Preparation and Flexibility Brought Banks Through the Storm
by Bill Spaniel, Senior Vice President & Lending Officer, Supervision, Regulation & Credit, Federal Reserve Bank of Philadelphia*
Preparation is key in the face of any challenge. When I first came to the Federal Reserve Bank of Philadelphia, I authored “View From the District: Preparing Now to Weather Conditions Ahead”1 in 2016. At the time, I was impressed with the city of Philadelphia’s efforts and ability to provide services to residents during a winter storm. Similarly, it has been important for the banking industry to be attentive and prepare for any financial storms or adverse events and apply the lessons learned from the Great Recession.
Over the past two years, we have all been challenged in ways that we could not have imagined. As we move forward, we continue to evaluate and mitigate the effects of the pandemic. Fortunately, it appears so far that community banks have weathered this unprecedented and ongoing “storm” well and have been vital in providing much-needed support to their customers and communities.
Early in the pandemic, the Federal Reserve took necessary and unprecedented actions to maintain stability during difficult times while promoting the safety and soundness of supervised financial institutions. The Federal Reserve acted decisively to pause examination work, expand communication channels, and issue guidance to support financial institutions and the continuation of the flow of credit and services. In the Third District, we worked closely with our state member banks to maintain and strengthen existing relationships and provide supervisory guidance in a timely manner. Further, we were able to enhance collaboration throughout the Third District to connect community bankers with Federal Reserve programs focused on the needs of their communities. We worked closely with outreach and community development areas to ensure that bankers and their customers understood the Federal Reserve’s expectations and programs. For example, with the implementation of the Paycheck Protection Program and Paycheck Protection Program Liquidity Facility (PPPLF), the Philadelphia Fed’s Supervision, Regulation & Credit and Community Development and Regional Outreach departments coordinated meetings with financial institutions to communicate program objectives and requirements as well as address specific questions. The collaboration of the various departments at the Philadelphia Fed allowed us to reach broader audiences in the Third District through speaking at trade associations’ virtual events and jointly attending meetings to discuss programs and concerns.
As we look ahead, it is important to reflect on and learn from the Federal Reserve’s initial supervisory response to the pandemic. In the Third District, I look forward to maintaining the valuable connections that we have with bankers and continue our conversations to address the future needs of their communities.
From March 2020 to June 2020, the Federal Reserve paused examinations for most community banks, which provided financial institutions the opportunity to focus on the health and safety of their staff, as well as the specific needs of their customers during uncertain times. While we could not foresee that the conditions required by the pandemic would remain for an extended time, it was critical for bankers to determine what was best for their staff, institution, customers, businesses, and communities. As supervisors, we listened to their concerns and monitored local conditions offsite. Given our close ties and proximity to financial institutions within each District, Federal Reserve supervisors were already familiar with local conditions prior to the pandemic. We also recognized the importance of supporting bankers’ ability to spend time with their customers and provide needed support without additional supervisory or regulatory burdens. By acting quickly to suspend onsite supervisory activities and shift to offsite monitoring, the Federal Reserve encouraged bankers to focus on operations, customers, and communities.
While onsite supervisory activities were temporarily suspended, the Federal Reserve launched several emergency lending facilities to assist financial institutions, municipalities, and businesses during the early days of the pandemic.2 These lending facilities, such as the PPPLF, the Term Asset-Backed Securities Loan Facility, the Main Street Lending Program, and the Municipal Liquidity Facility sought to maintain the flow of credit. Prior to the implementation of these lending facilities, the Federal Reserve conducted outreach with financial institutions to better understand their needs and those of their customers and communities. To those bankers who responded, your comments and feedback provided critical insights about credit conditions in your communities, which aided the Federal Reserve in designing these facilities. Once implemented, and as I mentioned earlier, the Federal Reserve was able to respond quickly to questions on these various facilities as a result of ongoing and local outreach efforts with the financial institutions and communities across the country.
Communication Is Key
As the early days of the pandemic unfolded, the Federal Reserve focused on being available to bankers to answer questions and on keeping the lines of communication open — night and day. We knew it was essential that financial institutions could reach us to discuss concerns, remain apprised of policy changes, and facilitate the flow of credit. In the Third District, we increased the number of virtual meetings and check-ins with state member banks. We also focused on sending more frequent communications to bankers as new guidance was released, which allowed us to emphasize and further explain the Federal Reserve’s supervisory expectations.
In the Third District, responses from financial institutions have been positive. I have heard that many bankers valued and appreciated hearing from us on a more frequent basis and outside of scheduled supervisory events. As a result, we were able to understand conditions as they unfolded, discuss potential impacts, and consider best practices. These conversations also contributed to the Federal Reserve’s ability to respond to the circumstances at hand. As we move forward, we will continue to have frequent touchpoint meetings, which only strengthens the Federal Reserve’s understanding of the conditions impacting banking organizations and allows for more timely sharing of guidance and information on regulatory changes and banking conditions.
While virtual communication channels are not always the optimal forum for meetings and events, I recognize a hybrid communication approach, with both in-person and virtual components, is here to stay. Moreover, a hybrid forum can be more inclusive. For example, earlier this year, the Philadelphia Fed and Cleveland Fed cohosted a virtual event to convene financial institutions between the two Districts. This forum allowed us to reach a broader audience to share national and local perspectives on a variety of supervisory and regulatory matters that are on bankers’ minds. We value the more frequent conversations, and the pandemic has demonstrated how we can be effective through increased communications in virtual formats. The emphasis is on supporting open conversations and opportunities to learn from one another.
Preparation for and Response to the Conditions Caused by the Pandemic
While we could not have anticipated the pandemic’s circumstances and effects, the overall banking industry was in strong financial condition entering 2020. Since the last financial crisis, many community banks had enhanced their risk management practices, asset quality monitoring, and capital planning. As a result, financial institutions were in strong capital and liquidity positions. A significant amount of work — and preparation — had taken place in the years leading up to the pandemic to bolster the safety and soundness of many financial institutions. Though significant losses have not been part of this crisis to date, financial institutions have been in a position to work with borrowers and, if needed, offset losses that may arise on banks’ balance sheets.
Early in the pandemic, it was evident that financial institutions could sustain their overall financial condition. The Federal Reserve encouraged financial institutions to work with their customers (i.e., maintain flexibility during the uncertainty), and the Federal Reserve would not criticize prudent decisions financial institutions made that were supported by sound risk management practices and assessments. Our ongoing conversations with bankers and offsite monitoring of financial institutions enabled the Federal Reserve to continually monitor the flow of credit, emerging trends, and areas of potential concern. The Federal Reserve was also prepared to use the range of its policy tools to meet its goals of maximum employment and price stability. We recognize that this pandemic has caused significant disruptions and losses; however, without the strong financial position of banks, the impacts of the pandemic could have been much worse.
The lessons learned from our experiences with past crises prepared supervisors and bankers for the uncertainty and challenges arising from the pandemic. So far, we have all focused our efforts on the critical areas and maintained effective support of the financial institutions and the communities they serve in a safe and sound manner. Certainly, this will continue to be a primary goal of effective supervision.
The pandemic presented unique challenges that required unprecedented actions by financial institutions and the Federal Reserve. I am confident the actions taken were appropriate and that the Federal Reserve’s approach to supervision and enhanced communications served all stakeholders well. We have built a strong foundation to adapt quickly to changing circumstances and have successfully adapted to a hybrid environment with both virtual and in-person meetings, programs, and supervisory activities. The Federal Reserve staff is here to serve as a resource and remains committed to strengthening relationships with bankers through enhanced communications and collaboration. These efforts will ensure bankers understand the Federal Reserve’s supervisory expectations. Further, as a resource, we aim to support bankers as they serve their customers and communities. I recognize that we will have challenges ahead; however, we will continue to learn and be flexible as circumstances change.
- * The author would like to thank Erin Connelly of the Federal Reserve Bank of Philadelphia for her contribution to this article.
- 1 See Bill Spaniel’s article in the Second Issue 2016 of Community Banking Connections, pp. 1, 10–11, available at www.cbcfrs.org/articles/2016/i2/view-from-the-district.
- 2 Refer to information on the Federal Reserve Board’s website at www.federalreserve.gov/funding-credit-liquidity-and-loan-facilities.htm.