Recognizing the significant and long-lasting effects of the coronavirus pandemic on financial institutions, federal and state financial regulators on June 23 issued joint guidance for how examiners should assess the effects of COVID-19 on the safety and soundness of banks and credit unions.
The guidance directs examiners to assess institutions according to existing agency policies and procedures, and to consider the appropriateness of management actions to address COVID-19 challenges. It provides specific instructions for examiners when considering an institution’s risk assessment, capital adequacy, asset quality, management actions, earnings, liquidity and market risk sensitivity.
“Examiners should assess the reasonableness of management’s actions in response to the pandemic given the institution’s business strategy and operational capacity in the distressed economic and business environment in which the institution operates,” the agencies said. “When assigning the composite and component ratings, examiners will review management’s assessment of risks presented by the pandemic, considering the institution’s size, complexity, and risk profile.”
The guidance states that examiners will not criticize financial institutions for the appropriate use of government backstops to meet liquidity needs, such as the Federal Reserve's discount window or the National Credit Union Administration's Central Liquidity Facility.
When determining whether a formal or informal enforcement is necessary, examiners should consider whether the institution appropriately planned for resiliency and operational continuity, has implemented prudent policies and is pursuing “realistic resolution of the issues confronting the institution,” they added.
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