2021 Risk Survey Results: High Anxiety

An outsized crisis requires bold action. The banking industry responded in kind when the economy spiraled as a result of the Covid-19 pandemic.

Financial institutions across the country assisted small businesses by issuing Paycheck Protection Program loans. Banks also almost universally modified loans to help borrowers weather the storm, according to Bank Director’s 2021 Risk Survey, sponsored by Moss Adams LLP. At the peak of the downturn, 43% of the directors, CEOs, chief risk officers and other senior executives responding to the survey say their bank modified more than 10% of the loans in their portfolio.

Conducted on the heels of a tumultuous 2020 — with the pandemic, social strife and political change continuing into January — the survey reveals high levels of anxiety across the risk spectrum. In particular, respondents indicate greater unease regarding cybersecurity (92%) and credit (89%), as well as strategic (62%) and operational (52%) risks.

Almost half of respondents indicate that some or most of the loan modifications extended into the fourth quarter 2020, and two-thirds reveal concerns about concentrations in their loan portfolio, with most pointing to commercial real estate (43%) and/or the hospitality industry (31%).

Forty-three percent indicate that their bank tightened underwriting standards during the downturn. Looking ahead, many are unsure whether they’ll ease their standards to lend to business customers in 2021 and 2022. The challenges to bankers have been deep during the past year.

As the CEO of a small, southeastern community bank put it: “What doesn’t kill you makes you stronger.”

Despite this uncertainty, bankers express some optimism. More than three-quarters believe that supporting their communities during the pandemic has positively affected their bank’s reputation. Eighty-seven percent expect fewer than 10% of their bank’s business customers to fail. And 84% will improve their bank’s business continuity plan due to what they’ve experienced.

Key Findings

More Robust Stress Testing
More than 80% say their bank conducts an annual stress test. Of these, 60% have expanded the quantity and/or depth of economic scenarios examined in response to the Covid-19 pandemic.

Cybersecurity Gaps
Sixty-three percent say their institution increased its oversight of cybersecurity and data privacy in 2020. Most say the bank needs to improve its cybersecurity program by training staff (68%) and implementing technology to better detect or deter threats and intrusions (65%).

Pandemic Plans Adjusted
Respondents identify several areas where they’ll enhance their business continuity plan as a result of the pandemic. The majority point to formalizing remote work procedures and policies (77%), educating and training employees (56%) and/or providing the right tools to staff (55%). Roughly half say that fewer than a quarter of employees will work remotely when the pandemic abates; 25% say that no employees will work remotely.

Banking Marijuana
Forty-one percent of respondents represent a bank headquartered where marijuana use is at least partly legal. Overall, one-third are unsure if their bank would be willing to serve marijuana businesses. Just 7% serve these businesses; 34% have discussed banking this industry but don’t work with these companies yet.

Climate Change Still Not a Hot Topic
Just 14% say their board discusses the risks posed by climate change at least annually; this is up slightly from 11% in last year’s survey. Fewer than 10% say an executive reports to the board about the risks and opportunities that climate change presents to the institution.

To view the full results of the survey, click here.

Seven Costs of Saying “No” to Cannabis Banking

Ask the typical bank executive why their institution isn’t providing banking services to state-legal cannabis-related businesses (CRBs), and you will likely hear a speedy retort along these lines:

“We’re not allowed to — it’s still federally illegal.”

“We would love to, but we don’t know enough about that industry to manage the risk.”

“We don’t think our customers would want our name and reputation associated with that.”

On the surface, these prudent practices make perfect sense. A complex legal landscape, inability to assess regulatory risk and desire to protect the institution’s reputation are compelling reasons to stay far away from cannabis-related proceeds. But there are hidden costs to saying “no” to cannabis banking. These hidden costs accrue to CRBs, the communities in which they are located, the financial institutions that avoid them and potentially society at large.

Community Risks

Community risks stem from direct and indirect sources. The obvious risks, such as the increased potential for crime and the resulting challenges to law enforcement, are frequently cited. The indirect risks are less obvious, such as a community’s inability to identify or collect appropriate taxes on CRB proceeds.

Cash on hand invites crimes of opportunity. A retail location that is known to have large volumes of cash on hand produces a seductive temptation for the criminal element.

Cash is easy to conceal from revenue officials. Fewer dollars in the public coffers are the inevitable outcome when revenue goes uncollected. In its “Taxing Cannabis” report, the Institute on Taxation and Economic Policy indicates that tax evasion and ongoing competition from illicit marijuana operations remain an ongoing concern in legal use states.

Opportunity Costs

Early adopters have demonstrated that the cannabis industry is willing and able to accept higher price points from financial institutions in exchange for the safety and convenience of obtaining traditional banking services. Your bank’s avoidance means forfeiting both short-term and long-term opportunities to generate fee income while giving others a head start on future business opportunities.

Cost of lost fee income. It is not uncommon to hear of small financial institutions generating multimillion-dollar annual fee income from CRB accounts. In less-established markets, accounts yield monthly fees based on their average deposit balances.

Cost of missing out. Just like its social media counterpart — FOMO or fear of missing out — COMO is real. If 5% to 10% of your peers are already banking CRBs, imagine what will happen as the next 10% step in. And then the next 10% after that. Before the real race has even begun, you’ve ceded some portion of the addressable market simply by not being present in the market today.

Economic Costs

The suppression of legal cannabis businesses weakens their potential to inform decisions and progress. Anecdotal and scientific evidence supports that mental and physical health benefits can be derived from responsibly sourced and properly administered cannabis-based products. Data from countries that are moving quickly to align public policy with sentiment and science on these issues indicates that sustainable economic benefits are possible.

Cost of falling behind in medical and other scientific research and advances. In 2018, 420Intel identified six countries for their cannabis research: Spain, Canada, the Czech Republic, Uruguay, the Netherlands and Israel. This type of research cannot be conducted in the United States because of federal prohibitions that require clearing multiple regulatory hurdles, at great cost.

Costs of pain and suffering to those in need of relief. Even if your personal belief sets don’t allow you to explore cannabis topics with an open mind, you need look no further than your media feeds or internet searches to find immeasurable examples of individuals who claim that using cannabis or cannabinoids have provided them with physical and mental health benefits.

Cost of lost economic growth potential. While exact numbers are hard to come by, there more than 110 studies taking place in Israel alone, funded at rates in the six and seven figures apiece. BNN Bloomberg reported that Canada’s legalized cannabis sector contributed $8.26 billion to its gross domestic product in its first 10 months of national legalization.

So before your bank decides the risks of saying “yes” to banking CRBs is still too high, pause to consider the risks you’re allowing to affect your institution and local community when you say “no.” Perhaps it’s time to take a fresh look at whether CRB banking is for you.

Your Bank’s Answer to the Cannabis Conundrum


strategy-5-30-19.pngBanks should not wait on lawmakers taking action on the myriad of proposed cannabis banking bills to make important strategic decisions about servicing marijuana-related business.

It is unclear if any of the proposed cannabis banking bills will gain enough traction and support in Washington to pass through Congress. Despite the inaction, a growing number of financial institutions are choosing to provide banking services to the cannabis industry. Banks considering doing business with cannabis companies need to determine if it fits within the institution’s overall strategy and risk appetite. To determine whether the business fits, a board should ask and answer the following four questions:

To be or not to be a cannabis bank? Every board needs to ask itself this question. Even if your bank does not actively seek out cannabis business customers, it is likely your bank has been or will be approached by a customer in the business who is seeking banking services.

The vast majority of banks in the U.S. have marijuana-related or hemp businesses in their market areas, now that more than three-fifths of the country permit some sort of legal cannabis production and use–medical, recreational or industrial hemp. It is quite possible your bank is unwittingly providing banking services to a customer who is at least tangentially related to the business. It is important for your board to definitively establish where your institution stands on this business line and communicate that to the business development, sales and other customer-facing personnel. Are you in or out? Not having a stance risks being flat-footed when an opportunity or a threat arises.

What is a marijuana-related business? The Financial Crimes Enforcement Network, or FinCEN, issued guidance in 2014 on how financial institutions can provide services to marijuana-related businesses in a manner consistent with their Bank Secrecy Act obligations. But neither FinCEN nor any bank regulator has defined the term “marijuana-related business,” or MRBs.

As a result, it is not always clear if your bank is doing business with an MRB. Certainly, those firms that physically handle the plant are MRBs: cultivators, processors, testing facilities, packagers, transporters and dispensaries. If they are required to have a state license, they are an MRB. Your bank should follow the FinCEN guidance regarding suspicious activity report filings when transacting with these companies.

But what about other individuals or companies that are indirectly connected to marijuana-related businesses, such as equipment suppliers, payment processors, consultants, landlords and advisors? There is no simple answer. If a significant portion of the customer’s revenue is dependent on the industry, it could be considered an MRB.

If your bank decides to offer banking services to cannabis businesses, the board and executives must establish a method to determine which indirectly related businesses are MRBs and prepare for revisions to the method if regulators provide further guidance.

Develop in-house compliance programs or engage a consultant? FinCEN is clear that a bank working with marijuana-related businesses must have a robust customer due diligence process. Shortcomings in the diligence process could lead to mistakes and missteps when it comes to compliance with the Bank Secrecy Act and anti-money laundering laws and lead to serious adverse outcomes.

Bank boards must determine whether their institutions have sufficient internal staff to develop and implement customer diligence and other compliance programs, or if they will outsource these functions. Any compliance function will require the board and management to provide appropriate oversight and monitoring of the cannabis-related compliance program.

Will your institution bank marijuana, hemp, or both? Recent changes in the Farm Bill made this a legitimate and important question for bank boards. Before the new Farm Bill was signed into law, the processes and procedures for dealing with hemp businesses were the same as cannabis businesses, because they were treated the same under the Controlled Substance Act.

The 2018 Farm Bill amended the Controlled Substance Act, including removing hemp from the definition of marijuana as long as it contains not more than 0.3% tetrahydrocannabinol, or THC. The bill also allowed states to establish programs for the licensure and regulation of cultivation, production, processing and sale of hemp products.

The Farm Bill changes mean it might become less difficult for banks to work with hemp-related customers from an operational and compliance standpoint. But neither the FinCEN nor federal bank regulators have issued updated guidance on working with hemp businesses following this change.

As federal policy on cannabis continues to evolve, banks will be well-served by internal evaluations and aligning their positions toward this industry sooner rather than later. Those four questions should assist any bank board in establishing their strategy for cannabis-related business.

Banks Face Continuing Legal Challenge Servicing Marijuana Growers


marijuana-9-8-17.pngIn the past five years, marijuana has become big business in the United States. There are now eight states with fully legalized recreational marijuana. Couple that with the other 20-plus states with legalized medical marijuana and we have two-thirds of Americans living in states with some form of legal access to marijuana. Many of the remaining states have decriminalized possession of small amounts of marijuana. Currently, it is estimated there are approximately 200,000 full-time and part-time workers in the cannabis industry, with legal marijuana and marijuana-related businesses (MRBs) anticipated to account for revenues in the $50 billion range over the next few years.

However, marijuana remains illegal at the federal level under the Controlled Substances Act. Marijuana continues to be classified as a Schedule I narcotic, which is the highest and most dangerous drug classification. Schedule I drugs are those that have no known medicinal value and the federal government considers to be illegal in all respects. Included with marijuana in this classification are heroin, ecstasy, methaqualone and peyote.

The inconsistency between state and federal laws has caused much confusion and consternation, particularly for financial institutions. In states where marijuana is legal, financial institutions have made many requests for federal guidance on banking MRBs. In 2014, the Department of Justice and Financial Crimes Enforcement Network, or FinCen, responded to such requests with the so-called Cole Memorandum and guidance titled “BSA Expectations Regarding Marijuana-Related Businesses,” respectively. The Cole Memorandum states the federal government will not prosecute within the cannabis industry so long as companies (including banks) obey local and state laws and regulations. The FinCen guidance provided a procedure for filing Suspicious Activity Reports for known MRB bank customers.

Unfortunately, neither of these governs the three prudential federal bank regulators, particularly in the enforcement of Bank Secrecy Act and anti-money laundering rules. As a result, most banks will not touch marijuana-related deposits, make loans to marijuana businesses or permit the use of credit cards on their payment systems. Banks that do provide services to MRBs are very quiet about it. They typically limit the deposits to certain dollar amounts, and if there is any whiff of concern, the accounts are quickly closed. It is estimated that in 2016, about 300 financial institutions in this country knowingly provided deposit accounts to MRBs. Many of these institutions have long standing relationships with their MRB customers and often require them to sign confidentiality agreements to keep the relationship quiet. There has been much speculation on how many banks are unknowingly banking marijuana customers, though it is certain that many are.

All of this legal uncertainty and risk has kept most banks out of the marijuana growing industry, leaving the business almost entirely cash-based. Many MRBs must find workarounds to deal with the cash they cannot deposit and the bills and taxes they must pay. Retailers have methods for hiding cash, including the purchase of armored cars and warehouses where cash can be stored. Many in the business have created their own security forces enlisting motorcycle gangs and former police or military personnel to protect their cash. Employees also are paid in cash, so pay day is staggered in order to prevent robberies. Taxes must be paid in person and are subject to penalties for cash payment. In addition, those who pay their taxes in cash are not eligible to take deductions, so they are paying taxes on gross revenue amounts, though it is difficult to determine (or audit) what those gross amounts really are. Many states are realizing this cash-based business is ripe for organized crime involvement.

With traditional banking mostly out of the picture, many entrepreneurs are working on technical alternative payment platforms as a way around old fashioned banking relationships. Some are using or developing crypto-currency platforms like Bitcoin and, more recently, Potcoin. These are only limited solutions to not having a deposit account or the ability to accept credit card payments. Others are trying to use stored value cards, cell phone apps and other mechanisms. Currently, no alternatives have caught on with the public or the industry. Alternative lenders, including individuals, private equity firms and loan sharks also have stepped in to provide expensive financing to the industry.

The Trump administration does not seem keen on legalizing marijuana, and Attorney General Jeff Sessions appears to be leaning toward increased enforcement. There are numerous bills in Congress to legalize marijuana and permit MRBs to be banked, but it is not clear whether any of these will pass. Until then, most banks will continue facing legal issues and continue avoiding the burgeoning and lucrative marijuana industry.