By Carl White, Senior Vice President, Supervision
This post is part of a series titled “Supervising Our Nation’s Financial Institutions."
The last several months have been challenging ones for all of us, both personally and professionally. We’ve all had to adjust, especially when it comes to getting essential work done. For the Federal Reserve and other bank regulators, the challenge has been to maintain close oversight of our financial institutions and to assist banks as they work to keep credit flowing to their customers. It’s been a delicate balancing act, but one that appears to be working well thus far.
Since a national emergency was declared in mid-March, the Fed—either alone or in concert with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and state bank supervisors—has strived to ease some of the regulatory requirements on banks. At the same time, it has also operated liquidity facilities to assist the enactment of monetary and fiscal stimulus programs, like the Small Business Administration’s Paycheck Protection Program.
Some of these actions have been in the form of guidance or more informal communications with financial institutions.1 Others have been the result of legislative (the Coronavirus Aid, Relief and Economic Security Act) or supervisory decisions.
More generally, the Fed has been emphasizing monitoring and outreach over traditional exams, especially for community banks. Beginning in late March, exams for banks (and holding companies) with assets of less than $100 billion were put on hold.
During the pause, examiners focused their attention on monitoring and analyzing bank operations, liquidity, capital, asset quality and consumer compliance risk. Examiners have also used complaints data gathered during the pause to identify any practices that may be detrimental to consumers and will continue to do so. Larger institutions were also evaluated for operational resiliency and potential effects on financial stability.
From an outreach perspective, the Fed hosted numerous webinars to connect directly with supervised institutions and respond immediately to their questions. Federal Reserve Bank of St. Louis supervision staff also participated in teleconferences hosted by state banking associations. These outreach efforts will continue.
The New Normal for Now
The Fed announced in mid-June that exams would resume for banks of all sizes.2 But how the exams will be conducted will differ from their pre-pandemic routine. For now, all exams will be completed off-site, and a streamlined approach will used for low- and moderate-risk banks so that resources can be focused on banks exhibiting higher risk. Some of the primary factors to determine high risk are:
- Credit concentrations in especially hard-hit industries like hospitality
- Locations in COVID-19 “hotspots”
- Demonstrated potential financial weaknesses before the pandemic
- Heightened consumer compliance risk due to product offerings or business operations
- A lack of risk management efforts relating to the pandemic
While exams resume, supervisory staff will continue to monitor all banks for safety and soundness. Consideration will be given to unique and challenging operating conditions that will likely linger for the foreseeable future. Supervisors continue to stress that banks will not be penalized for good faith efforts to work with their borrowers who are having financial difficulties associated with the pandemic.
We still don’t know the full effect the pandemic will have on businesses and institutions across the U.S. It is likely, however, that the impact will be uneven, with certain parts of the country and some institutions experiencing greater challenges than others. Communication between bank management and bank supervisors will remain a vital component to understanding the unique challenges that banks are facing as we work together to better understand the longer-term effects the pandemic will have on the institutions we supervise and their local economies.
Notes and References
- See the March 23 press release "Federal Reserve Announces Extensive New Measures to Support the Economy,” the March 22 statement “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (PDF)” and the March 26 statement “Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19 (PDF).”
- See the June 15 press release "Federal Reserve Board Announces it Will Resume Examination Activity for all Banks, After Previously Announcing a Reduced Focus on Exam Activity in Light of the Coronavirus Response."