What Regulators Are Doing About Coronavirus

For the last few weeks, bank regulators have been gearing up
their responses and preparations as the U.S. financial industry and broader
economy confront the impact of the coronavirus pandemic.

On March 13, President Donald Trump declared a national state of emergency that freed billions in aid as cities and sectors grappled with the pandemic. The announcement capped off a tumultuous week of market freefalls and rallies, the cancelation of major sporting events, closed college campus and the start of millions of Americans voluntary and involuntary quarantining and national social distancing. It remains to be seen how long the outbreak will last and when it will peak, as well as the potential economic fallout on businesses and consumers.

Already, the Federal Open Market Committee has lowered the federal funds rate twice; the most recent was a surprise 100-basis point decline on March 15, to the range of 0 to 25 basis points. The Fed last lowered interest rates to near zero back in late 2008. The move is intended to support economic activity and labor market conditions, and the benchmark rate will stay low until the Fed is confident the economy has weathered recent events.

Additionally, the Fed announced it would increase its
holdings of both Treasury securities by at least $500 billion and agency
mortgage-backed securities by at least $200 billion.

Bank executives and directors must now contend with near-zero rates as they work with borrowers to contain the economic implications of the coronavirus.

“The adverse economic effects of a pandemic could be significant, both nationally and internationally,” the Federal Financial Institutions Examination Council wrote in recently updated guidance on how banks can minimize the adverse effects of a pandemic. “Due to their crucial financial and economic role, financial institutions should have plans in place that describe how they will manage through a pandemic event.”

The ongoing events serve as a belated reminder that pandemic
preparedness should be considered as part of board’s periodic review of
business continuity planning, according to a March 6
interagency release. These plans should address how a bank anticipates
delivering products and services “in a wide range of scenarios and with minimal
disruption.”

The FFIEC’s guidance says pandemic preparation in a bank’s business continuity plan should include a preventive program, a documented strategy that is scaled to the stages of an outbreak, a comprehensive framework outlining how it will continue critical operations and a testing and oversight program. The plan should be appropriate for the bank’s size, complexity and business activities.

A group of agencies including prudential bank regulators are
encouraging financial institutions to work constructively with customers in
communities impacted by the new coronavirus, according a statement
released on March 9. They also pledge to provide “appropriate regulatory
assistance to affected institutions,” adding that prudent accommodations that
follow “safe and sound lending practices should not be subject to examiner
criticism.”

The regulators also acknowledged that banks may face
staffing and other challenges associated with operations. The statement says
regulators will expedite requests to provide “more convenient availability of
services in affected communities” where appropriate, and work with impacted
financial institutions for scheduling exams or inspections.

The Federal Deposit Insurance Corp and the Office of Comptroller of the Currency highlighted more specific ways banks can work with customers in a set of releases dated March 13. Some of the suggested potential accommodations, made in a safe and sound manner and consistent with bank laws, include:

• waiving ATM, overdraft, early time deposit
  withdrawal and late credit card or loan fees
• increasing ATM daily cash withdrawal limits
• reducing restrictions on cashing out-of-state
  and non-customer checks
• increasing card limits for creditworthy
  borrowers
• payment accommodations that could include deferring
  or skipping payments or extending the payment due date to avoid delinquencies
  and negative reporting if a disruption is related to COVID-19.

The OCC points
out that lending accommodations for existing or new customers can help
borrowers facing pressured cash flows, improve their ability to service debt
and ultimate help the bank collect on the loans. It adds that banks should
individually evaluate whether a loan modification would constitute a troubled
debt restructuring.

The regulator also acknowledged that some banks with customers impacted by issues related to the coronavirus may experience an increase in delinquent or nonperforming loans, and says it will consider “the unusual circumstances” these banks face when reviewing their financial condition and weighing the supervisory response.

The FDIC
specifically encouraged banks to work with borrowers in industries that
are “particularly vulnerable to the volatility” stemming from COVID-19
disruption, as well as the small business and independent contractors reliant
on those industries.

“A financial
institution’s prudent efforts to modify the terms on existing loans for
affected customers will not be subject to examiner criticism,” the FDIC wrote
in its release.

Some of the largest and most dramatic regulatory
accommodation related to the new coronavirus has come from the Federal Reserve,
given its role in the funding market and its role overseeing large bank holding
companies.

The Fed announced
on March 12 that it would inject $1.5 trillion into the U.S. market for
repurchase agreements over the course of two days. The increased purchases,
which serve as short-term loans for banks, were not meant to directly stimulate
the economy. Instead, they were done to “address the unusual disruption” in
Treasury financing markets from the coronavirus and help ensure it would
continue functioning properly.

The Fed also announced several more changes to accommodate banks on March 15. It is now allowing depository institutions to borrow from the discount window for as long as 90 days and is encouraging banks to use its intraday credit. It is explicitly encouraging banks to use their capital and liquidity buffers to lend to customers impacted by the coronavirus and lowered the reserve requirement ratio to 0%, effective at the start of the next reserve maintenance period on March 26.

For more information from the regulators, check out their websites

FDIC: Coronavirus (COVID-19) Information for Bankers and Consumers
OCC: COVID-19 (Coronavirus)
Federal Reserve Board: Coronavirus Disease 2019 (COVID-19)
Conference of State Bank Supervisors: Information on COVID-19 Coronavirus and State Agency Nonbank Communication/Guidance on Coronavirus/COVID-19