Optimism – and a Solid Business Continuity Plan – are your Best Friends Right Now
The world, the United States and, of course, the United States banking Industry have been dramatically affected by the COVID-19 (or Coronavirus) pandemic. As of the date of this posting, the Coronavirus situation remains fast-moving and confusing, and we are exposed to a never-ending stream of news reports and virus infection data on a daily basis. Depending on whether you are an optimist or a pessimist, the inhabitants of the world have either completely overreacted to this new “flu” strain, or we are at the edge of a precipice overlooking the abyss and maybe we should all jump and get it over with.
Bankers’ attitudes about the Coronavirus pandemic mostly mirror that of the larger population. There are a number of bankers who think Coronavirus will be a short-term negative blip in what will continue to be strong operating performance over the next several years, while other bankers think this pandemic will make the financial crisis of 2008-2010 look like a walk in the park.
At Artisan Advisors, we think it is a good idea for all of us bankers to take a breath and assess where the pandemic stands now, where it might likely wind up, and what might be the effects on the banking industry.
Coronavirus and the United States Banking Industry
In just a few months, the Coronavirus pandemic has quickly become the major issue facing the United States banking industry. Banks all over the country, big and small, are assessing the risk the virus poses not only to banking operations but to employees and customers as well. Most of our client banks have invoked their business continuity plans, which in most cases have pandemic protocols.
Business continuity plans vary from organization to organization. But the most effective plans should address the following issues when facing a pandemic type situation: contagion control, financial considerations (both bank’s balance sheet and client customer), and regulatory responsibilities.
As to contagion control, banks are trying to minimize human interaction to avoid the spread of Coronavirus. The risk of virus transmission is directly tied to the number of human contacts made. Less humans, less risk. It is that simple. To that end, banks are requiring all workers that can do his or her job remotely to stay home and are only allowing those workers whose physical presence is essential to operations to work onsite. Banks are utilizing split operations, which basically means that essential onsite employees are rotating or taking turns being onsite. Travel bans have been put in place. A number of banks are limiting transactions to drive throughs as much as possible, requiring personal customer interactions by appointment.
Banks are setting up internal informational websites to keep employees informed as to operational developments related to the pandemic and to provide the correct protocol to follow in the event of contact with an infected co-worker or customer.
Of course, the biggest contagion control effort is online and mobile banking. Banks are reaching out to their customers to remind them that the bank is open and available to serve through their online banking site, mobile application, or ATM.
Our client banks have addressed a number of financial contingencies in their business continuity plans. In regard to pandemic situations, banks will have to consider increasing cash levels to meet increased demand for currency. This is also a good time to test bank liquidity lines of credit to make sure access is available if needed. Banks should reach out to any customer that operates in a particularly affected industry, e.g., restaurants, hospitality, etc., and determine that customer’s ability to operate during the pandemic. Many banks are developing loan products designed to help virus-affected business and consumer customers to meet their obligations while waiting for operations to return to normal.
As a whole, if the industry takes Coronavirus-related losses, and it will, the fact that the banking industry has record capital levels, up almost $800 billion since the financial crisis, should serve as protection against a banking crisis. With excess capital, most banks should be able to increase reserves (through ALLL qualitative factors) without major risk to regulatory required capital ratios.
Speaking of regulators, the various regulatory agencies have indicated a willingness to help banks navigate the Coronavirus crisis. In their tool bag, the regulators have the ability to provide flexibility on branch office closures, relief to troubled borrowers, extensions of credit to borrowers who may not ordinarily qualify, flexibility on municipal finance exposures, and the ability to set up quickly temporary locations. In combination with other forms of relief, these regulatory tools are important to the banking industry’s successful response to the Coronavirus pandemic.
Our view at Artisan Advisors of the Coronavirus pandemic effects on the industry is that the industry has never been healthier and that the industry will successfully navigate its way through this challenging period our country is experiencing. Balance sheets are strong and banks have come a long way since the 2008-2010 financial crisis with their business continuity planning. The industry will face a high degree of uncertainty over the next two quarters, but successful containment of the virus will mean a turnaround later this year.