In my 20+ years at the FDIC and now 8 years here at Plansmith, I honestly never imagined that all those Contingency Funding Plans (CFPs) I’ve read and written would actually be relevant. I always viewed them as a good way to layout the framework for monitoring funding risk and alternate sources of liquidity, but I certainly didn’t think that the “systemic stress” scenarios would really ever be something we’d actually be dealing with.
For those of you who didn’t see it, click here to read the blog I posted yesterday focusing on some things you can do help your community get through this current crisis. Today, we’re going to turn our focus to what you can, and should, be doing to limit the impact that this crisis might have on your institution.
As I had mentioned, in the next week or two, Plansmith will be hosting webinars on how you can better use our tools to re-forecast and improve your financial planning efforts. But for now, I want to lay the ground work for that exercise and focus on some things you should be thinking about to be better prepared for the possible impact of this current crisis.
Listed below are five things all financial institutions should be doing now (in no particular order).
Consider Activating Your Contingency Funding Plan (CFP)
While the CFP was something likely drafted years ago that you hoped and thought would never be needed, unfortunately, now is the time. Gather your CFP Team, your ALCO, or at least your senior management team, and collectively decide what phase of stress you may be in, or headed for. Look at what portions of the Plan apply and what steps should be added or eliminated. At a minimum, discuss what alternate funding sources are available, what assets can be liquidated, what message(s) should be sent to customers, and who should talk to the media if inquiries are made. Be sure everyone knows their roles and responsibilities, and keep in constant communication should a funding crisis occur.
Review Vulnerable Assets
Look at your loan portfolio. Do you have any concentrations of credit? Who are your largest individual borrowers, and do you have material exposure to any economic sector(s) that might be particularly hard hit by this crisis (travel, tourism, hotels, entertainment, child care, nursing homes, agriculture, etc.)? Proactively reach out to these borrowers and ask them what they are expecting for their businesses in the coming weeks and months. Consider restructuring debt as necessary, and closely review regulatory troubled debt restructuring (TDR) guidelines to minimize the impact those efforts have on you.
Not only do you need to look at loans, but you should also review your investment portfolio, particularly any municipal and corporate bonds. While many municipal holdings will likely not be impacted, weaker municipalities and certain revenue bonds related to specific projects could face material stress.
And, don’t forget about the ALLL (examiners certainly won’t). In addition to specific impairments, those “qualitative” factors that are part of all ALLL calculations are likely going to need some material upward adjustments. It’s almost certain that examiners and auditors will expect higher ALLL levels, and the “economic” qualitative factor will be the first place they’ll start.
Examine Your Funding Structure
“Knowing your customer” is not the same as knowing your customers’ deposit stability. Now is the time to truly examine your funding structure and any deposit concentrations you may have. Consider reaching out to large deposit customers to discuss their needs and plans. Give them assurances that you’re still operating as usual, and discuss the ways they can still access their funds and use your services. Now is a great time to emphasize electronic banking solutions and remote capture options. Also look closely at any non-core funding sources you may have. Does your funding structure include brokered CDs, internet deposits, Fed funds purchased, FHLB borrowings, or material levels of retail CDs from “specials” or promotions? If so, these are all areas examiners will be closely looking at and could be subject to regulatory restrictions should your financial condition deteriorate.
Monitor Deposit Flow
There is a huge difference between panic and preparation, but the fact is, you don’t know how your customers are going to react if the current crisis intensifies. In normal times, we can pretty much count on daily deposit inflows and outflows to balance each other out, and our reserve liquidity to be sufficient to easily cover any shortfalls. However, these aren’t “normal” times, and while we’ve seen people line up to buy toilet paper, they haven’t been lining up to withdraw cash…at least yet. But what if they do, or what if they just start pulling it out electronically? Are you monitoring daily deposit outflows? If not, you should be.
Bolster Liquidity & Capital
You also don’t know what regulatory restrictions may be imposed, particularly if asset quality erodes and your financial condition weakens. Now is not the time to “run lean” on liquidity. In the previous economic crisis, the FDIC did an outstanding job of maintaining confidence in the banking system and deposit insurance. However, how depositors will react to a pandemic that has caused state-wide “stay-at-home” orders, quarantines, and travel bans is at best, uncertain. Moreover, the inevitable deterioration in the condition of some financial institutions will likely result in brokered CD restrictions, deposit rate cap limits, retail deposit run-off, correspondent bank line cancellations, and reduced FHLB borrowing capacity for those institutions that experience asset quality problems. As a result, now is the time to bolster liquidity (and capital if you can). Given the low rate environment, consider things like longer-term borrowings, brokered CDs, and internet deposits. Take action to limit deposit outflows, consider negotiating rates for high-balance customers, and offer prudent incentives to grow retail deposits (maybe some of those gift cards we mentioned in yesterday’s blog) if at all possible. Certainly be conscious of credit needs in your community, but also be judicious in plans for any loan growth.
While we don’t know where this crisis will take us, institutions that are proactive in their planning and preparation will most likely be impacted the least. As we mentioned in yesterday’s blog, most of you have already thought of, and are doing many of these things, but again, hopefully we gave you a couple additional ideas of how you can be better prepared for where “the puck is going” and jump-start your planning efforts. Remember to keep an eye out for our upcoming webinars on how to better use our planning tools, and please forward this blog to others that you think might find it useful.
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