Over the past two weeks, we have received numerous inquiries from financial institutions on what actions should be taken or considered to address the COVID-19/Coronavirus pandemic.  While every bank is different and the current situation is evolving each day, we have engaged in numerous discussions with banks on various strategies and considerations that are being reviewed or implemented during this uncertain time.

• Business Continuity Plan. At this point, each financial institution should have implemented the pandemic planning contingencies contained in its business continuity plan.  On March 6, 2020, in response to the burgeoning public health crisis, the Federal Financial Institutions Examination Council (“FFIEC”) issued revised guidance on how to address pandemic planning in a financial institution’s business continuity plans (“Pandemic Planning Guidance”).  In general, the revised Pandemic Planning Guidance represents an update to the FFIEC’s previous guidance issued in response to the avian flu pandemic of 2007.  Although there are no substantive updates contained in the revised Pandemic Planning Guidance, the FFIEC’s updated guidance reiterates and emphasizes the importance of maintaining a pandemic response plan that includes strategies to minimize disruptions, and ensure recovery, from a pandemic wave.  In particular, the updated guidance states that banks should consider minimizing staff contact, encouraging employees to telecommute and redirecting customers from branch to electronic banking services.  We anticipate that regulators will be reviewing an institution’s utilization of its business continuity plan at upcoming safety and soundness examinations.

• Branch Operations. Based on our discussions, we believe that many banks have taken or plan to take actions related to their branch operations.  Below is a summary of various actions that a bank may wish to take regarding its branch operations.

  • Branches Remain Open with Caveats. By and large, branches remain open and available to assist customers with their banking needs; however, a number of banks have elected to close branch lobbies and direct customers to utilize drive-up facilities, walk-up teller lines and ATM machines to the extent possible.  In addition, customers are also being directed to banks’ online platforms.  For customers who require physical or in-person assistance, such as access to a safe deposit box, some banks are requesting customers schedule an appointment with bank employees.

  • Branch Closures. To the extent a bank may be readying a branch closure strategy, below are federal and state requirements that must be satisfied.

    • Federal Requirements. On March 13, 2020, the Federal Deposit Insurance Corporation (the “FDIC”), the Office of the Comptroller of the Currency (the “OCC”) and the Board of Governors of the Federal Reserve System (the “FRB”) (collectively, the “federal banking regulators”) each issued corresponding guidance addressing COVID-19’s impact on customers and bank operations.  As part of that guidance, the federal banking regulators have indicated that bank branch closures, or changes to branch hours, are expected and that in such an event it is recommended that a bank (i) notify the applicable federal banking regulator as soon as practicable of the closure/change in bank hours, (ii) comply with any notice or filing requirements with applicable state banking regulators and (iii) place a customer notice on the front entrance of the impacted branch describing the reason for the closure and/or change in hours.

    • State Law Requirements. While closing lobbies and redirecting customers to drive-ups does not generally require a bank to obtain the approval of state banking authorities, at least some state banking authorities have requested that banks provide notice of such changes.  For example, Illinois-chartered banks seeking to fully close a branch(es) or change branch hours must provide prior notice to the Illinois Department of Financial and Professional Regulation, Division of Banking (the “IDB”) and obtain an official proclamation from the IDB under the Illinois Banking Emergencies Act (205 ILCS 610).  In addition, the bank must post notice of the temporary closing or change in branch hours and the authorization for such change on the main entrance doors of the applicable branch.

  • ATM/Cash-On-Hand Strategies. As part of a push to increase customer traffic to automated teller machine (ATM) locations, and minimize direct customer contact, banks indicated that they have increased or plan to increase ATM daily allowable cash withdrawal limits.  How large of an increase is ultimately dependent on the individual circumstances of the institution.  In addition, banks may experience greater cash withdrawal requests from depositors.  As a result, banks may wish to keep higher levels of cash in its branch offices.

  • Regular and Periodic Cleaning of Branches. Each bank we spoke with also indicated that they have implemented enhanced periodic cleaning of their branches and offices.  Some banks have indicated that “deep” cleanings are being completed on a biweekly or weekly basis.

• Employee Considerations.

  • Flexible Work-from-Home Arrangements. We have also discussed with institutions the potential for implementing flexible work-from-home or telecommuting arrangements for specific business line employees.  Whether or not this is a viable option for a specific institution is dependent upon a number of fact-specific circumstances — e.g., whether the bank’s information technology systems can support an increased number of employees utilizing the bank’s server remotely, ensuring that each employee who remotely accesses the bank’s systems can do so in a confidential manner that protects that bank’s data, whether there are geographic and business-line specific considerations that prevent working remotely, etc.  Nonetheless, a bank should plan to test their information technology systems and update their information technology policies prior to implementing such arrangements.

  • Utilization of Split-Staff and Split-Location Strategies. In addition, split-staff and split-location strategies have been discussed, with a number of banks indicating that they are currently utilizing a split-staff strategy.  Under a split-staff strategy, an institution staggers its employees on any given day.  For instance, half of the institution’s employees come in on Monday, Wednesday and Friday, and the other half of the employees come in on Tuesday, Thursday and Saturday – the idea being that by limiting employee interaction with customers on any given day a bank can maintain continued operations (albeit on a much more limited basis) if only one group of employees is potentially exposed to COVID-19.  In addition, certain institutions also indicated that they plan to utilize a split-location strategy.  Under a split location strategy, a bank splits its employee staffing across various branches and offices, with the rationale being the same as under a split-staff strategy.  If one location is potentially exposed to COVID-19, a bank’s operations can continue through its other locations.

  • Employee Training. Banks have also implemented staff training on how to properly interact with customers during this troubling time.  Typically utilizing World Health Organization and Centers for Disease Control and Prevention guidance, banks have sought to implement new procedures meant to limit physical contact (e.g., prohibiting handshakes) and eliminating or reducing scheduled meetings.

• Liquidity and Capital Considerations. During times of uncertainty and financial market volatility, such as was the case in the financial crisis and which we are experiencing currently, banks have often found it difficult to enhance liquidity and raise additional capital at a time when they need it the most.  Based on our discussions, we recommend that financial institutions review their current and near-term liquidity/capital strategies.  Below are a few items to consider.

  • Subordinated Debt and Equity Issuances. Bankers agree that reviewing the bank’s capital strategies in uncertain times is a critical consideration, including in order to address any potential need to enhance immediate or near-term liquidity or to shore up capital – the assumption being that banks may need to weather a prolonged economic slowdown.  Other banks may also wish to review various alternatives available to issue debt for additional liquidity, to potentially refinance outstanding debt arrangements at lower rates, or to provide additional capital.

  • Lines of Credit. As lenders, banks are aware that their loan customers may be considering a draw down on their existing lines of credit.  Banks may also wish to consider potentially drawing down on their existing lines of credit (e.g., Federal Home Loan Bank advances, holding company lines of credit, etc.) as an effective tool to increase the holding company’s or bank’s liquidity.  Before either drawing down any existing line of credit or utilizing the proceeds for any purpose other than increasing cash-on-hand, a bank should carefully review the covenants in the underlying loan agreements.

  • Securities Portfolio. Reviewing current strategies pertaining to an institution’s securities portfolio is also a consideration for banks.  Many banks have built-in gains in their portfolio.  Consequently, institutions are reviewing their portfolios to determine whether to realize existing gains to boost liquidity in the short-term or maintain its current strategy to assist earnings in the longer-term.

  • Stock Repurchase Programs. Many publicly traded banks have suspended their stock repurchase programs as part of a capital conservation strategy.  While no bank has announced plans to cut dividends, now is the time to review contingency plans and consider when such action may be warranted.

  • Federal Reserve Discount Window. If necessary, potential use of the FRB’s short-term emergency loans dispensed through the discount window is also being discussed.  While the use of the discount window may be considered a last resort for many institutions, as it has typically been viewed as indicating a bank is in dire financial straits, senior bank management is revisiting their policies and procedures to ensure the bank can access the discount window should circumstances require it.  Importantly, on March 17, 2020, the FRB and eight of the largest financial institutions in the U.S. coordinated to provide these large financial institutions access to the discount window.  Largely symbolic, the actions are being viewed by banks as an effort to remove the stigma of accessing the discount window.  Whether these coordinated efforts will be a success remains to be seen.

• Stress Testing of Loans. Banks are beginning to stress test their loan portfolios.  For some of these institutions, stress testing may be centered on specific industries and sectors of the loan portfolio that may have been more substantially impacted by COVID-19 (e.g., hospitality/restaurants, travel, entertainment and companies with supply chains dependent upon China or Europe).  For others, the entire loan portfolio is believed to be subject to stress due to the pandemic.  Regardless, we anticipate that many institutions will consider the need to begin stress testing their portfolios.

• Review of Insurance Policies. Another consideration discussed with banks is the need to review currently in-place insurance policies for business disruption coverage to determine if such policies would cover matters resulting from the COVID-19 pandemic.

• Assist Impacted Customers. Consistent with the recent guidance issued by the FRB, FDIC and OCC, financial institutions are considering offering a variety of relief options related to specific product/service lines to customers.  For example, some banks may waive late fees on loan payments or credit cards and others may waive ATM- and deposit-related fees.  It is expected that these relief options will be limited to specific product/service lines and limited to a certain period of time.

On March 19, 2020, the FDIC issued Frequently Asked Questions (“FAQs”) for Financial Institutions Affected by the Coronavirus Pandemic.  The FAQs provide insight into how the FDIC, and perhaps other federal banking regulators, will review, among other things, payment accommodations, reporting of delinquent loans, document retention and reporting requirements, troubled debt restructurings (TDRs), nonaccrual loans and allowance for loan and lease losses (ALLL).  Banks should review the FAQs in connection with providing any financial assistance to impacted customers.

The items noted above should not be considered definitive or exclusive.  A financial institution should carefully consider the above items, among others, and determine how to tailor any proposed changes to its operations in light of the very fluid circumstances surrounding the current COVID-19 pandemic.  Please feel free to reach out to any member of the Vedder Price Financial Institutions Group noted below to discuss the items addressed in this bulletin.

Click here to review the FFIEC’s revised Pandemic Planning Guidance.

Click here to review OCC Bulletin 2020-15 (March 13, 2020) (Pandemic Planning: Working With Customers Affected by Coronavirus and Regulatory Assistance).

Click here to review FDIC FIL-17-2020 (March 13, 2020) (Regulatory Relief:  Working with Customers Affected by the Coronavirus).

Click here to review FRB SR 20-4/CA 20-3 (March 13, 2020) (Supervisory Practices Regarding Financial Institutions Affected by Coronavirus).

Click here to review the FDIC’s FAQs for Financial Institutions Affected by the Coronavirus (March 19, 2020).