Regulatory Examinations in the Time of COVID

Since March of this year, there has been a plethora of guidance released related to examiner expectations, exceptions, and leniency being given related to several different regulations during the complications that have arisen in the banking industries specifically since COVID-19. While we won’t discuss the details of every single one of those guidances, exceptions and leniencies here, as that would fill an entire manual rather than a newsletter article, it is important to understand the current overall climate with examiners and what examiners are saying banks should expect as examiners inspect the bank during this time.

On Wednesday, August 26, 2020, Federal Reserve Board Governor Michelle Bowman spoke at the Kansas Bankers Association Conference regarding the impact of COVID-19 on the banking industry. Bowman mentioned that the FRB paused examinations in March in order for banks to be able to focus on meeting the financial needs of its customers, including the Paycheck Protection Program. The FRB has since resumed examinations of its banks but will be focusing on higher risk banks first. This would be banks that particularly have higher concentrations of loans in high risk or stressed industries or areas. Bowman reiterated what has been previously stated in guidance that the agency will remain sensitive to the unique operational challenges that banks have been facing when it comes to banking in the COVID-19 era.

Representatives from the OCC and FDIC have not made similar speeches or statements to what Bowman discussed at the Kansas Bankers Association Conference. However, the OCC and FDIC did join the FRB in June of this year in releasing Interagency guidance related to assessing Safety and Soundness in the time of COVID-19.In that guidance, the agencies states that during examinations, they would be taking bank asset size, complexity, and risk profile into account when it comes to the unique stresses that have been put on the bank at this time. The agencies will look to whether they believe the bank has adequately addressed those stresses and is responding to mitigate safety and soundness risk appropriately. The agencies reiterated that as mentioned in previous statements and guidance, if the bank followed those guidelines that allowed for certain exemptions or leniencies, the bank would not be penalized for those actions. However, if the examiners find that the bank has not adequately met the stresses and responded to mitigate safety and soundness risk at the bank outside of those express exemptions or leniencies, the examiners may consider providing feedback or in some cases downgrading the bank’s composite or component ratings under existing examination procedures.

As such, although a wealth of leniencies have been given by the agencies, the bank should still do its best to continue to follow the rules and keep safety and soundness in mind. It is more important than ever that banks thoroughly document situations where the bank has faced a hardship or difficulty related to a COVID-19 so that the examiners are fully aware of everything the bank has done in order to do its best to comply with all the rules during those hardships or difficulties.

Banks may find our pandemic toolkit generally helpful: