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Bank examinations during COVID-19

Banking supervision update – August 2021

August 2, 2021


Dan Schultz Examiner
Dane Scofield Examiner
Bank examinations during COVID-19 key image
Cara Ewing/Minneapolis Fed

Article Highlights

  • Virtual exams worked well during pandemic
  • Goal was to ensure banks’ resiliency
  • In-person exams to resume when travel is deemed safe
Bank examinations during COVID-19

Many industries and organizations had to change and develop new strategies during the past year, and the Federal Reserve Bank of Minneapolis was no exception. Starting in March 2020, our Minneapolis and Helena offices implemented a Systemwide effort to conduct examinations remotely for the foreseeable future. In this article, we recap how we’ve worked with banks during COVID-19, made significant changes to examination processes due to the pandemic, and found benefits and challenges of conducting exams entirely off-site. We also offer advice and ask for feedback to help future exams go smoothly.

How the Federal Reserve has worked with banks

In March 2020, the president declared a national emergency in response to the impacts of COVID-19.1 This declaration triggered provisions in SR Letter 13-6 and CA Letter 13-3. These supervisory letters authorize examiners to adapt examination procedures to accommodate extenuating circumstances and to relieve the pressures experienced by financial institutions handling disasters or catastrophic circumstances. As a result, examination teams across the Federal Reserve System paused all pending examinations while we reassessed our practices. This reassessment included a review of ongoing monitoring data, consumer complaints, and additional outreach to understand any financial constraints or other challenges faced by banks in the Ninth District.

In June 2020, the federal financial institution regulatory agencies, in consultation with the Conference of State Bank Supervisors, jointly released Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions.2 The guidance stressed the need to consider the unique, evolving, and potentially long-term nature of the issues and to exercise appropriate flexibility in supervisory responses. Following this guidance and the feedback received during our outreach, we adopted a flexible and balanced approach to examinations that allowed our work to resume without compromising the safety of everyone involved.

Implementing key priorities

One of our key goals in modifying the supervisory approach during this time was to ensure the resiliency of banks while not impeding the flow of credit that is vital to the communities they serve. As a result, we implemented the following changes:

Operating 100 percent off-site—One of the largest changes to the exam process during this time is that we no longer meet bankers in person at their institutions during the exam. Instead, conversations take place via teleconference or virtually using video applications. Generally, this new process has worked well for our examiners and state member banks. However, we recognize that face-to-face communication is preferable when possible, and we thank our state member banks for their continued flexibility with our off-site approach.

If you are interested in testing video or teleconferencing options prior to the start of your next examination, please contact your examiner in charge.

Focusing on operational and financial resiliency—As part of the institution’s risk management assessment, examiners evaluate the reasonableness of the institution’s response to the pandemic. We leverage documentation obtained at prior supervisory events when practical, and we maintain an awareness of a firm’s operational capacity through continuous monitoring of activities conducted by a bank’s central point of contact. When rating an institution, examiners are mindful of issues caused by external factors beyond management’s control.

Limited loan file reviews—Examiners continue to review a sufficient number of loans to adequately assess asset quality and provide a rating. To reduce regulatory burden, we request a limited number of documents and focus on borrowers with the greatest perceived risk. When financial information may be unavailable, in our discussions with bankers we place greater reliance on management’s knowledge of a borrower. Loans identified as having limited risk undergo a discussion-based review. Our goal is to understand how key lending relationships are impacted by the pandemic and what actions management has taken in response to changes in credit risk. Discussions focus on general portfolio trends, borrower accommodations/deferrals, future prospects of certain loan segments, and the adequacy of the allowance for loan and lease losses and the allowance for credit losses.

CARES Act—Compliance examiners also limit loan file reviews by focusing examination activities on key risks in a financial institution’s banking activities. This generally results in less intense reviews of low-risk areas, but there are some areas in which we expand our reviews based on increased risk due to the pandemic. One of these areas is the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was designed to provide important relief to borrowers affected by the pandemic. Banks implemented new measures for credit reporting and mortgage servicing in a short period of time and, in many cases, under new constraints related to these programs. When evaluating compliance with the CARES Act, we consider this context and take into account a bank’s good-faith efforts3 to support consumers.

Community development considerations—The pandemic also expanded the scope of activities considered during a Community Reinvestment Act performance evaluation. For example, CA Letter 21-5 offers guidance for evaluating activities in response to the pandemic. The letter expands the scope of activities that examiners will consider when evaluating a financial institution’s performance in the community, which is important for recognizing pandemic-related community development activities.

Examination timelines—When needed, we have been flexible with examination timelines to accommodate for the increased time required to coordinate meetings and ongoing communication. We want to ensure that we are respectful of bank staff’s time, particularly during this ongoing pandemic.

Ensuring a smooth remote exam

Clear and ongoing communication is the key to success in achieving an efficient virtual examination. At the start of each examination, exam staff normally arrange short, regular meeting times with bank management. Establishing these meetings early on ensures that examiners and bank staff have a fixed time to address questions. To help facilitate productive meetings during the exam, we encourage banks to do the following:

  • Review exam instructions related to technology being used during the exam.
  • Designate a primary contact for questions and documentation requests, and determine a backup contact in case there are connectivity issues.
  • Notify examiners when a key employee(s) will be out of the office and offer a backup contact, if available.
  • Explain any pandemic-related successes and challenges and clarify if the bank deferred work in areas of lesser risk because of operational or financial disruptions.

The overall situation appears to be improving across the Ninth District, and we hope to resume normal travel when it is safe to do so. We appreciate the feedback thus far and bankers’ willingness to work with us through these changes. We encourage additional feedback and ideas on how we can continue to improve the examination experience.

Finally, we would also like to thank our state member banks for supporting their communities and employees while also assisting with our increased off-site monitoring throughout the pandemic. We appreciate banks’ willingness to share information on operations and the impact of the pandemic.


1 Proclamation 9994, Declaring a National Emergency Concerning the Novel Coronavirus Disease COVID-19 Outbreak, 85 FR 15337 (March 18, 2020).

2 Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions (June 23, 2020).

3 These good faith efforts will be considered per Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (April 7, 2020), so long as they are demonstrably designed to support consumers and comply with consumer protection laws. See CA Letter 20-11 for more information.

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