Community Banking Connections

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Embracing Agility and Innovation During the Pandemic and the New Normal
by Lisa A. White, Executive Vice President, Supervision, Regulation, and Credit, Federal Reserve Bank of Richmond

Like many of you, I continue to work from my home office as I’ve done since March 16, 2020. Though many of us quickly mobilized and adapted to a work-from-home posture, I hadn’t imagined myself signing on to my laptop in my dining room for more than a year. The Federal Reserve Bank of Richmond continues to plan for a gradual return to the office, and I find myself wondering what the new normal will look like — and which trends and new practices will become business as usual.

At the Richmond Reserve Bank, we have been thinking through how we retain the best of what’s happened this past year while also preserving pre-pandemic practices that were working well. Some of the challenges of working through these thorny issues are well captured by Richmond Reserve Bank President Tom Barkin in his speech, “The Future ‘Hybrid’ Office”:

“Most firms are exploring a more flexible ‘hybrid’ model that combines in-person and remote work. On the surface, it should work — after all, we already knew how to operate in person, and now we know how to manage virtually. But combining them presents a whole new set of questions.” ¹

For the Richmond Reserve Bank and for banking organizations, those questions involve the delicate balance of executing on business objectives, serving our communities, and carrying out our day-to-day routines. Together our organizations also want to leverage technology investments and strengths acquired during the pandemic, while trying to retain and build on each of our organization’s individual identities and cultures.

As we address culture, I must acknowledge that the pandemic has also highlighted immense societal challenges we collectively face, such as those stemming from systemic racism. These important issues have stimulated conversations at the Richmond Reserve Bank that have in turn broadened our understanding of these issues. In doing so, we are leveraging both data and qualitative information to better support America’s economy. Across the Federal Reserve System and the banking industry, we need to evolve our strategies and actions to address diversity, equity, and inclusion — and make that a part of our new normal.

In It Together

Having engaged with bankers around the Fifth District, which covers Virginia, the Carolinas, Maryland, the District of Columbia, and much of West Virginia, I sense that the COVID-19 crisis feels similar to both bankers and supervisors. Since we are facing many of the same challenges in our work and in our personal lives, we feel that we’re in this together.

Bankers and supervisors both responded to the needs of their stakeholders with agility and innovative thinking. As just one of many examples, in December 2020, the Richmond Reserve Bank converted its annual Community Bankers Forum to a virtual format. As part of our event, a panel of community banking executives discussed their strategies for navigating the public health crisis, each focusing on how people in their organizations stepped up to help however necessary. Like the panelists, I witnessed many examples of people at the Federal Reserve getting involved in work that was different than their normal assigned tasks. Though no one had a playbook for an extended global pandemic, community banking organizations and regulators alike have displayed inspiring agility and resiliency in serving their customers, managing risks, and navigating economic and health uncertainties over the past 16 months.

Operational Resiliency

Fortunately, the banking industry entered 2020 from a position of financial strength. As a result, the Fifth District’s financial institutions withstood the effect from increased credit provisions and were able to extend credit through facilitating customers’ drawdowns of credit lines and supporting programs like the Paycheck Protection Program (PPP), all while dealing with a challenging interest rate environment.

Firms swiftly implemented business continuity plans at the pandemic’s onset. Most institutions in the Fifth District sent a large percentage of their employees to work remotely with little lead time. In general, these banks successfully navigated the challenges of continuing to serve customers in the largely virtual environment — providing access to traditionally in-person banking services through appointment-only meetings, extending drive-through hours, more fully leveraging interactive teller machines, and speeding up plans to offer digital banking services.

Significantly, all hands were on deck at many Fifth District community banking organizations for the PPP rollout and subsequent rounds of new funding. This meant balancing core work responsibilities while processing new loan applications in support of one of the largest small business lending programs in our nation’s history. The success of the program is primarily due to the agility and commitment of bank employees wearing many different hats.

Likewise, our examination teams began their new remote work arrangements with only a few days’ notice. Examinations that were underway and typically held onsite were completed remotely. With our colleagues around the Federal Reserve System, we paused planned examination events for about three months at Federal Reserve–supervised community and regional-sized firms so that banks could focus on supporting their customers. Some of our examination staff were redeployed to support the large banking organization supervision teams. Others pivoted to an offsite monitoring approach with periodic outreach to institutions and analysis of institution-specific and portfolio-level trends. Our Fifth District Focus webinar series, which presents content on top banking risks and hot topics, focused on key takeaways gleaned from this work and the rapid flow of supervisory guidance released during the first half of 2020.

We have been conducting examinations virtually since July 2020. Our current examination approach has been tailored to focus on financial and operational resiliency as well as a bank’s approach to working with borrowers amid the pandemic. Similarly, the Richmond Reserve Bank, like the other Reserve Banks, has shown flexibility by supporting key pandemic-related programs with staff from across the Bank. For instance, individuals from the Enterprise Risk Management and Audit units helped to support the Federal Reserve’s PPP Liquidity Facility (PPPLF), a liquidity source offered through the Federal Reserve’s discount window that is collateralized by PPP loans. In addition to our work on the PPP and PPPLF, we have been collaborating with key partners around the Richmond Reserve Bank, particularly those involved in research, community development, and external engagement, to better understand regional conditions and the economic effect of the pandemic on communities in the Fifth District. Leveraging our technology tools, we have been able to increase our connections with business and community leaders in our District. Our connections increased to more than 1,000 in 2020 from 400 in 2019.

As Fifth District institutions have opted to reopen physical branch locations in varying degrees, employee and customer safety is front and center in the design and implementation of daily opening and closing procedures. Banks are taking steps to account for social distancing requirements, to maintain their offices with increased cleaning, and to refine their business continuity and contingency planning processes. These plans have also incorporated alternate workplace arrangements, such as split-work sites, working from home, and rotating shifts for all employees on a regular basis. One institution went as far as identifying cleaning services for each of its 30 locations in the event of a branch-specific virus outbreak. Contingency planning is not limited to branches and physical space. It also focuses on how consumer preferences may have permanently changed as a result of the widespread adoption of digital banking services during the pandemic.

Banks have leveraged operational resiliency to demonstrate innovation and ingenuity. Both prior to and during the pandemic, banks were making investments, oftentimes through partnerships with third parties including fintech firms, to drive innovation that aligns with strategic goals and greater profitability. Digital banking and application program interface solutions have become increasingly popular as have regulatory technology services such as those addressing compliance and Fair Lending analysis, as well as Bank Secrecy Act and anti-money laundering considerations.

Again, the PPP provides a useful case study showing how Fifth District financial institutions, like those across the nation, quickly innovated to meet customers’ needs. Over the course of the pandemic, a Fifth District bank that is a national leader in Small Business Administration lending automated some of the manual work associated with the PPP. The innovative technology solutions allowed the bank to originate a high volume of PPP loans. Other banks adapted by utilizing vendor-provided software to support PPP loan originations and the loan forgiveness process.

Amplified Risk

With ingenuity and innovation comes the need for increased focus on the evolving risk profile that results. From a risk management perspective, technology investments and partnerships like those that have been described typically gravitate toward two specific areas: cybersecurity and third-party risk management.

Cybersecurity

The security of Federal Reserve–supervised financial institutions’ sensitive information continues to be a System-wide top priority in the face of heightened risk because of the pandemic. Cyberattacks have become more sophisticated and persistent, which makes implementing, maintaining, and updating controls more difficult.

One risk factor stems from balancing the needs of the customer against combatting the increasing threats to information security given the continuously evolving technologies and the amount of data shared between vendors and financial institutions. Additional layering of risks during the pandemic results from increased cybercriminal activity, such as preying on consumers as they grapple with difficulties stemming from COVID-19 and fraudulently applying for financial aid programs. Another layered risk factor is the significant migration toward remote access in the pandemic environment, which presents opportunities for criminals to exploit financial institutions’ remote systems and customer-facing processes.

Cybercriminals and malicious state actors are targeting vulnerabilities in remote applications and virtual environments to steal sensitive information, compromise financial activity, and disrupt business operations. Cybercriminals are increasing their exploitation of social engineering vulnerabilities as well as looking for weaknesses in critical infrastructure. Fifth District–supervised institutions have noted digital manipulation of identity documentation, especially related to employment/unemployment and medical data. Further, fraudsters are taking advantage of compromised credentials across multiple bank accounts.

Third-Party Risk Management

The pandemic has highlighted the importance of third-party arrangements to a bank’s operational resilience and created new challenges in risk management. Meeting the needs of their customers, shifting their workforces to a remote posture, and operationalizing new programs such as the PPP required banks to expand and, in some cases, find new and unexpected vendor relationships.

As institutions increase the number and complexity of these relationships, they must consider the risk implications to their critical operations and core business lines. An effective process to analyze, measure and control risks associated with third-party arrangements, especially vendors with access to sensitive information, is critical. Increased monitoring of where customer data are stored and the number of individuals and vendors with access to these data is also crucial.

Strength of Community Banks

Over the course of the pandemic, I’ve heard numerous stories about the lengths to which community banks have supported their communities. A team member who is supporting the PPPLF efforts spotted a window sign at a local business thanking one of our state member banks for helping to keep all their employees on the payroll.

These are the types of stories that underscore the value of the community banking model and why the Federal Reserve System is committed to supporting responsible innovation. As Governor Michelle W. Bowman pointed out in her speech “Empowering Community Banks” at the Conference for Community Bankers in February, “These relationships are the hallmark of community banking, and as we look toward the future, community banks will continue to play an essential role in supporting customers, delivering financial services, and providing resources to their communities and customers.”²

As we navigate the new normal, I believe that the Federal Reserve and community banks need to work together to promote technological innovation that will enable bankers to mitigate risks and to meet the banking needs of their customers and communities. I look forward to a continued dialogue with bankers as we face these challenges together.