The current outbreak of the coronavirus has triggered considerable press coverage about the steps the Federal Reserve Board and the Federal Open Market Committee may take to reduce interest rates and soften the adverse impact of the virus on the U.S. economy. However, the bank regulators have other tools that, appropriately used, can address other adverse impacts of the virus on our economy. These tools include flexibility on branch office closures, providing relief to troubled borrowers, the ability to extend credit to borrowers who may not ordinarily qualify, flexibility on municipal finance exposures, and the ability to set up temporary locations. In combination with other forms of relief, these tools are important to a nationwide response.
Banks are generally prepared for such contingencies and likely have been dusting off their plans for the impact of this coronavirus. Since 2007, federal bank regulators have encouraged banks to undertake pandemic planning to reduce the likelihood that a bank’s operation will be significantly affected by a pandemic event.1 That planning is expected to be part of a bank’s business continuity plan. Pandemic planning is to focus particularly on the potential for severe staffing shortages.
Further, of course, federal bank regulators have considerable experience dealing with the effects that natural disasters, such as hurricanes and severe storms, wildfires, and even volcanic eruptions, have on bank operations. Those natural disasters may be analogous to the effect of a serious pandemic. Thus, as banks face the coronavirus threat, it is worthwhile reviewing what steps the regulators have taken in the past when banks have been faced with natural disasters.
In the case of natural disasters, the bank regulators have exhibited flexibility in permitting office closures without prior notice. Section 42 of the Federal Deposit Insurance Act prohibits a bank from closing a branch except after 90 days’ notice to its primary federal regulators.2 The statute does not expressly provide an exception for emergencies. However, the regulations that the regulators have adopted to implement that statute expressly provide that, in the case of an emergency or disaster at an office that requires the office to be relocated to a temporary location, a bank may notify the appropriate office of the regulator within three days of that relocation.3
Further, the federal bank regulators, working with the Conference of State Bank Supervisors, have repeatedly recognized the serious impact of hurricanes and wildfires on customers and operations of banks. The regulators have provided appropriate regulatory assistance to affected banks. That assistance usually includes the expressed understanding that the damage caused by the natural disaster may affect compliance with publishing requirements for branch closings and merely ask that affected banks notify their primary regulators in such events. The Office of the Comptroller of the Currency has permitted national banks in such circumstances to close affected offices at the discretion of the banks in the understanding that only those bank offices directly affected by potentially unsafe conditions will close and that those offices should make every effort to reopen as quickly as possible.
Of particular importance to policy makers and government officials in making such decisions will be to weigh appropriately the impact of allowing local branch closures, presumably to permit workers to work remotely if possible, with the potential that branch closures may cause concern regarding consumers’ access to their funds. We think it likely that any such decision will incorporate assurances that consumers have multiple alternatives to access their funds, including through electronic transactions and access to ATMs.
Historically, in these kinds of situations, the bank regulators have issued pronouncements urging banks to work constructively with affected borrowers. As well, behind the scenes, they have assured banks that examiners will not criticize prudent efforts by the banks to adjust or alter terms on existing loans in affected areas. Loan modifications are then evaluated individually to determine whether they should be deemed “troubled debt restructurings,” as the regulators recognize that efforts to work with borrowers in communities under stress can be consistent with safe and sound practices and in the public interest.
The Community Reinvestment Act
The Community Reinvestment Act (“CRA”) is designed to establish the priority for a bank’s meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. In times of natural disasters or crisis—such as may exist with pandemic fears, the bank regulators recognize and give CRA credit to banks for community development loans, investments, and services that help federally designated disaster areas in the bank’s assessment areas.
The bank regulators have also expressly recognized that local government projects may be negatively affected by natural disasters. Therefore, the regulators have asked that banks monitor municipal securities and loans that might be affected by the disaster; they also have encouraged prudent efforts by banks to “stabilize” such investments.
The bank regulators historically have understood that banks can face challenges in re-opening facilities after an emergency situation. In such cases, they pledge to expedite requests for temporary facilities, with even a telephone notice sufficing to initiate the approval process and written notification being submitted subsequently.
If the emergency affects a bank’s ability to file required reports, the bank regulators have indicated that they would not expect to assess penalties during this period.
At this point, we do not know how the coronavirus response will develop. We hope it will not develop into a full pandemic akin to a natural disaster. However, if it does, the bank regulators have precedent and tools to deal with it that also may be helpful to our economy.