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What Examiners Will Be Looking for in Your COVID-19 Response

3 min read
Jul 1, 2020

The ongoing COVID-19 pandemic has impacted operations and financials at every financial institution. You know it, I know it, and the regulatory agencies know it too. That’s why they’ve released new guidance on safety and soundness exams for the COVID-19 era. 

The Fed, FDIC, OCC, and NCUA released Interagency Guidance for Assessing Safety and Soundness Considering the Effect of COVID-19 Pandemic on Institutions 

In addition to existing policies and guidance, the agencies will also assess whether financial institutions have effectively managed COVID-19 risks and taken appropriate action to mitigate them. This includes the ability and willingness of management to take action and resolve issues. The agencies also recognize that even when FIs have good governance and risk management systems for identifying, monitoring, and controlling risk, there can still be an adverse impact to the FI. 

This is especially true when it comes to financials and operations. 

While examiners should recognize that external economic problems may be the source of operational and financial weakness, they will still want to see that it was not exacerbated by poor risk management and governance. They will be looking for risk assessments with adequate scope and content. 

Operational Issues 

Change management. Quickly adapting to social distancing, work-from-home practices, and government stimulus programs can impact operational, compliance, and cyber risks. Internal controls may need to change with them. 

Strategic planning. As part of the management assessment, examiners will consider how effectively management responded to business market changes and adopted its long-term strategic planning. 

Management. When deciding whether to assess a pandemic-related enforcement action, examiners will consider where management: 

  • Appropriately planned for financial resiliency and continuity of operations; 
  • Implemented prudent policies 
  • Is pursuing realistic resolution of the issues confronting the institution.  

Internal controls. Have new controls been put in place to mitigate risks and have controls been tested for effectiveness? This includes third-party controls and maintaining controls even when faced with cost-cutting, limited staffing, or delayed implementation.  

Audit. Examiners want to see plans for audits and reviews, including reviews for work-from-home arrangements and programs such as PPP, mortgage deferrals, loan forbearance, and other new programs that may pose credit, legal, and compliance risks if not properly managed. 


Credit risk. Credit risk should reasonably reflect the institution’s asset quality based on economic conditions in the FI’s business markets. 

Impact. Management should understand the pandemic’s effects on the institution’s earnings potential, capital adequacy, funding, liquidity, operations, and sensitivity to market risk. 

Interest rate risk. There should be procedures to review and update asset and liability models for short-term and long-term changes or unusual changes to deposit balances, adjustments to loan payments, changes in interest rates, and anything else needed to ensure good models.  

Capital adequacy. Temporary balance sheet growth is expected, but those changes should be carefully monitored and there should be a plan to maintain capital adequacy and build capital, if needed. 

Asset quality. The pandemic has created situations where normal supporting documentation may not be available. Management needs to be able to identify loans and investments impacted by the pandemic and quickly recognize deterioration and potential loss exposure.  

Examiners will look for evidence of prudent credit modifications and underwriting plus the ability to maintain appropriate loan risk ratings, designate appropriate accrual status on affected loans, and provide for an appropriate Allowance for Loan and Lease Losses (ALLL) or Allowances for Credit Losses (ACLs). This includes reasonable classification of credits even when documentation is harder to come by and the ability to review credit risk effectively. 

Underwriting standards will also be examined for appropriateness, recognizing that standards may have been eased to help customers as encouraged by regulators. If it was to adopt new business lines, examiners will look for sufficient controls and expertise. 

Paycheck Protection Program (PPP). Examiners will not criticize institutions that participate in the PPP in accordance with SBA program guidelines.  

Credit modification. Examiners won’t criticize FIs for working with borrowers with existing loans even if those loans have or develop weaknesses that ultimately result in adverse credit classification. 

Earnings. Examiners will consider the impact of loan modifications; personnel, legal, fraud, and IT expenses; and the impact of markets, customers, and government programs. 

Liquidity. Examiners won’t criticize FIs for appropriate use of the discount window or other Federal Reserve lending programs, or the NCUA’s Central Liquidity Facility, or prudent use of its liquidity buffer to support economic recovery. 

How has your FI responded to the pandemic? Download our Post-Pandemic Incident Assessment to help evaluate the effectiveness of your risk assessments and response.


Related: What is Business Continuity Management?

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