Five Reasons to Consider Banking Cannabis

Like nearly every industry, the banking sector is facing major economic disruption caused by the coronavirus pandemic.

Operational strategies designed to capitalize on a booming economy have been rendered obsolete. With the Federal Open Markets Committee slashing interest rates to near zero, financial institutions have needed to redirect their focus from growth to protecting existing customers, defending or increasing earnings and minimizing losses.

While this will likely be the status quo for the time being, bank executives and their boards have a responsibility to plan ahead. What will financial markets look like after absorbing this shock? And, when rates begin to rise again — as they will, eventually — how will you position your financial institution to take advantage of future growth?

The booming legal cannabis industry is one sector banks have been eyeballing as a source for low-cost deposits and non-interest income. While ongoing conflict between state and federal law has kept many financial institutions on the sidelines, others have made serving this industry part of their growth strategy. According to new market research, the U.S. legal cannabis market will be worth $34 billion by 2025. While we don’t claim that sales will be immune to the financial shock caused by the pandemic, they have remained somewhat steady — due in large part to being deemed essential in most states with legal medical cannabis programs. With much of this revenue unbanked, it’s worth taking a closer look at how this industry can be part of your bank’s long-term strategy. Here are five reasons why.

  1. Cannabis banking can provide reliable non-interest income. As net interest margins compress, financial institutions should look to non-interest income business lines to support overall profitability. Cannabis companies are in dire need of quality banking solutions and are willing to pay upwards of 10 times the amount of traditional business service charges. Assessing substantially higher base account charges, often without the benefit of an earnings credit to offset those charges, means there are untapped cash management fee opportunities. Together, these fees can fully offset the operational cost of providing a cannabis banking program.
  2. New compliance technologies can reduce costs and support remote banking. Many banks serving cannabis customers are using valuable human capital to manage their compliance. However, new technologies make it possible to automate these processes, significantly reducing the labor and expense required to conduct the systematic due diligence this industry requires. New cannabis banking technologies can also enable contactless payments, and handle client applications, account underwriting and risk assessment — all via remote, online processes.
  3. Longer-term, cannabis banking can provide a source of low-cost deposits. The pressure to grow and attract low-cost deposits may wane momentarily but will continue to be a driver of bank profitability long-term. Increasing those deposits today will protect future profitability as the economy improves.
  4. Comprehensive federal legalization is on the back burner — for now. While your bank may want to wait for federal legalization before providing financial services to this industry, there’s a significant first-mover advantage for institutions that elect to serve this industry today. The ability to build new customer relationships, earn enhanced fee income and gain access to new sources of low-cost deposits early on could be a game-changer when legalization eventually occurs.
  5. You don’t need to be a pioneer. Having spent most of my career leading retail operations at a community bank, I know financial institutions don’t want to be the first to take on something new. Although it is still a nascent industry, there are financial institutions that have served cannabis businesses for several years and are passing compliance exams. Banks entering the industry now won’t have to write the playbook from scratch.

The coronavirus pandemic requires banks to make many difficult decisions, both around managing the financial impact and the operational changes needed to protect the health of customers and employees. While adapting operating procedures to the current environment, banks should also begin planning for a future recovery and identifying new potential sources of growth. Cannabis banking can provide a lucrative new revenue stream and the opportunity for financial institutions to grow deposits with minimal competition — at least for now.

Survey Results: Crisis Reinforces Need for Talent

Throughout the Covid-19 pandemic, banks have relied on their employees to counsel customers and process billions of dollars of Paycheck Protection Program loans — not to mention working behind the scenes as they adapt to a virtual work environment.

The crisis reinforces the old adage that good talent is hard to find. “Hire right,” investor Ray Dalio once wrote. “The penalties of hiring wrong are huge.”

Bank Director’s 2020 Compensation Survey, sponsored by Compensation Advisors, confirms that talent can be difficult to find in key areas. More than 70% of directors, CEOs, human resources officers and other senior executives responding to the survey point to skills that are particularly difficult to hire and retain, such as information security, technology, lending and risk.

But hiring less-skilled staff also proves challenging: Half indicate that it’s “somewhat” or “very” difficult to attract and retain entry-level employees who fit into the organization’s culture. What’s more, concerns around recruiting younger talent have risen slightly in the past three years: 30% cite this as a top-three challenge this year, compared to 21% in 2017.

Yet, 79% believe their bank offers an effective compensation package that helps attract and retain top talent.

This apparent disconnect could stem from the generation gap between bank leadership and younger staff. Two-thirds of survey respondents are over 55, while more than half of their bank’s workforce is 45 or younger. One can infer that these employees, mostly Gen Z and millennials, primarily occupy entry and mid-level positions.

The survey was distributed in March and April, as the coronavirus forced banks to rapidly shift operations to work-from-home arrangements and adjust branch procedures. Ninety-two percent of respondents indicate their bank instituted or expanded remote work, and 80% introduced or expanded flexible scheduling in response to Covid-19. As the industry emerges from this crisis, how will this impact corporate culture moving forward, as well as expectations from prospective employees?

Key Findings

Covid-19 Response
In addition to adapting to remote and flexible work arrangements, more than half expanded paid leave to encourage staff to stay home if they showed symptoms of the virus. In addition, 81% have limited service to drive-thru only, and 78% limited in-person meetings to appointment only, in order to keep customers and staff safe.

Top Compensation Challenges
The top two compensation challenges that respondents identify remain the same compared to last year: tying compensation to performance (48%), and managing compensation and benefit costs (44%).

Few Measure D&I Progress
Stakeholders have increasingly paid attention to corporate efforts around diversity & inclusion. However, 42% of respondents say their bank lacks a formal D&I program, and doesn’t track progress toward hiring and promoting women, minorities, veterans or individuals with disabilities. Of the metrics most frequently tracked by banks, 58% look at the percentage of women at different levels of the bank, and 51% at the percentage of minorities. Less than half track the gender pay gap, participation of women or minorities in development programs, or participation by employees in D&I-focused education and training.

CEO Retirement
More than 20% expect their CEO to step down within the next three years; an additional 7% are unsure whether their CEO will retire. This metric is, naturally, age dependent: For CEOs over the age of 65, more than half are expected to retire.

CEO, Board Pay Increased
Median total CEO compensation increased in fiscal year 2019, to $649,227. Pay ranged from a median of $251,000 for banks under $250 million to $3.6 million for banks above $10 billion. More than 70% measure CEO performance against the bank’s strategic plan and corporate goals.

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

Adapting Bank Supervision to the Covid-19 Reality

Can a bank socially distance itself from its primary federal regulator?

In the midst of the Covid-19 pandemic, the answer is apparently yes.

The Office of the Comptroller of the Currency, which oversees nationally chartered banks and thrifts, has been impacted by the virus’ shutdown in much the same way as the institutions it oversees.

In an interview with Bank Director, Acting Comptroller of the Currency Brian Brooks — who replaced former Comptroller Joseph Otting after his resignation on May 29 — says the pandemic has forced the agency to adapt its preferred method of operation to the restrictions of social distancing.

“One thing that I worry about from a supervision perspective is, historically, bank examiners go on-site,” Brooks says. “Not because it’s convenient, but because being able to be in a room with bankers and sit face to face with people … is a critical tool in identifying fraud and identifying trends that might not make it onto a management report, or might not be raised in a formal presentation. And the longer banks are in a work-from-home environment, the harder it is for us to do that human aspect of bank supervision.”

Brooks says while there are legitimate health reasons why much of the banking industry has operated with a distributed workforce for the last several months, he’s anxious to reintroduce the element of personal contact into bank supervision. “I know that may not happen next month or even this quarter, but we need to start charting that course back, because this method of supervision can’t go on forever,” he says.

The OCC is reopening its facilities on June 21 and is encouraging people who do not have underlying health conditions and would feel comfortable doing so to return to their offices. “That’s our way of showing leadership to the industry of how one can start charting this course back to normalcy,” Brooks explains. “But having said that, we’ve moved to significantly enhanced cleaning schedules. We’re obviously providing face masks and gloves to people who are in mail-handling or public facing positions. We’re changing seating arrangements to maximize the availability of social distancing. And of course, we’re continuing to allow anyone who wants to, to work remotely while making the office … more normalized for everybody else.”

Brooks believes that recent data on the virus suggests that the health risk for most people is manageable. “What the data seem to be showing is that hospitalization rates and fatality rates for people of working age, who don’t have particular risk conditions, seem to be within historic norms,” he says. “Which is not to say that this is not a dangerous disease, but it does appear to be that … people who are under a certain age and who don’t have certain conditions are not at special risk relative to other types of viruses that we’ve seen before.”

And when OCC examiners do return to on-site visits to their banks, they will follow whatever safety protocols the bank has in place.

The Covid-19 pandemic has dealt a crushing blow to the U.S. economy — which entered a recession in February — and the OCC wants national banks to take a hard look at their asset quality. It’s not an easy assessment to make. Banks have granted repayment deferrals of 90 days or greater to many of their borrowers at the same time as the federal government suspended troubled debt restructuring guidance and pumped money into the economy through the Paycheck Protection Program. A clear asset risk profile has yet to emerge for many institutions.

“Some of the traditional metrics that we’ve used to determine asset quality … could be masked by a lot of the relief efforts,” says Maryann Kennedy, senior deputy comptroller for large-bank supervision at the OCC. “Many of our institutions are going back and retooling many of their stress testing models in response to the breadth, depth and velocity of the number of programs that they’re instituting there.” 

Just because OCC examiners don’t have personal contact with their banks doesn’t mean they haven’t been talking to them through the pandemic. Some of those conversations are an effort to triage which banks may need the greatest attention from regulators.

“There is a real time risk-based assessment of what’s happening with our national banks and federal savings associations, so we can try to understand how we move forward and where we focus our attention. [It’s] is very challenging, similar to the challenge [banks have] trying to understand their asset quality and the situation with their loan portfolios,” says Kennedy.

The OCC is essentially trying to assess the pandemic’s economic impact on national banks and thrifts while those institutions make their own credit risk assessments.

“A real-time conversation that’s going on right now, particularly in that in our larger banks, is ‘What is your stress forecasting looking like for provision expense in the second quarter, as well as what could be those potential impacts to earnings, particularly as it relates to any earnings expectations that might be out there?’” Kennedy says. “Those are challenging conversations going on right now … as our bank managements sort of work through the struggle [with] some of those specifics. It’s not a real predictive economy right now.”

Repatriating Office Employees While the Pandemic Continues

It is the greatest human resources challenge of the modern corporate era.

In early March, U.S. companies — including most banks — sent their employees home to work as the Covid-19 pandemic gained strength and many states issued shelter-in-place requirements and business lockdowns. Most banks kept their branches open for limited customer access, and continued to staff their operations centers, but sent most of the remaining people home. Now, banks are starting to repatriate these employees as state restrictions are eased, and the economy begins to reopen.

There are a number of factors to consider as your bank prepares to repatriate its office staff, including how to keep them safe and changes that will have to be made to the workplace. Some employees may be leery of returning to their old offices since the Covid-19 infection rate is still rising in many states, even though the national rate is slowly declining. New precautions need to be put in place to protect your staff from infections, and these will need to be communicated clearly to them.

It seems highly likely that U.S. companies will have to learn how to live with the Covid-19 virus for the foreseeable future.

Darin Buelow, a principal with Deloitte Consulting LLP and leader of its global location strategy practice, says the only comparable experience in recent memory was the hectic week after the Sept. 11, 2001 terrorist attack on the World Trade Center towers in New York. Most of lower Manhattan was closed, and the big Wall Street banks had to make alternate plans so they could operate when the financial markets reopened on Sept. 17.

The banks had to figure out how they were going to get ready for the market reopening, and to do so without trying to cram and jam all their employees back into lower Manhattan,” Buelow says. “This prompted them to [move to] their business continuity sites, if they had them, in the suburbs. And if they didn’t, very quickly look for those locations where they could try to get trading desks and phone banks and everything else they needed to occupy offices.”

Of course, this was in the days before widely available video conferencing services. Many households still had dial-up internet service, so relying on a distributed workforce wasn’t an option. “But it was short-lived, and Manhattan was deemed to be okay again,” Buelow says. “What we’re experiencing now is new for all of us.”

Buelow has five suggestions that bank management teams should consider as they prepare to bring their employees back into the office.

Prioritize Employee Health and Safety
To make employees feel safe while the pandemic continues, banks should provide them with personal protection equipment (PPE) while also conforming with new, Covid-19 hygiene standards that have started to emerge. Banks should be stockpiling PPE supplies now, even if they don’t anticipate bringing their people back until the fall or later. Banks that have kept their branches and operations centers open have already had to take these precautions, although they now be applied on a larger scale. “Demand is increasing because there are more companies that are planning on having those stockpiles ready to go for when reentry happens,” Buelow says. “But also, the supply curve has been increasing. We’ve got more companies engaged in producing those products now, and they’re really starting to ramp up.” Of course, this could change if a surge in infections occurs this fall as the economy reopens, leading again to scarcities.

There are various Covid-19 hygiene standards that companies can rely on as they prepare their workplaces for reentry. The Occupational Safety and Health Administration has released a set of recommendations — “Guidance on Preparing Workplaces for Covid-19” — as have the International Facility Management Association and the Building Owners and Managers Association International. And of course, banks should be checking state and local guidance and requirements as well.

Modify the Workplace
Most offices will have to be reconfigured to provide enough room to maintain social distancing precautions, and this could limit the available space for people to 25% of its normal capacity. “If they try to get up to 50% capacity, most layouts are going to be problematic, and it may be difficult to achieve six-foot distancing,” Buelow says.

Banks with employees in high-rise office towers will have to work closely with their landlords to address a number of issues. “Many [banks] are going to be in multi-tenant situations,” Buelow says. “Landlords have responsibility, oftentimes, for the lobby, for lobby security, maybe lobby temperature testing, maybe lobby hygiene, bathroom hygiene and ventilation. Increasing ventilation is something that’s being debated, the merits of that, the feasibility of that to remove airborne contaminants from offices. Not an easy thing to do, but the landlord has to be part of that conversation. Modifying the workplace is not just what to do in your own space and your cube farm, it’s also engaging with the landlord.”

Elevators in high-rise office towers pose another challenge because they will only be able to take a small number of people at a time to maintain some level of social distancing. “Imagine in a multi-tenant building that has an elevator design platform, which presumes that people are going to pack those elevators [from] 8:00 to 9:00 in the morning,” says Buelow. “Even if your company decides that it’s only going to bring back 10% or 15% [of its employees], if there are other companies that have a much higher number than you and you’re not the only one using those elevator banks, it’s going to slow it down for everyone.” Buelow says that some companies are already modeling how long it will take employees and customers to reach a desired floor using their building’s elevators. He knows of one major company that estimated it would take two hours in the morning and evening for people to enter and exit the building.

Prepare the Workforce
Communication is a critically important piece of the office worker repatriation process. Returning employees will need to be trained on any new Covid-19 safety procedures or mechanisms that have been put in place, as well as proper PPE use. Equally important, employees will need assurances that their health and safety are the bank’s top concern. “I think most companies are going to be very proactive, transparent and genuine in their communications to their employees,” Buelow says. “I think it’s important to communicate with employees that the company is going to place their health and safety above everything else. Be open about the timing of when you think you’re going to be looking at coming back. We’ve seen companies say things like, ‘We know it’s not going to be before Labor Day.’ Or, ‘We know it’s not going to be before 2021.’”

Buelow says some companies have assured employees who are afraid of returning to the office that there will be no repercussions if they continue working from home. “‘And when you feel comfortable coming back, we would love to have you, assuming the state and local regs allow it and we feel like we’ve been able to put in place the changes that we feel are necessary, in order to make it a safer workplace,’” he says. “I think it’s just all about communication and change management, and helping employees understand where the company’s priorities are.”

Develop Pandemic Management Protocols
These involve all the processes the bank will rely on to keep employees and customers safe. Some of these processes will be in response to federal, state and local mandates, while others will be developed by the bank itself.

“We’re already living in a country that has pandemic management protocols [PMPs] in place,” says Buelow. “You have to wear a face mask if you’re going to go to the grocery store. You might be gated on your way in, you might be subject to temperature testing. So those PMPs are a fact of life in many U.S. cities right now. And it could be that way for some protracted period of time. What we’re saying is that companies need to have new protocols and new procedures and new policies to deal with pandemic times.”

Buelow offers one example of a PMP that could become a common occurrence as employees start returning to the workplace. “What if you develop a fever while you’re at work, in the office on the 17th floor, at 3:00 in the afternoon?” he says. “Where do you go? What’s your routing? Who do you notify? What does day one look like on the first day of reentry? What can employees expect? What’s the protocol for testing and screening? What’s the work-at-home policy? I think there’s new policies that have to be written, new procedures and protocols that have to be developed and followed.” 

Use Technology to Enable New Ways of Working
It seems likely that companies will be forced to rotate their office staff until either an effective coronavirus vaccine has been widely distributed, or some level of herd immunity develops and naturally drives down infection rates. And there are a variety of technology tools that can help manage Covid-19 risk in the workplace.

If you’re going to do temperature screening, for example, you’ll need a way to track and manage that information while protecting the employee’s identity. “There are technologies out there to help with … contact tracing or contact awareness so that somebody who has a fever at 3:00 in the afternoon, who were they sitting near?” Buelow says. “Who did they brush up against? Who did they eat lunch with?”

Another technology, deployed either as a wearable or a mobile app, would enable employers to detect who an infected person came in contact with so it wouldn’t be necessary to quarantine an entire floor or department for two weeks out of an abundance of caution. “Deloitte has an application that just hit the street, called MyPath, which does a lot of these things,” Buelow says. “It’s a tool that companies can use for these kinds of self-certifications at home and contact awareness, and case management, and a number of other things to help clients and companies with all of the technological aspects of reentry.”

There is also a technology that monitors how rooms are being used and whether social distancing restrictions are being observed. “Are people congregating in rooms where they shouldn’t be having too many people in a particular room?” says Buelow. “Removing chairs or draping them so that people don’t use them doesn’t do any good. If a meeting is called in a conference room with 20 people and they just roll 20 chairs in there, they’re not socially distant anymore.”

The process of repatriating office workers includes a lot of unknowns. For example, how will they feel about working in a very different environment which may still pose an infection risk despite all the precautions? “We’re not really sure what reentry is going to look like,” Buelow says. “If the employer creates a space that is so antiseptic, and everyone’s wearing masks, and nobody’s in meetings with anyone else, and they’re behind barriers, it could actually discourage integration. If you had to wait in the lobby for an hour-and-a-half for an elevator, on top of all of that, would you really want to come back on Tuesday after your Monday experience? So, that remains to be seen, and it could further delay reopening.”

CEOs Weigh Challenge of Recalling Workers During Pandemic

The Covid-19 pandemic is a crisis at both the personal and corporate level.

Having sent most of their employees to work from home since March, banks are now making plans to gradually re-integrate them into their old work environment. Doing so while infection rates are still high – and in some locations, still rising – is a human resource challenge unlike any faced in the modern corporate era.

Can banks bring their employees back to the workplace and keep them safe – and are they ready to come back?

I’ve had this conversation with a number of bank CEOs and senior executives in recent months; they all treat office worker repatriation as a serious issue that demands a thoughtful and careful approach. To a person, they express reluctance to force employees to return to an office environment if they fear there is a greater chance of being infected there than in their own homes.

And since all of their banks have operated with a distributed work force for three months or more with little — if any — decline in productivity, there’s no sense of urgency to immediately pull everyone back to the office.

Large banks that operate from office towers in big cities may face the biggest logistical challenges in bringing people back.

In an interview for my story in the third-quarter issue of Bank Director magazine – “Surviving the Pandemic” – Bill Demchak, chairman and CEO at Pittsburgh-based PNC Financial Services Group, gave voice to the cautiousness that many bank leaders feel.

Demchak says his executive team has discussed the timing of when PNC might reopen its 33-story office tower in downtown Pittsburgh. “Should we start bringing people back sometime in June, given that the government says it’s okay?” he asks. “We ultimately decided not to.”

Demchak lists some of the many considerations. The bank would have to partition off sections of the floor space in Plexiglas to maintain social distancing. The software running the elevators would have to be reprogramed to control the flow of people to upper floors, and the small number of people who would be allowed in each car would have to stand facing the interior walls to protect themselves. Seventy percent of PNC employees in the tower also commute on mass transit, which would increase their risk of infection. And since most summer camps in the Pittsburgh area have been cancelled because of the coronavirus, pulling people back into the office would create an immediate child care issue for many.

There are advantages to having your people in the same place. “You get knowledge transfer; people learn new skills and you maintain the culture of behavior and norms that we want to promote as a firm,” Demchak says. “I don’t know that you get any of that by bringing 30% of the senior people back and ticking them off by surrounding them with Plexiglas and making them ride the elevators backwards.”

Fifth Third Bancorp in Cincinnati has already begun to repatriate some of its employees to their old office locations. About half of the bank’s 22,000 workers remained onsite, either in the branches or operations centers, during the pandemic.

The plan is to bring back the remaining 11,000 in three phases, according to Chairman and CEO Greg Carmichael, beginning with an initial 1,000 in phase one who are onsite now, working in social distancing arrangements. “We want to learn, make sure that’s going to go as well as we would expect it to,” he says. “There’s signage that’s required, how many people in an elevator, how many people in a bathroom, food service, all those types of things.” The remaining 10,000 will be brought back in the next two phases. Fifth Third is following recommendations from the Centers for Disease Control and Prevention for Covid-19 workplace health and safety, and going beyond them in some instances.

The bank also had to stock up on large quantities of personal protective equipment, and anyone who has tried to purchase facemasks and hand sanitizers knows they are hard to come by even in small numbers. “We’ve got the hand sanitizers. We’re doing the wipe downs of the workstations, and we’ve got face coverings for all 11,000 employees,” Carmichael says.

The bank has also established an employee hotline to report violations of the new safety rules. “If someone sees a situation they’re not comfortable with, we have a hotline they can call immediately and we’ll address it immediately,” Carmichael says. “We want our employees to know that their safety is job one for us, and making sure we’re protecting them the best we can.”

It’s likely that not every employee will want to return to their old office. “The people that I talk to are really in fairly diametrically opposed camps right now,” says Darren King, the chief financial officer at M&T Bank Corp. in Buffalo, New York. “There’s the crowd that says, ‘I love working from home. I never want to go back to the office.’ And there’s an equally passionate crowd that says ‘As soon as the office is open, let me in. I want out of my house.’”

The trick will be offering flexibility to those employees who prefer to remain home-based, while keeping the office crowd safe. Like most banks, the majority of M&T’s staff have been working remotely through the pandemic; because productivity hasn’t suffered, it may be a matter of choice for some.

“We would not force anyone who’s uncomfortable and able to work from home to come back,” King says.

Former CFPB Head on a Post-Pandemic Banking Industry

Banks across the country have been frontline responders in the unfolding economic crisis.

Many are offering forbearance and modifications to borrowers facing health emergencies or financial hardship. But they should take care not to assume business will get back to normal for their consumers, even as states reopen and economic activity thaws, says former CFPB Director Richard Cordray.

Cordray, the former Ohio Attorney General, headed up the Consumer Financial Protection Bureau after its inception in the passage of the Dodd-Frank Act until his resignation in 2017. The sometimes-controversial agency focuses on consumers’ financial rights and protections; its jurisdiction extends to institutions above $10 billion in assets.

Bank Director recently spoke with Cordray after a COMPLY Summit Series webinar that he participated in about how banks can navigate customer relationships during and after the pandemic.

BD: This pandemic has led banks to roll out consumer-friendly policies, like waiving or suspending overdraft or late fees. Do you think these changes are permanent, or do you see them coming back?
RC: The fees have been put on hiatus at certain banks, but they’re still out there. It has been better practice for banks, during this crisis, to be very consumer friendly —  recognizing that, through what is clearly no fault of their own, many of their customers have been required to stay at home, their businesses have been shuttered and they don’t have income coming in — and give them a break.

BD: What should guide banks as they decide how to help consumers?
RC: At this point, I think the pressure on banks is mostly reputational. If banks are not perceived as serving their customers in involuntary distress well, they end up in trouble as a matter of public branding. There’s a certain normative effect on banks now, in the depths this crisis, that has nothing to do with what they’re legally allowed or not allowed to do.

If bank customers are going regain their footing in the future, shoving them into bankruptcy or financial ruin is not helpful and it’s not in the bank’s own interest. Reputational risk is a real and significant thing that banks have to think about. All you have to do is think about Wells Fargo and how their reputation has been damaged in recent years. Banks do not want to take on the brand of being a company that’s not sensitive to their customers.

BD: There have also been consumer-friendly practices coming out of the CARES act and different edicts from state government for moratoriums on evictions. How can financial institutions aid in these efforts?
RC: To the extent that banks hold car loans or mortgages [that aren’t subject to CARES Act relief], they have a judgment to make: Are they going to afford similar relief to their customers? Some are, some aren’t. If you’re holding auto loans, you can dictate that there will be no auto repossessions during this period. I think that would be by far the better practice.

BD: We’ve seen announcements from regulators encouraging banks to work with customers. Is there anything regulators or banks could be doing more of?
RC: I think it would make sense for mortgages holders to give forbearance to their customers, whether or not its mandated by the CARES Act. Foreclosure is a last resort. If we have a rash of foreclosures, they’re going to get tied up in the courts and it’ll be difficult for mortgage holders to foreclose quickly. They will start to suffer the loss of the abandoned and vacant houses that we saw during the last crisis, and that’s something to be avoided at all costs for them.

BD: Once we return to a more normal operating environment, I imagine many of these types of forbearance relief will go away. Do you have any thoughts about how banks can help customers through this transition?
RC: The wrong way to do this would be to say that debts accumulated over the course of the emergency orders need to be repaid all at once. That is not realistic and is not going to be successful. If people couldn’t make those payments during this period, they’re not going to have all that money suddenly to pay it just because we came to the end of this period. The result will be foreclosures, evictions and repossessions. The right thing to do is have that amount be repayable over time or put it on the back end of the loan.

On the Radar For the Pandemic’s Next Phase

The banking industry must address and satisfy several competing interests as executives and the workforce adjust to the new normal of life during a pandemic.

Banks across the nation have stepped up as leaders in the fight against the Covid-19 pandemic. Now as the dust settles from the initial shock in mid-March, what are issues that your bank should be prepared to address looking forward?

When and how should we reopen our physical locations?

While banks have continued operations during the pandemic, many limited their services. It is not clear when these services will fully ramp back up. As your bank debates the best course of action for your circumstance, consider the following:

  • Prioritize health and safety by installing physical protection at branches and offices, including sneeze guards at teller windows, medical screening of employees, enhanced cleaning procedures and required use of personal protective equipment.
  • When considering return-to-work policies, be flexible and responsive to employee concerns and location-specific issues.
  • Apply the lessons learned during this period and embrace (or even improve) the technology for working remotely.
  • Task teams with understanding federal, state and local requirements related to the pandemic and the bank’s corresponding compliance obligations. These teams should meet regularly to ensure full compliance at all locations.

The ABA published a free matrix to assist banks in their reopening efforts.

We participated in the Paycheck Protection Program; now what?

There are some important post-lending matters for banks that participated in the Paycheck Protection Program to consider:

Brace for litigation. Some banks have faced lawsuits from applicants that failed to receive PPP funding. While your bank may not be able to avoid a similar lawsuit, it should avoid liability in these suits by following established procedures and demonstrating that your bankers did not deny applicants on a prohibited basis (race, religion, gender, age, among others).

Additionally, banks have encountered complaints filed by agents of borrowers seeking lender fees. You should not face liability in these suits if you did not execute a binding agreement with an agent before loan origination. Your bank’s defense will be even stronger if you mitigated this issue on the front end —for example by requiring borrowers to certify whether they used an agent, and if so, requiring the agent to complete a Form 159.

Stay current on loan forgiveness requirements. The Small Business Administration stated that it would review all PPP loans over $2 million following each loan forgiveness application submission. Thankfully for lenders, banks can rely on borrower certifications on loan forgiveness amounts. Nevertheless, agencies continue to release new guidance, and customers will rely on lenders to help them through the process.

Look for new opportunities to serve your customers and communities. There are rumors that Congress may issue a third round of PPP funding that will apply to more eligible borrowers. The Federal Reserve announced the expansion of its Main Street Lending Program, which can be a valuable source of liquidity as banks seek to meet customer needs. The SBA also released guidance on the sale of participating interests in PPP loans.

What regulatory or supervisory concerns should we be prepared to address?

Credit Decisions. Your bank must continue to balance meeting customer needs and making prudent credit decisions in the current economic environment. Many banks have started tightening credit standards, but this comes with a potential uptick in complaints about harmful lending practices. Regulators have indicated that they will scrutinize lending activity to ensure banks comply with applicable laws and meet customer needs in a safe and sound manner. The Office of the Comptroller of the Currency urged banks to “prudently document” their PPP lending decisions. The Consumer Financial Protection Bureau instructed small business owners “who believe they were discriminated against based on race, sex, or other protected category” to file complaints. Your decisions on credit parameters must be well thought out and applied uniformly.

Bank Secrecy Act/Anti-Money laundering Focus. Banks may face heightened risks from new customers or new activities from existing customers. For the first time since 2014, the Federal Financial Institutions Examination Council released updates to the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) examination manual. While these updates are not directly related to the pandemic, regulators may scrutinize BSA/AML efforts at your next examination. Use this updated guidance as a springboard to assess your BSA/AML compliance program now.

IT and Security Concerns. Banks used technology enabling virtual or remote interactions during the pandemic, increasing risks associated with IT security. The regulators issued a joint statement addressing security risk management, noting that bank management cannot rely on third-party service providers and must actively ensure technological security. Expect this to be an area of focus at your next examination.

How the Covid-19 Crisis Turned One CEO Into Counselor in Chief

Since taking over as CEO of Amalgamated Bank in 2014, Keith Mestrich has demonstrated his management chops by reengineering the $5.3 billion institution’s balance sheet and improving its profitability.

But that experience pales in comparison to the challenge of running a company headquartered in New York City, which is ground zero for the Covid-19 pandemic. Most of Amalgamated’s 400 employees have been working from home since mid-March, including Mestrich. “I never thought that I’d be in the sixth week of running a bank from the basement of my house, by myself,” he says.

The pandemic has had a devastating impact on the U.S. economy; the likelihood of a severe recession requires management teams to carefully monitor their banks’ vital signs, including loan losses, liquidity and regulatory capital levels. But most bankers are experienced at this, most recently during the Great Recession in 2008. They know how to manage balance sheets through an economic downturn.

Managing employees through a crisis of this magnitude is another matter entirely.

One obvious way in which the current situation is starkly different from the last recession is the incredible personal stress the pandemic has placed on employees. Social distancing and sheltering orders have forced most employees to work remotely, either isolating them or requiring them to juggle work and parenting if young children are in the home.

These stresses are layered on top of the fear of infection. In New York City, where most of Amalgamated’s employees work, there were more than 138,000 confirmed cases of Covid-19, with nearly 10,000 confirmed deaths and more than 5,000 probable deaths through April 22, according to the New York City Department of Health and Mental Hygiene. And of course, the news has been full of stories about the city’s overcrowded hospital emergency rooms and the desperate, daily search for ventilators and protective gear.

People are frightened, including many Amalgamated employees. One of Mestrich’s jobs now is to be counselor in chief.

“I spend a huge amount of my time just checking in with people at all levels of the bank,” Mestrich says. “People who have to come in and work have different levels of fear and … and that is calibrated by their own family situation. I talked to one woman who works in one of our branches, who has three kids, and she’s a single mom, and knows that if anything were to happen to her, [it] could be really devastating, so her fear level is very different than somebody who’s a single person and relatively young and healthy.”

He has also heard positive stories from his employees. “I got a great message from one guy – the only member of our staff who I know was actually hospitalized – [that] he was going back to work,” Mestrich says. “He’s recovered and doing well.”

The fear that some Amalgamated employees experience could magnify when they’re asked to return to their old work environment. “I think coming back is going to be really challenging, especially for organizations that are in hot spots,” he says.

Will companies be required to test their employees and verify the results, and will social distancing requirements remain in place in the office? Amalgamated will rely on guidance from the government in repatriating employees, although Mestrich notes that “guidance right now, as of today … is very all over the place.”

No matter how this normalization process is executed, Mestrich says it will have to be done with great sensitivity. “I think we’re going to have to be unbelievably empathetic to people who have any number of situations, whether they’re a little bit older worker or they have underlying medical conditions or they still have kids at home and don’t have any other childcare arrangements or they’re just fearful,” he says.

Amalgamated has its roots in the U.S. labor movement. The bank was founded in 1923 by the Amalgamated Clothing Workers of America to provide banking services to its members and is still 40% owned by the union’s modern day successor, Workers United. Mestrich says many of the private sector unions that bank with Amalgamated have “seen significant layoffs and a lot of stress, both in terms of trying to figure out how to service their members, but also concerned about revenue dropping from dues income.”

And of course, many union members lave been laid off as well. In early April, Amalgamated launched the Frontline Workers Fund to provide financial support to workers impacted by the pandemic, including health care, grocery, cleaning service, food service, domestic and retail workers. It contributed $50,000 to stand up the fund and will donate 10 cents whenever a customer opens a new account or spends over $10 using the bank’s debit card. Amalgamated will donate proceeds from the fund to other union organizations for distribution.

The Amalgamated Foundation has also joined several other large foundations to establish the Families and Workers Fund. This fund will also focus on workers, families and communities that have been impacted by the pandemic. It has an initial commitment of $7.1 million, with a goal of raising $20 million. Amalgamated will also manage the fund’s operations.

In one sense, these two initiatives are just larger examples of the empathy that Mestrich has for his own employees. After all, what is philanthropy but empathy in action.