Pivoting to Offense to Endure the Covid-19 Economy

Banks must plan for the economic conditions looming on the other side of Covid-19.

Banks must simultaneously figure out how to weather the public health crisis and serve their clients in almost entirely remote environments while preserving their financial health for months of economic uncertainty. The depth and longevity of this crisis requires banks to strategically reassess the immediate negative impacts, project probabilities of further disruption and re-engineer their delivery models.

We believe that the banks that take bold and decisive action around these key issues will emerge from this period with more-durable relationships, greater agility and resilience, steeper market growth and better profitability compared to their peers. Banks should prioritize a set of five stabilizing actions that will set the stage for resilience in any potential downturn. 

Help Customers Confront the Crisis
Adversity contains implicit opportunity for customer outreach. Banks should contact customers to communicate that their bank is open and available for support. They should devise strategic outreach programs to solidify customer confidence and build long-term relationships.

Banks should then immediately focus on helping customers find ways to ease cash flow constraints and shortfalls in working capital and liquidity reserves. They should consider relief programs and creative, beneficial adjustments to loan structures such as permitting deferred payments, interest-only payments, re-amortizing payments or waiving select fees. Aligning their clients’ new needs with bank solutions and products will establish a foundation for post-crisis revenue growth.

Surgical Expense Reductions
Often, the immediate reaction during economic turmoil is to cut staff without strategic approach. While this can lower costs by the next financial period, this approach fails to strategically position the bank for post-downturn recovery and risks misaligned skill-sets or understaffing.

We recommend that banks understand which levers can be strategically pulled to quickly reduce costs. These levers range from identifying and evaluating paper-based processes, robotic process automation and aligning operations and personnel to the revised sales volume estimates. There are significant cost savings available even in credit risk management — simply by optimizing credit processes and better leveraging data.

Credit Risk Management Tailored to the Crisis
Banks had no visibility into the recession, and must assess not only the immediate impact on borrower financial and implied repayment performances but also the delayed impact on various segments of the economy. Ensure your risk management strategy reflects the new credit reality:

  • Consider proactively managing the portfolio renewal cycle by implementing mass short-term extensions on lines of credit, re-evaluating credit policy exception limits and increasing monitoring through frequently conversations with borrowers.
  • Leverage data to scale the identification of emerging portfolio risk and related triggers.
  • Consider creating a Covid-19 financial health assessment to facilitate financial relief and to identify potential credit downgrades.
  • Assess industry-based impacts on your portfolio to predict deteriorating credits in order to right-size loan loss reserves. 
  • Increase the frequency and detail of credit monitoring procedures for sectors that have been immediately impacted and those that will be impacted in the near term.

Align Resources with Client Need
Changes in spending will impact the creditworthiness of many loan applicants, so banks must take a hard look at realistic expectations for new business goals in 2020 and 2021. Realign banker-relationship manager priorities and shift from new business development with prospective customers to selling deeper into the existing portfolio, where possible. Client engagement will enable banks to manage risk while providing the client with much-needed attention, solutions and assistance. 

It will also be critical to scale up certain operational functions quickly to meet shifting client demand. Realigning  branch staff to handle call center volume and line resources to assist with spiking credit action volumes allow you to redeploy and scale your workforce to the new reality.

Create a Balanced Remote Workplace Strategy
Banks must leverage all available tools not just to maintain, but further, customer relationships and generate new business activity where possible. Empower customers to make deposits digitally by providing remote deposit capture hardware and services and consider waiving a portion of RDC equipment or service fees for a trial period.

Proactively run and distribute bank statement reports through digitally secure methods, rather than requiring customers to create and distribute these reports. Collaborate with bank customers to send check payable files to the bank for check printing and distribution.

We believe a bank’s actions in the next 90 days are vital to the survival, sustainability and long-term positioning for regrowth. Responding to customers with needed outreach sets the stage for new levels of customer loyalty. Shifting the bank’s focus inward toward operations with a keen focus on streamlining processes, proactively changing procedures and aligning the right people to the right tasks will ultimately lead to both a sustained and improved financial ecosystem.

Directors’ Defense Against the Pandemic Impact on Credit

Bank directors and management teams must prepare themselves and their institution for the potential for an economic crisis due to the COVID-19 outbreak.

This preparation process is different than how they would manage credit issues in more traditional economic downturns; traditional credit risk management tools and techniques may not apply or be as effective. Directors and others in bank management may need to consider new alternatives and act quickly and deliberately if they are going to be successful during this very difficult time.

The traditional three lines of defense against quickly elevating credit risk may not work to prevent the credit impact of the new coronavirus and its consequences. The “horse is out of the barn” and no existing, normal risk management system can prevent some level of losses. This pandemic is the proverbial black swan.

The real questions now are how can banks prepare to deal with the related issues and problems?

Some institutions are likely to be better prepared, including those with:

  • A strong capital base.
  • Good, conservative allowance reserve levels.
  • Realistic credit risk assessments and portfolio ratings prior to the pandemic.
  • Are poised to take part in a potential acquisition.
  • A good strategic approach that is not materially swayed by quarterly earning pressures.
  • A management and board that “tells it like it is” and is realistic.
  • Good relationship with regulators, CPA firms, professionals and investors.

What are a bank’s options when trying to assess and manage the pandemic’s impact?

  • Deny the problem and kick the can down the road.
  • Wait for the government and regulators to provide solutions or a playbook for the problems.
  • Sell the bank — most likely at a big discount if at all.
  • Liquidate the bank, likely only after expending capital, with assistance from the Federal Deposit Insurance Corp.
  • Be proactive and put in place processes to deal with the problem and consequences.

There are some steps a bank can take to be proactive:

  • Identify emerging and potential problems and the options to handle them, and then create a plan that is strategic, operational and provides the best financial result.
  • Commit to doing what’s right for the bank, its employees, customers and community.
  • Enhance or replace the current credit risk management system with a robust identification, measurement, monitoring, control and reporting program.
  • Adopt an “all hands-on deck” to improve focus and deal with material issues in a priority order, deferring things that do not move the needle.
  • Assess internal resources and consider moving qualified personnel into areas that require more focus.
  • Seek outside professional assistance, if needed, such as loan workout or portfolio analysis and planning.
  • Perform targeted reviews of portfolio segments that are or may become challenged because of the pandemic and potential fallout, along with others may have had weaker risk profiles before the pandemic.
  • Communicate the issues such as the magnitude of the financial challenge to employees, the market, regulators, CPAs and other professionals who provide risk management services to your bank.
  • Deal with problems head-on and decisively to maintain credibility and respect from various constituencies while achieving a superior result.

It is best for everyone in the bank to work together and act quickly, thoughtfully, honestly and strategically. There will, of course, be some expected and understood need in the short term for increases in allowance provisioning. If planning and actions are executed well, the long-term results will improve the bank’s performance and enhance its credibility with the market, regulators and all other professionals. Just as valuable as an outcome is that your bank’s reputation will be enhanced with your employees, who will be proud to have been part of the effort during these difficult times.

Understanding New and Emerging Credit Risks


The crisis may be over, but the challenges of managing credit risk in a low interest rate environment and increasingly competitive marketplace are not. Traditional credit metrics improved significantly in 2013, including net charge offs and the allowance for loan losses. Similarly, the federal banking system set a new record level of net income in 2013. So, shouldn’t boards of directors be able to breathe a sigh of relief, knowing that their credit risk management systems have worked? Why then, do regulators, such as the Office of the Comptroller of the Currency, see signs of increasing credit risk and warn examiners to focus on underwriting standards, new product plans and risk management systems? David Shaw, director, Credit Risk Management Services at WeiserMazars LLP, discusses new credit risk concerns, the forces driving them and the need for enhanced risk management programs.

What are some of the factors in today’s banking environment causing increased credit risk?
In essence, banks feel a need to increase revenues and interest income in the face of a continuing low interest rate environment and an increasingly competitive marketplace. For larger institutions, this means competing first on price, then offering longer terms and eventually relaxing covenants for commercial loans. Community banks are also becoming more involved in the highly active commercial and industrial (C&I) loans market because many of them are seeking to diversify loan portfolios away from commercial real estate by adding other, less familiar loan types.

What are some of the signs or signals that have caught the attention of examiners and loan review providers?
Some banks are loosening underwriting standards, as evidenced by increases in exceptions to policies, including extending loan terms, excluding or weakening loan guarantees, increasing collateral advance rates, loosening reporting requirements, and offering fewer and less stringent covenants (sometimes known as covenant lite). Regulators are also reviewing new product offerings because they increase credit risk, either because the bank may not have experience with the offering or may not have considered its full impact on the bank’s risk profile.

Are there other signs that WeiserMazars has seen?
Yes, particularly in the community banking sector, there has been increased C&I lending, most notably commercial lines of credit supported by working capital assets. Of particular concern is the fact that many institutions have not recognized or adopted new policies, procedures, underwriting standards and monitoring systems for these types of loans. For example, many institutions continue to use EBITDA (earnings before interest, taxes, depreciation and amortization) as the sole measure of cash flow, ignoring the balance sheet and cash flow from operations, as if they were doing a commercial real estate loan. It is important to analyze periodic accounts receivable. Additional concerns include the level of experience of loan officers and the added resources and infrastructure needed to adequately monitor these loans.

What are the roles and responsibilities of directors to oversee these issues?
First, boards need to understand that new or expanded product lines add to strategic risk as well as credit risk. As a strategic decision, expansion of product lines will impact other areas of the bank, including capital requirements and ratios, risk thresholds, provisioning and the allowance for loan losses, as well as create a need for different and unfamiliar forms of stress testing. Second, boards need to ensure that the bank’s technology and staffing are adequate, and determine whether additional investments will need to be made in these areas. Finally, boards need to examine and understand any revisions to commercial underwriting policies and procedures, and track their impact on volume and credit quality metrics.

Should banks consider outsourcing some of the processes and administrative functions?
Banks can consider outside resources to draft or review new or revised underwriting standards and policies. A loan review firm or other consultants can review the underwriting documents to assess the analysis and compliance with policies. There are also outside firms that can perform the back-office functions of ongoing monitoring of commercial loans.