The state and federal financial institution regulatory agencies issued joint guidance to outline examination standards and principles for assessing the safety and soundness of institutions in light of the ongoing impact of the COVID-19 pandemic. The pandemic places extraordinary burdens on financial institutions. Bank management teams across the state face challenging lending and operational decisions, while dealing with historic economic uncertainty. The guidance emphasizes not only how examiners will conduct examinations, but also to inform financial institutions what they should expect from examinations in light of the pandemic.

During an examination, management’s assessment of risk and the appropriateness of response to the risks identified are the regulatory and supervisory priorities. The guidance speaks to the importance of an institution-wide risk assessment, incorporating the potential impacts of the pandemic on the institution. DFI examiners will differentiate between issues and risks created by the pandemic versus those arising from management and board decisions. Furthermore, examiners will focus their assessment on management and the board’s ability to respond to and manage the risks the pandemic brings to their institution. Many potential issues arising from the pandemic are outside management’s control; however, risk identification and mitigation, and portfolio monitoring remain essential.

On Aug. 3, 2020, federal regulators released additional interagency guidance regarding loan modifications. Per the guidance, regulatory agencies encourage reasonable loan modifications to assist borrowers. This guidance describes prudent banking practices with respect to loan modifications, emphasizing the importance of management gathering updated borrower information when available, following applicable accounting standards, and implementing proper controls.

Division of Banks Information Technology (IT) examiners are also assessing the impacts of the pandemic on bank IT operations. Prior to 2020, pandemic preparedness was assessed as part of standard IT examinations because of its importance in bank business continuity management programs. However, the effectiveness of pandemic planning has been a significant focus in 2020. Examiners will evaluate the effectiveness of pandemic response procedures and assess if the current pandemic has identified any risks that need further mitigation or practices that need improvement. Examples of potential concerns include altered processes due to a lack of staff availability, changes to approval processes and security controls, and adequate security for remote access. Overall, banks have successfully navigated the IT risks of the COVID-19 pandemic, and were largely equipped to support remote workers prior to the pandemic. As a result, financial institutions in this state have continued to successfully serve their communities while keeping personnel and customers safe.