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How are those tasked with monitoring the safety and soundness of community banks supporting those banks as they respond to the multitude of people and businesses that have been impacted by the COVID-19 pandemic?

Bryan S. Huddleston
Bryan S. Huddleston, Assistant Vice President

As appeared in the Cleveland Fed Digest's Ask the Expert on 10.20.2020

Issue #38 | October 20, 2020

Community banks are the lifeblood of local communities. In a lot of small towns, their job is to finance business activity, make sure individuals have access to capital—everything necessary for a small town to survive and thrive. It’s very important that customers have faith in these institutions. When any type of economic crisis comes, people worry about their money. Is the bank safe? Do I need to take my money and put it under a mattress?

During the COVID-19 economic shutdown, a lot of people and small businesses who bank with community banks have been hit hard. This includes the restaurant, travel, and fuel industries. We as bank examiners understand that there are those customers whose income streams have been disrupted. So we have had to work with banks to make sure that during this time of uncertainty and crisis, the banks meet the needs of their customers. We have allowed banks the time to work through the problems that are natural to this situation: How do they keep their employees safe? When should their branches be open? What impact will closed branches have on their bottom lines, and how will they meet the needs of customers who want to access their money?

We’ve been encouraging bankers to work with their customers. For example, when deferring principal and interest payments on loans for negatively impacted customers, bankers were able to do so without concern that we regulators would automatically categorize these credits as problematic or troubled. Categorizing the loans as such would require that bankers set aside additional funds to cover potential losses, funds that would otherwise be used for normal operating activities such as making loans within the community.

In March, the Federal Reserve paused all new bank examination activities for three months for smaller institutions. Usually, exams involve our sending up to six examiners to a bank and staying on site for two to three weeks. We didn’t go on site with any of our banks during this time. Instead, we stayed in contact with bankers via phone calls to monitor their cash positions, the amount of foot traffic within their lobbies, and efforts they were taking to meet with customers and provide normal lending services. To date, all of our examination activity continues to be conducted off site. This approach has helped enable banks to continue to work with their customers and their local communities.

We continue to monitor the areas critical to the health of institutions. We focus on heavily impacted industries and the resiliency of those industries’ borrowers. To date, most of the banks we monitor—which are those headquartered in Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky—are recovering from the disruption in their normal activities caused by the pandemic. However, we will continue to monitor banks that may have concentrations in highly impacted industries, such as restaurants, that might be doing fine now but may encounter additional challenges when the weather changes and restaurants lose access to their outdoor dining business. Another concentration a bank might have that would cause concern is commercial real estate lending, particularly office space, as more and more businesses realize their employees can work effectively from home. That could lead to a reckoning within real estate once this pandemic is over.

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Bryan S. Huddleston is an assistant vice president with the Cleveland Fed. He oversees a staff that monitors the safety and soundness of both community banks, or those with $10 billion in assets and less, and regional banks, or those with $50 billion in assets and less. The team assesses the quality of banks’ assets, including loans; evaluates institutions’ requests to expand, including new branches; and takes action against institutions if they violate laws and engage in unsafe or unsound practices, among other things.


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