With the economic impact of the coronavirus still masked by relief efforts, community banks should act conservatively in 2021, making sure their banks have proper risk management processes in place to guard against additional fallout, regulators said Friday at the New Jersey Bankers Association Economic Leadership Forum. They noted that those banks that adapt and act properly now will be better positioned to seize opportunities when the pandemic ends.
The discussion, moderated by Invictus Group CEO Adam Mustafa, featured Leandro De Almeida, the Office of the Comptroller of the Currency's team lead in New York, and Bill Spaniel, SVP, Supervision, Regulation and Credit at the Federal Reserve Bank of Philadelphia.
The regulators suggested that banks do the following in 2021:
- Monitor and adjust concentration limits, especially those that have exposure to industries most affected by COVID-19. The OCC’s De Almeida noted that institutions with “good concentration practices in place have fared better over the past 10 months than those that do not.”
- Stress testing is “very important, now more than ever,” De Almeida said. He advised banks to use stress testing on a loan and portfolio basis. He also recommended a pandemic stress test that splits up the loan portfolio by NAICS codes, so banks can see which industries are potential trouble spots. “It’s just another piece of management information that can help project the impacts of the pandemic on what's going to happen potentially to classification levels, losses, earnings and capital,” he said.
- Understand the risk in your portfolio, even if regulators are not asking you to classify loans as troubled debt restructurings. “Whether you classify it or not, I think is less than the issue as opposed to do you really understand what the risk it is posing,” Spaniel said. He noted that some borrowers will struggle in the future. “We need to be realistic about this. The steps were designed to give people more time, but I don't think we should put off things once we know it's inevitable that there are going to be asset quality problems in some of these portfolios.”
- Make sure your bank has a “clear understanding” of what has happened to its capital and have a plan to get through the pandemic and beyond. “We're also going to want to see a plan for what do you do on the other end of this, when those deposits run off. How do you get back to normal?” Spaniel said. “If you're really just kind of allowing the capital ratios to happen to you without a lot of foresight and forethought about where you're headed, that would be problematic.”
- Get ready for CECL, even if your deadline for implementation isn’t until 2023. De Almeida said that if a bank hasn’t taken any steps to get ready for the new accounting standard, “they’re behind, they need to play catch up as soon as possible.”
- Talk to your regulators before issuing dividends or buying back stock. “We have told people in the near term, it's probably a good idea to not do significant stock buybacks and to maintain your dividends where they are,” Spaniel said. “And I think banks can look to the guidance that we give CCAR banks as just kind of a watchword of where we see that we're not yet out of the woods. It’s probably time to hedge your bets or save for a rainy day.”