Ensuring ‘safety and soundness’ amid COVID-19: Pandemic forced bank exams to go remote Ensuring ‘safety and soundness’ amid COVID-19: Pandemic forced bank exams to go remote

New approach needed when face-to-face exams became impossible New approach needed when face-to-face exams became impossible

March 31, 2022

Peter McAvoy was used to traveling often for work. The Federal Reserve Bank of Boston exam manager, who helps regulate a large financial institution, typically spent weeks at a time in New York and North Carolina.

There, he and his colleagues conducted exams onsite at the company’s offices: meeting with senior executives, analyzing financial documents, and gauging the riskiness of the company’s business practices. But when COVID-19 hit in March 2020, all trips and face-to-face interactions stopped.

“I was due in New York the next week, but all that got canceled,” said McAvoy, who works in the Boston Fed’s Supervision, Regulation & Credit department. “We went fully remote, and we still are.”

The switch to virtual work forced examiners at the Boston Fed to take novel approaches to banks and other financial institutions. Stopping exams indefinitely was not an option, as they are critical to maintaining the economy’s well-being. And examiners also had to make sure that institutions could continue serving rattled customers as everyone worked through the crisis.

Navigating the pivot to remote work

Exams are key to ensuring the economy’s financial stability and health, said Gabriela Webber, an exam manager at the Boston Fed who works with regional and community banks.

“They allow us to assess how our community’s deposits are being used in a safe and sound manner, (and) also that their lending and funding needs are being met,” she said.

Examiners take numerous steps to evaluate a bank’s soundness. Among them:

  • Review detailed financial information and meet with bank leaders
  • Look at the level of risk involved in a bank’s transactions and activities – including risks related to credit and lending practices, shifts in market prices, and the institution’s liquidity and ability to meet contractual obligations
  • Evaluate what methods a bank has in place to manage such risks
  • Review how well the institution is following banking laws and regulations
  • Assess the effectiveness of a bank’s leadership

When regular in-person visits to financial institutions became impossible, examiners began to focus less on exams and more on outreach and off-site monitoring.

“That was really to allow our banks to focus on assisting customers,” Webber said.

After several months, they resumed exams, but they were fully remote. Webber added that bank actions also had to be considered in the context of the public health crisis.

“We’ve always had risk-focused exams, but these were really focused on the reasonableness of the actions that management took in response to the pandemic specifically,” she said.

McAvoy said even though his team had experience with remote meetings and conference calls, it took some time to adjust to conducting exams virtually.

“I've been doing this a long time, and I think I've got a pretty good nose for when something isn't right. But it’s not as easy to size people up (in a remote environment),” he said. “I also can't use the other people I'm working with as a sounding board as easily. … I can't look across the table and ask somebody a question.”

McAvoy said he’s become more intentional about reaching out and connecting with his colleagues, and they’ve continued to remotely monitor the institution they’re assigned to throughout the pandemic.

“It's a year-round plan,” he said. “We're constantly looking at the firm and the flow of information coming from it: board reports, financial data, committees within the firm, (and) management reports, too.”

Taking on new responsibilities to address emergency needs

Webber said many bank examiners also took on new roles during the pandemic to help set up the Fed’s emergency lending facilities – like the Main Street Lending Program – which focused on ensuring struggling small and medium-sized businesses, as well as nonprofits, had access to emergency loans through the CARES Act. That meant some examiners had to handle new responsibilities amid the pandemic.

Some examiners are also licensed as certified public accountants, attorneys, or actuaries – and those diverse skillsets came in handy when building the emergency facilities, McAvoy added.

Webber said, “I think the examiners did an excellent job adapting, whether it was to a new type of work on a facility, or to taking on a new assignment within our unit because a colleague was working on a facility.”

Learn more about the work of the Boston Fed’s Supervision, Regulation & Credit department here.

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