on increasing cybersecurity and data privacy in the wake of cyberattacks targeting financial institutions, such as Capital One Financial Corp.
With more bank staff working remotely, cyber risks are even greater now. Employees are also emotionally taxed with concerns about their health, family and jobs, increasing the risk for errors and oversights. Unfortunately, the COVID-19 pandemic presents cybercriminals with a ripe opportunity to prey on individuals.
In the survey, respondents whose bank had weathered a natural disaster within the last two years were asked if they were satisfied with their institution’s business continuity plan. The majority, or 79%, indicated they were.
However, the Covid-19 pandemic isn’t a typical natural disaster. Although buildings haven’t been destroyed, companies are still experiencing significant disruption to their normal operations — if they’re able to operate at all.
These circumstances, coupled with expanding technology and banks operations increasingly moving to the cloud, will likely lead to further changes in business continuity planning.
In an interagency statement released a week before the World Health Organization declared that the Covid-19 outbreak a pandemic, federal regulators reminded depository institutions of their duty to “periodically review related risk management plans, including continuity plans, to ensure their ability to continue to deliver their products and services in a wide range of scenarios and with minimal disruption.”
The Federal Financial Institutions Examination Council also updated its pandemic guidance, noting the need for a preventative program and documented strategy to continue critical operations throughout a pandemic.
Since that time, banks have encouraged customers to broadly adopt digital platforms and, when necessary, serve customers in person through drive-through lines or by appointment to reduce face-to-face contact. Bank employees wear masks and gloves, branches are cleaned frequently and, where possible, staff work remotely.
The pandemic is a real-world tabletop exercise that can provide important takeaways about the effectiveness of an organization’s business continuity plan. It’s important for organizations to take advantage of this opportunity.
For example, there could be another wave of Covid-19 later this year; alternately, it could be years before we see an event similar to what we’re experiencing. Either way, your bank must to consider the potential consequences of each outcome and have a plan ready. Reviewing your organization’s business continuity plans and initiatives can help reveal opportunities to move forward with confidence, despite challenging operating environments.