A Business Continuity Plan Checklist for Banks, for COVID-19 and Beyond
Michael Canale, John DelPonti and Joseph Sergienko
Find out how financial institutions can maintain cash-flows, identify new digital opportunities and adapt their workforces to prepare for a protracted downturn
With a second wave of COVID-19 infections possible and uncertainty surrounding the timeline for development of a vaccine, business leaders must settle in for what has become a new normal. For banks and other financial institutions, that means creating or reviewing a business continuity plan checklist.
These institutions can offer sorely needed lifelines to help the economy stay afloat during the challenging times to come. But to do so effectively—and without going under themselves, as some experts anticipate will be the case—banking executives must adapt to new cash-flow and credit risks, embrace digital opportunities and shift effectively to sustainable remote-working environments.
Cash is king
Converging forces have ratcheted up the pressure on banks’ cash positions. Costs, associated partly with the transition to remote work (e.g., buying hardware for employees working at home) have increased. The Fed’s interest rate cuts have led (at least temporarily) to thinner margins. Yet customers are simultaneously demanding more credit: Commercial lending volumes are already more than twice what they would be in a typical year.
Providing that credit while managing dwindling cash-flow isn’t easy. As banking executives settle into this new environment, they should:
Watch their liquidity position closely
This includes constant assessments around the pledgeability and/or rehypothecation of collateral, the value of loans and securities as pledgeable collateral, the ability to post to central banks and fluctuations in intraday liquidity (which may incur significant swings amid a crisis).
Revise budgets and priorities to cut costs
Some things may never return to the way they were before COVID-19. This is true of office space and even retail banking, which may remain primarily online once the crisis passes.
Budgets should be amended accordingly: Can you pull back on certain leases? Cut back on travel? As priorities shift, where might you reallocate funds? For instance, some banks didn’t have enough traders in place to handle the rush once volatility went through the roof—what can you do to stem such disruptions in the future?
Reassess scenario analyses and credit assumptions
Credit quality is deteriorating fast, particularly in brick-and-mortar industries and badly hit regions. In such volatile markets, price discovery can be a challenge, limiting the effectiveness of hedging relationships.
Executives should plan for severe and extended shock scenarios that consider unemployment of over 10 percent to 20 percent, GDP losses of up to 40 percent and even negative interest rates. They should also review their price discovery policies and procedures. That is: Do you have standard approaches for when the bank has a limited view into price discovery? Who is empowered to execute on this plan? How can it be done with consistency?
A tipping point for digital—and other opportunities
Digital banking practices were well on their way before COVID-19 forced us all indoors. The shift to digital has now been greatly accelerated. The necessity for digitalization and automation is playing out on the front lines. Banks are struggling with the volume of Small Business Administration Paycheck Protection Program loan volumes, servicers are dealing with millions of forbearance requests, call center wait times are increasing, contactless payments are becoming the preferred method to avoid potential virus exposure and banking is increasingly moving to mobile apps and online.
Executives need to think through the entire scope of their existing remote-banking capabilities, from how to onboard customers in a manner that is more at arms’ length (while still meeting KYC/BSA and other due diligence expectations), to loan origination and customer engagement, to e-mortgages and mobile banking apps. On the technology side, fintechs and other third-party vendors are well positioned to help; yet as fintechs may still be behind when it comes to compliance, those who work with them should engage external counsel to navigate the nuances of regulations.
Other opportunities may arise from the coming return to regionalization of supply chains and the increasingly local nature of customers’ banking needs. This raises profitability questions, whether it involves losing cheap offshore labor or additional fees for services in far-reaching locales. But it also foretells new lending programs, particularly for new and existing small, local businesses—businesses that will need a new engine for growth as they look to emerge from the downturn.
Workplace changes
Some banking executives are simply trying to figure out “[h]ow to get employees up elevators.”
This is emblematic of a range of issues posed by the new working environment. As more states give the signal to reopen, these decisions will fall largely to the private sector. If you want to send people back to work, you’ll have to take ownership over PPE, testing and cleaning (and, yes, elevator safety).
As executives prepare for these eventualities, they should consider the following:
Transitioning to sustainable, remote-working environments
Reduced travel, expanded use of virtual meeting tools and enhancement of remote-work systems
Flexible hours for working parents who homeschool
Bring-your-own-device policy enhancements, to include devices outside of smartphones and tablets
Increased cybersecurity measures for remote workers
Going paperless (expedite transition from paper to digital, scan all mail, leverage intelligent document scanners and capture software)
Developing procedures for third-party vendors/consultants, including virtual meetings, supplier drop-offs, mail and secure file-transfer methodologies
Evolving the way offices are used and maintained
Stage who comes into the office and when
Coordinate cleaning and disinfection schedules with office usage
Transition to hoteling model to reduce cost of office space
Take employees’ temperatures and provide in-office testing
Provide access to N95 masks and gloves
Revising disaster recovery and business continuity plans
Develop incident management and scenario plans specific to COVID-19—it may return in the winter, and pandemic threats will continue—and specific to each group in the organization
Expand beyond IT/infrastructure to include all aspects of a bank’s operations and impact on customers
Develop relocation plans for the hardest-hit areas
The transformations ushered in by COVID-19 will be with us for some time; even when they pass, it will not be business as usual. The banks that thrive during and immediately after the downturn will be those that didn’t wait to adapt to these changes but instead took swift and strategic actions in preparation for a new normal.