The FDIC intends to keep providing regulatory flexibility to banks as they navigate the economic recession brought on by the COVID-19 pandemic. The federal regulatory agency wants banks to remain agile and do what they can to support consumers and small business owners during the crisis, according to FDIC Chairman Jelena McWilliams. McWilliams, who began a six-year term on the FDIC Board of Directors in June 2018, previously served as executive vice president, chief legal officer, and corporate secretary for Fifth Third Bank in Cincinnati, Ohio. She addressed a group of bankers last week in a virtual meeting hosted by the Michigan Bankers Association to discuss issues the industry faces and the economy. McWilliams later spoke with MiBiz.
What’s your key message for banks these days?
To continue reaching out to their businesses, and small businesses in particular, to see whether they need to proactively react to the changes in the marketplace for those businesses and residential borrowers and consumers. On the other side, my message is they cannot be stressing out their portfolio internally enough because things are fluid and they’re changing on a daily basis.
The bankers need to know and understand their communities and to proactively reach out to understand what’s going on. If they have high concentrations in the industries that have been particularly impacted — and now it seems like it’s every industry, but early on it was the hospitality and airline industries, tourism and some of the supply chains that support those industries — our message is they have to take a look at those concentrations and figure out and understand how they’re going to address the risks if there’s a prolonged period to recovery.
How do you assess the state of the industry going into the crisis and the economic period that we now face?
Based on the data we’re looking at going into this crisis, which wasn’t a financial crisis — and we’re going to do everything we can to make sure it doesn’t turn into a financial crisis — luckily and fortunately banks were well capitalized (and) they had a lot of liquidity. Their loans that they underwrote were based on sound underwriting principles, so this was not like 2008. The one difference that has been worse, I would say, and more shocking to the system than 2008 is how quickly this descended upon us and the resulting government closures that resulted in business closures.
As we look at the next few months, our internal stress testing of the larger banks, and the internal stress testing of the banks themselves, have shown them to be pretty resilient, even to a shock like this. Now, the level of their resiliency is going to be tested by the duration of the times … and understanding that if it’s a quick down and a quick up, we’re going to be OK. If it’s a quick down, a prolonged down, and then some up, we’ll probably be OK, depending on how long the down is. If there is a ‘W,’ that’s going to stress everyone’s portfolios.
How have banks handled the crisis to date?
Lenders have had to adjust for this constantly evolving and changing marketplace where literally in the first few days and weeks of the pandemic back in March, you didn’t know what to expect and how to look at your portfolio, and what does this mean for the economy. I think they have been able to do enough stress-testing of their portfolios internally to take a look at the concentrations and risk exposure to be able to understand how best to navigate the landscape in the next few months. What we told them is start adjusting your loans, start modifying your loans, go ahead and reach out to your borrowers proactively on the commercial and residential and consumer side, and figure out what do they need. Do they need you to modify a loan? And if they do need you to modify that loan, tell us if you have any regulatory concerns.
What can banks expect in the regulatory environment as they navigate the economic conditions?
We have been urging with the other agencies to have utmost regulatory flexibility. Unlike the 2008 crisis, this came upon us very quickly. The lessons learned from the 2008 crisis is that it is better to be proactive, even if the issue is not clearly big at the onset, but you don’t want it to develop into a big issue. I call it putting out fires. You want to put it out while it’s still small. So, we have decided to give utmost flexibility on our exams. Banks can be a vehicle to recovery. We need to make sure there are no roadblocks to that vehicle.
What’s an example of the FDIC’s flexibility?
All of our exams have moved offsite. We informally surveyed our banks early on in March to see, would they prefer to continue with their exam on the current schedule. Surprisingly, most of the banks said yes. The banks that asked for a delay — not many have, but some have — we granted 30 to 60 days. Then we had a handful of banks that were unable to proceed because they have personnel that is affected directly by COVID-19. We don’t want to put on the added pressure of having to go through a bank exam while they’re dealing with key personnel that have been impacted.
What’s your expectation of banks during this period?
I’m urging management teams at different banks to think through the experiences they have had in the past and to proceed wisely, knowing that we’re not going to be back to maximum employment for some time, which could be years. So in the meantime, they will have to adjust their portfolios, they will have to err on the side of being more prudent, rather than less. This is definitely — and more of the banks that I’ve talked to have agreed — and absolutely no time to be exuberant.
What’s your biggest concern right now?
The overall economy. Sooner or later we’ll have a vaccine, and the question in the meantime is what happens with folks who actually can’t make their bills. Government stimulus can only go so far, so it is going to be crucial that we reopen the economy and be smart about it because there are absolutely people dependent on daily income.
A lot of our community banks are small. They function in local communities and they’re overwhelmingly represented in rural communities, and in those communities you don’t have many choices for jobs.
When local businesses close, some of them won’t be able to withstand the shock. What does that mean for the local communities and what does that mean for the survival of small banks in America?
What permanent changes do you see coming out of this for the banking industry?
What I think is going to be the biggest long-term change, and it’s not actually driven by the pandemic, is there has been a shift to digital channels. There has been a transformation in the sector of more banks going digital and delivering services and products digitally, and now because of the pandemic their systems have been tested and a lot of them have fared very well. So, if anything, there’s a silver lining: the ability of banks to transform their processes to go digital. I think you’re going to see the digital evolution exacerbated at every level of banking.