Over the past two weeks, we have received numerous inquiries from financial institutions on what actions should be taken or considered to address the COVID-19, or the new coronavirus, pandemic. While the current situation is evolving each day, we have engaged in numerous discussions with banks on various strategies and considerations that are being reviewed or implemented during this uncertain time.
Business Continuity Plan
Every financial institution should have implemented pandemic planning contingencies contained in its business continuity plan. In response to the burgeoning public health crisis, the Federal Financial Institutions Examination Council issued revised guidance on March 6 on how to address pandemic planning in a bank’s business continuity plans. The revision updates previous guidance issued in response to the avian flu pandemic of 2007.
Although there are no substantive updates contained in the revised Pandemic Planning Guidance, the FFIEC’s update reiterates and emphasizes the importance of maintaining a pandemic response plan that includes strategies to minimize disruptions and recover from a pandemic wave. The updated guidance states that banks should consider minimizing staff contact, encouraging employees to telecommute and redirecting customers from branch to electronic banking services. We anticipate that regulators will review an institution’s utilization of its business continuity plan at upcoming safety and soundness examinations.
Based on our discussions, we believe that many banks have taken or plan to take actions related to their branch operations. Below is a summary of various actions that a bank may wish to take regarding its branch operations.
Branches Remain Open, with Caveats. A number of banks have elected to close branch lobbies and direct customers to utilize drive-up facilities, walk-up teller lines and ATM machines where possible. In addition, they are also directing customers to their online platforms. Some banks are requesting customers who require physical or in-person assistance, such as access to a safe deposit box, to schedule an appointment with bank employees.
Branch Closures. To the extent a bank may be readying a branch closure strategy, below are federal and state requirements that must be satisfied.
Federal Requirements. On March 13, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Federal Reserve Board issued corresponding guidance addressing COVID-19’s impact on customers and bank operations indicating that they expect bank branch closures, or changes to branch hours. In such an event, they recommend that a bank (i) notify the applicable federal banking regulator as soon as practicable of the closure/change in bank hours, (ii) comply with any notice or filing requirements with applicable state banking regulators and (iii) place a customer notice on the front entrance of the impacted branch describing the reason for the closure and/or change in hours.
State Law Requirements. Closing lobbies and redirecting customers to drive-ups does not generally require a bank to obtain the approval of state banking authorities, but some state banking authorities have requested that banks provide notice of such changes. For example, Illinois-chartered banks seeking to fully close a branch or change branch hours must provide prior notice to the Illinois Department of Financial and Professional Regulation, Division of Banking, and obtain an official proclamation from the IDB under the Illinois Banking Emergencies Act (205 ILCS 610). In addition, the bank must post notice of the temporary closing or change in branch hours and the authorization for such change on the main entrance doors of the applicable branch.
ATM/Cash-On-Hand Strategies. In a push to increase customer traffic to ATMs and minimize direct customer contact, some banks have increased or plan to increase ATM daily allowable cash withdrawal limits. The size of the increase depends on the individual circumstances of the institution. Banks may experience greater cash withdrawal requests from depositors and may wish to keep higher levels of cash in its branch offices.
Regular and Periodic Cleaning of Branches. Each bank we spoke with also indicated that they have implemented enhanced periodic cleaning of their branches and offices. Some banks have indicated that “deep” cleanings are being completed on a weekly basis.
Flexible Work-from-Home Arrangements. We have also discussed the potential for implementing flexible work-from-home or telecommuting arrangements for specific business line employees with institutions. Whether or not this is a viable option for a specific institution is dependent upon a number of specific circumstances: whether the bank’s information technology systems can support an increased number of employees utilizing the bank’s server remotely, ensuring that each employee who remotely accesses the bank’s systems can do so in a confidential manner that protects that bank’s data and whether there are geographic and business-line specific considerations that prevent working remotely, among others. Nonetheless, a bank should plan to test their IT systems and update policies prior to implementing such arrangements.
Utilization of Split-Staff and Split-Location Strategies. In addition, we’ve discussed split-staff and split-location strategies; a number of banks indicated that they are currently utilizing a split-staff strategy. Under a split-staff strategy, an institution staggers its employees on any given day. For instance, half of the institution’s employees come in on Monday, Wednesday and Friday, and the other half of the employees come in on Tuesday, Thursday and Saturday. The aim is that limiting employee interaction with customers on any given day allows a bank to maintain operations on a much more limited basis if only one group of employees is potentially exposed to COVID-19.
In addition, some institutions also indicated that they plan to utilize a split-location strategy, distributing staff across various branches and offices. If one location is potentially exposed to COVID-19, a bank’s operations can continue through its other locations.
Employee Training. Banks have also implemented staff training on how to properly interact with customers during this troubling time. Following guidance from the World Health Organization and Centers for Disease Control and Prevention, banks have implemented new procedures meant to limit physical contact (like prohibiting handshakes) and eliminating or reducing scheduled meetings.
Liquidity and Capital Considerations
During times of uncertainty and financial market volatility, like the financial crisis, banks have often found it difficult to enhance liquidity and raise additional capital when they may need it the most. Based on our discussions, we recommend that financial institutions review their current and near-term liquidity/capital strategies. Below are a few items to consider.
Subordinated Debt and Equity Issuances. Banks may need to weather a prolonged economic slowdown. Bankers agree that reviewing the firm’s capital strategies in uncertain times is a critical consideration to address any potential need to enhance immediate or near-term liquidity or to shore up capital. Other banks may also wish to review various alternatives available to issue debt for additional liquidity, to potentially refinance outstanding debt arrangements at lower rates, or to provide additional capital.
Lines of Credit. As lenders, banks are aware that their borrowers may be considering a draw down on existing lines of credit. Banks may also wish to consider potentially drawing down on their existing lines of credit (such as Federal Home Loan Bank advances or holding company lines of credit) as an effective tool to increase the holding company’s or bank’s liquidity. Before either drawing down any existing line of credit or utilizing the proceeds for any purpose other than increasing cash-on-hand, a bank should carefully review the covenants in the underlying loan agreements.
Securities Portfolio. Reviewing current strategies pertaining to an institution’s securities portfolio is also a consideration for banks. Many banks have built-in gains in their portfolio. Consequently, institutions are reviewing their portfolios to determine whether to realize existing gains to boost liquidity in the short-term or maintain its current strategy to assist earnings in the longer-term.
Stock Repurchase Programs. Many publicly traded banks have suspended their stock repurchase programs as part of a capital conservation strategy. While no bank has announced plans to cut dividends, now is the time to review contingency plans and consider when such action may be warranted.
Federal Reserve Discount Window. Bankers should also discuss potentially using the Federal Reserve’s short-term emergency loans dispensed through the discount window if necessary. While many institutions consider using the discount window as a last resort and could indicate dire financial straits, senior bank management should revisit their policies and procedures to ensure their institution can access the discount window should circumstances require it.
Importantly, on March 17, the Federal Reserve and eight of the largest financial institutions in the U.S. worked together to provide these large financial institutions access to the discount window. Largely symbolic, the actions are being viewed by banks as an effort to remove the stigma of accessing the discount window. Whether these coordinated efforts will be a success remains to be seen.
Stress Testing of Loans. We anticipate that many institutions will consider the need to begin stress testing their portfolios, and some already are. For some, stress testing may be centered on specific industries and sectors of the loan portfolio that may have been more substantially impacted by COVID-19 (such as hospitality/restaurants, travel, entertainment and companies with supply chains dependent upon China or Europe). For others, the entire loan portfolio may be tested, under the assumption it could be subject to pandemic-related stress.
Review Insurance Policies. Another consideration we’ve discussed with banks is the need to review in-place insurance policies for business disruption coverage to determine if they would cover matters resulting from the COVID-19 pandemic.
Assist Impacted Customers. Consistent with the recent guidance issued by the Fed, FDIC and OCC, banks are considering offering a variety of relief options related to specific product/service lines to customers. Some banks may waive late fees on loan payments or credit cards and others may waive ATM- and deposit-related fees. We expect these relief options will be limited to specific product and service lines, and to a certain period of time.
On March 19, the FDIC issued a set of Frequently Asked Questions for banks impacted by the coronavirus. The FAQs provide insight into how the FDIC, and potentially other federal banking regulators, will view payment accommodations, reporting of delinquent loans, document retention and reporting requirements, troubled debt restructurings, nonaccrual loans and the allowance for loan and lease losses. Banks should review the FAQs in connection with providing any financial assistance to impacted customers.
The items noted above should not be considered definitive or exclusive. A financial institution should carefully consider the above items, among others, and determine how to tailor any proposed changes to its operations in light of the very fluid circumstances surrounding the current COVID-19 pandemic.
Click here to review the March 13 OCC Bulletin 2020-15 (Pandemic Planning: Working With Customers Affected by Coronavirus and Regulatory Assistance).
Click here to review the March 13 FDIC FIL-17-2020 (Regulatory Relief: Working with Customers Affected by the Coronavirus).
Click here to review the March 13 FRB SR 20-4/CA 20-3 (Supervisory Practices Regarding Financial Institutions Affected by Coronavirus).