Pandemic Planning: Keeping the Bank Off the Critical List

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.

u00e2u20acu0153We 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,u00e2u20ac says Stephen R. Malphrus, staff director for management at the Federal Reserve Board. u00e2u20acu0153With 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.u00e2u20ac

Malphrus also cites the u00e2u20acu0153doctrine of social isolationu00e2u20ac indicating health authorities would recommend public assemblies be limited. Understanding state and local policies will be critical to any successful plan. u00e2u20acu0153Work with local health and safety authorities,u00e2u20ac says Malphrus and u00e2u20acu0153understand their plans for school closings, quarantines, and isolation.u00e2u20ac

The guidance states, u00e2u20acu0153Experts believe the most significant challenge may be the severe staffing shortages that will likely result from pandemic outbreaks.u00e2u20ac 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. u00e2u20acu0153Larger institutions had more difficulty,u00e2u20ac said Mary Frances Monroe, manager for supervisory policy and guidance in the FRB Division of Banking Supervision and Regulation. u00e2u20acu0153Coordinating the large numbers of absentee replacement was a problem.u00e2u20ac

Planning for this absenteeism is a key part of any business continuation plan (BCP) but is especially critical under a pandemic plan. u00e2u20acu0153Financial institutions should look at pandemic plans in terms of robustness, management succession, and cross training,u00e2u20ac 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:

Donu00e2u20acu2122t 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 firmu00e2u20acu2122s 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. u00e2u20acu0153Banks are encouraged to consider buddy bank operations. This system worked well during Katrina. Essential services were still provided.u00e2u20ac

u00e2u20acu0153A lot of community banks outsource back-office work to the same third-party vendors, making sharing easier,u00e2u20ac continues Malphrus. u00e2u20acu0153We 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.u00e2u20ac

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

u00e2u20acu0153If the board is attempting to prioritize its activities, it should first ask: u00e2u20acu02dcWho was working over the Thanksgiving holidays?u00e2u20acu2122 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.

u00e2u20acu0153Then it should ask: What if 30% to 40% of those u00e2u20acu02dcessentialu00e2u20acu2122 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.

u00e2u20acu0153The 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.

u00e2u20acu0153Finally, 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 u00e2u20acu02dcon life supportu00e2u20acu2122 during a pandemic, and the staff sent home.u00e2u20ac

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.u00e2u20ac

The new guidance specifies that cross training should be a part of the financial institutionu00e2u20acu2122s overall BCP and business impact analysis (BIA). According to the guidance, the BIA should u00e2u20acu0153assess cross training conducted for key business positions and processes.u00e2u20ac

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.

u00e2u20acu0153Cross training also makes your current operations more efficient,u00e2u20ac explains David B. Opton, chief executive officer and founder of ExecuNet, a career and business network and advisory firm for high-level executives. u00e2u20acu0153With cross training, the customer is going to receive better service during normal times.u00e2u20ac

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.

Optonu00e2u20acu2122s advice is to look within your institution. u00e2u20acu0153Bank alumni might provide a source of skilled personnel. Retirees and former employees offer a pool of potential replacements,u00e2u20ac offers Opton. u00e2u20acu0153If 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 whatu00e2u20acu2122s going on will also help get them back to work.u00e2u20ac

In addition, a well-developed management succession plan is critical during times of crisis. u00e2u20acu0153Bank directors will want to engage management to assure they have a plan in place that is well thought out, thorough, and updated periodically,u00e2u20ac says Malphrus.

u00e2u20acu0153Succession planning is also an important part of management retention during normal times,u00e2u20ac adds Opton. u00e2u20acu0153A 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.u00e2u20ac

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 telecommutingu00e2u20acu2122s role during a pandemic.

For instance, many organizations said in the questionnaire that telecommuting isnu00e2u20acu2122t 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 donu00e2u20acu2122t have the necessary IT equipment to support telecommuting or that theyu00e2u20acu2122re 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.

u00e2u20acu0153Bank examiners will look for pandemic planning as an addition to the banku00e2u20acu2122s current business continuation plan,u00e2u20ac says Malphrus. u00e2u20acu0153The next version of examination procedures will be modified to include pandemics.u00e2u20ac 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? u00e2u20acu0153It wouldnu00e2u20acu2122t hurt to include a plan for dealing with a second wave,u00e2u20ac adds Monroe.

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