Insights

On June 23, the federal financial institution regulatory agencies (the Federal Deposit Insurance Corporation, the Federal Reserve Board, the Office of the Comptroller of the Currency and the National Credit Union Administration) jointly issued examiner guidance to outline the supervisory principles for assessing the safety and soundness of institutions given the ongoing impact of the COVID-19 pandemic.

The guidance provides that examiners should consider the unique, evolving and potentially long-term nature of the COVID-19 issues confronting institutions and exercise appropriate flexibility in their examination findings. Examiners may provide supervisory feedback or downgrade an institution's composite or component ratings when conditions have deteriorated.

When examiners are conducting their supervisory assessment, the guidance requires them to consider whether institution management has handled risk adequately, including taking appropriate actions in response to stresses caused by COVID-19 impacts.

Banking agencies have issued numerous statements related to supervisory policy since the declaration of the COVID-19 national emergency. Appropriate actions taken by institutions in good-faith reliance on these statements within the applicable time frames described in the statements will not be subject to criticism or other supervisory action. It will be important for management to stay abreast of these policy statements and to take necessary actions to follow the guidance.

Among the other items addressed, the guidance indicates that examiners, when assessing management, will consider management's effectiveness in responding to the changes in the institution's business markets and whether the institution has addressed these issues in its longer-term business strategy.

In considering whether to take formal or informal enforcement action in response to pandemic-related issues, the examiners will consider whether an institution's management has planned appropriately for financial resiliency and continuity of operations, implemented prudent policies, and is pursuing a realistic resolution of the issues confronting the institution.

With regard to credit modifications, examiners will not criticize institutions for working with borrowers as part of a risk-mitigation strategy intended to improve existing loans, even if the restructured loans have or develop weaknesses that ultimately result in adverse credit classification. In assessing an institution's safety and soundness, examiners will not criticize management for engaging in prudent loan modifications and working with borrowers in a safe and sound manner.

As part of the institution's risk management assessment, examiners will evaluate management based on the reasonableness of management's response to the pandemic. As additional information becomes available, examiners expect management to update risk assessments, measure the effectiveness of the response and adjust as necessary.

If you have any questions regarding this guidance or any other bank regulatory issues, please reach out to any of the attorneys in Day Pitney's Financial Services Regulation practice group.

For more Day Pitney alerts and articles related to the impact of COVID-19, as well as information from other reliable sources, please visit our COVID-19 Resource Center.

COVID-19 DISCLAIMER: As you are aware, as a result of the COVID-19 pandemic, things are changing quickly and the effect, enforceability and interpretation of laws may be affected by future events. The material set forth in this document is not an unequivocal statement of law, but instead represents our best interpretation of where things stand as of the date of first publication. We have not attempted to address the potential impacts of all local, state and federal orders that may have been issued in response to the COVID-19 pandemic.