The COVID-19 pandemic has impacted financial institutions from nearly every angle imaginable. The pandemic has caused financial stress for borrowers as well as institutions themselves, triggered economic uncertainty, and even caused an upheaval in daily operations as many states issued various forms of stay-at-home and shelter-in-place orders. As such, federal and state regulators have come together to issue new guidance for examiners of financial institutions in the current climate.
New guidance was issued this week by major regulators, including the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and state financial regulators.
The overall message to regulators is that they should conduct their examinations with some understanding and flexibility amid the pandemic, mindful of the fact that everything from asset quality to capital adequacy and operations will likely be impacted in some way.
“Stresses caused by the spread of COVID-19 have led to significant economic strain and adversely affected global financial markets,” the regulators said in the announcement of the new guidance. “The interagency guidance instructs examiners to consider the unique, evolving, and potentially long-term nature of the issues confronting institutions due to the COVID-19 pandemic and to exercise appropriate flexibility in their supervisory response.”
In addition to assessing each institution’s financial condition, examiners are urged to assess “the effectiveness of each institution’s risk assessment and response to the economic changes.”
Examiners are directed to take special consideration of several factors, including that institutions have been encouraged to use their capital buffers to continue lending activities, that “limited operational capacity” may impede institutions from normal loan review processes, and that supporting documentation for credit classification may be limited currently, among other factors.
The new guidance also directs examiners to abstain from criticizing or penalizing institutions for modifications they have made for borrowers during the pandemic or for participation in the Small Business Administration’s Paycheck Protection Program.
Despite some concessions during this time, the regulatory agencies maintain that ratings will be applied and downgrading may be necessary for some institutions. However, in the case of a downgrading, “examiners will give appropriate recognition to the extent to which weaknesses are caused by external economic problems related to the pandemic versus risk management and governance issues,” the agencies stated in their guidance.
Also, if an examiner issues a supervisory action, “the agencies will tailor their response to the institution’s specific issues and the willingness and ability of institution management to resolve the issues,” according to the new guidance.