Federal Reserve Prioritizes Monitoring and Changes Examination Focus in Statement on Supervisory Activities in Light of COVID-19

On March 24, 2020, the Board of Governors of the Federal Reserve System (FRB) issued a Statement on Supervisory Activities (Statement)¹ as part of the evolving effort by federal banking regulators to work with financial institutions and their customers affected by COVID-19. The Statement clarifies the FRB’s focus and priorities from a supervisory perspective, building on a prior interagency press release issued on March 9, 2020² and a joint interagency statement issued on March 22, 2020.³

The Statement makes clear that all FRB examination activities will be conducted off-site until normal operations may be resumed. Moreover, the FRB will generally prioritize its supervisory efforts with a focus on monitoring at the expense of full examinations, specifically concentrating on understanding the challenges and risks brought on by the current environment. Regulated institutions should expect a continued dialogue as the COVID-19 situation unfolds with additional statements, webinars, frequently asked questions and ongoing coordination with regulators.

While these actions are not surprising, the Statement’s on-the-ground implications for supervised institutions are significant, particularly for those with less than $100 billion in total consolidated assets. For such institutions, the FRB “generally intends to cease all regular examination activity, except where the examination work is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need” (emphasis added). The Statement does not define “critical examination work” for these purposes but provides useful examples indicative of a narrow set of circumstances for examination to be necessary, including “exams of less-than-satisfactorily rated state member banks or institutions where a Reserve Bank is aware of liquidity, asset quality, consumer protection, or other issues that are an immediate threat to an institution’s ability to operate or to consumers, or Reserve Bank monitoring identifies an unusual circumstance.”

For supervised institutions with assets greater than $100 billion, the FRB will significantly “defer” planned examination activity based on assessing “the burden on the institution and the importance of the exam activity to the supervisory understanding of the firm, consumer protection, or financial stability.” However, the Statement specifies that firms must still submit their capital plans as scheduled by April 6, 2020, for the forthcoming Comprehensive Capital Analysis and Review or CCAR exercise. Acknowledging the fluidity of the situation, the FRB will reassess its approach to examinations in the last week of April. Finally, the Statement also extends by 90 days the time period institutions have to remediate supervisory findings (unless notice is provided for a more timely remediation) (e.g., a status update due in 30 days is now due in 120).

In sum, the Statement reiterates the FRB’s focus on the immediate impact COVID-19 has wrought to effectively reduce burdens on both regulators and institutions to ensure focus remains squarely on the crisis as guidance will continue to evolve with changing circumstances. Notably, the Statement presently applies only to financial institutions whose primary federal regulator is the FRB, such as state member banks, bank holding companies and savings and loan holding companies. Institutions regulated by the OCC, FDIC or other agencies are not subject to the Statement unless those respective agencies take similar action.

¹ See Federal Reserve Statement on Supervisory Activities (Mar. 24, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200324a1.pdf.

² See FRB, Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), Office of the Comptroller of the Currency (OCC) and Conference of State Bank Supervisors Joint Press Release. Agencies encourage financial institutions to meet financial needs of customers and members affected by coronavirus (Mar. 9, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200309a.htm.

³ See FRB, CFTC, FDIC, NCUA, OCC and Conference of State Bank Supervisors Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Mar. 22, 2020), available at https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200322a1.pdf. The interagency statement from March 22 encourages financial institutions to work prudently with borrowers affected by COVID-19, notifying regulated institutions that the FRB will not criticize financial institutions for mitigating credit risk through “prudent actions that are consistent with safe and sound practices.”

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