Operational resilience

• As the pandemic advances, some branches/offices may need to close temporarily, or employees may not want to come in to work.
• ATMs may need to remain open and have enough cash to dispense.

• How can banks ensure operational consistency with branch/office operations if there are temporary closings or employee absences?
• How can branches sufficiently replenish cash for ATMs?

• Consider reducing branch hours or, if possible, utilizing only drive-through operations.
• Assess opportunities to deliver services solely through digital channels.

• Many institutions already have traders working from home and remote offices, and some regulators such as the Financial Industry Regulatory Authority (FINRA) have temporarily waived rules in this regard.
• Meanwhile, the United Kingdom’s Financial Conduct Authority (FCA) has stated that all firms are expected to meet their regulatory compliance obligations regarding trading orders transactions, timely entry of orders, using recorded lines, and giving staff access to compliance support.

• What flexibility might regulators grant that would enable traders to work from home?
• What systems/tools/support need to be provided to traders who may be forced to work from home?

• Be in close contact with industry groups, such as the Securities Industry and Financial Markets Association (SIFMA), and regulators, such as the Commodities Futures Trading Commission (CFTC), National Futures Association, and the FCA, for information and updates on obtaining waivers.
• Work with vendors to set up alternate recording options.

Financial and business impacts

• The Federal Reserve has intervened in the repo market to ensure adequate market liquidity.
• The ECB, BoJ, and PBoC have taken a variety of actions to ensure market liquidity.
• Some institutions’ contingency funding plans (CFPs) may have already been invoked. And due to market volatility, there could be big swings in stress testing results and limit/threshold breaches. Some market participants may already be experiencing increased liquidity tightening.

• If there is a liquidity crunch, what current plans and activation steps are in place? To what degree have they been reassessed in light of recent market conditions?
• If institutions needed to sell assets to cover liquidity shortfalls, are the requisite legal documents up to date?

• Adequate liquidity across the enterprise globally should be ensured. Banks should be closely reviewing and monitoring daily liquidity stress testing reporting, limit/threshold monitoring, liquidity coverage ratio (LCR) results, etc. They should be monitoring market activity against their liquidity stress indicators for triggers that would activate the CFP.
• Analyses should be conducted to determine the size and impact of any liquidity shortfall if liquidity stress indicators are being triggered regularly. Impacts to secured funding/asset sales (including market access) should be included in the analysis. This information should be presented to management across liquidity and liquidity risk (liquidity crisis team) as part of the CFP being activated.
• Liquidity preservation actions should be part of banks’ CFPs and would include options for ensuring liquidity if the CFP has been invoked.
• Requirements should be recalibrated based on emerging market conditions and likely future scenarios.
• Banks should go beyond the LCR requirements when communicating their liquidity status to regulators. Regulatory relations teams should be part of the liquidity crisis management team/committee under the CFP.

• Risk-weighted assets (RWA) may be impacted by higher charges from increased volatility levels and higher counterparty risks.
• With the implementation of Current Expected Credit Losses (CECL) and a potentially less favorable economic outlook, banks’ loss allowances may be negatively impacted. Also, borrowers may want to refinance at longer maturities to lock in lower interest rates. Under CECL, this could result in additional loss allowances.

• How do increased volatility and price movements of assets affect RWA?
• Does the current economic and market environment warrant additional stress testing? How severe would a worst-case scenario be?
• With changes in economic assumptions, how will loan loss allowance estimates change?

• Assumptions driving the valuation of asset values should be revisited.
• Additional stress tests with different underlying scenarios specific to COVID-19 should be conducted.

• If general economic conditions deteriorate and lead to lower GDP growth, there could be reduced demand for banking products and services.
• With central banks aggressively cutting interest rates, banks’ net interest income will likely be challenged.

• Do leaders know where potential revenue losses could be the steepest?
• With potential declines to net interest income, what options exist to boost noninterest income?

• Work with relevant departments and units globally to develop an understanding of potential revenue hits and outline steps for mitigation.

• With clients potentially experiencing stressed financial conditions, credit quality/ratings may be affected.
• Also, pledged collateral may experience a decline in value.
• Customers, both retail and institutional, may resort to minimal or delayed payments on their loan balances.

• How can firms best assess and proactively work with clients who may be affected by the virus to renegotiate loan terms and conditions?
• Are borrowers/clients at risk of violating loan covenants? Is there an exception management process in place?
• Will firms need to increase loan loss provisions?

• Find out which sectors/regions/clients are most at risk.
• Reach out to clients with communications and information requests to provide temporary help as appropriate.
• Loan loss provisions under different economic scenarios should be reexamined.

• Currently, increased volatility and decline in prices across many asset classes have impacted the trading books and increased market risk as well as counterparty credit risk.

• How can capital allocations be determined across trading books in stressed markets?
• Are precautionary steps, such as trading asset divestments, required, and if so, which assets could be disposed of first?
• How quickly can hedging strategies be adjusted across foreign exchange, commodities, equities, or fixed income, as the situation develops?

• Capital allocations and hedging strategies across trading books should be revisited.

Risk and controls

• A sharp drop in interest rates and increased volatility in securities and FX prices increase banks’ market risk, potentially leading to losses.

• Has the exposure of the institution’s earnings or economic value of capital been adversely affected, and is it materially different from model-implied scenarios?
• Does the current environment warrant an update of internal models?

• Revisit internal models capturing market risk and account for potentially higher correlation.
• Communicate with the regulator if capital is adversely affected and materially differs from model-implied scenarios.

• Recent market events may have affected counterparties’ credit profile.

• How should any potential changes to counterparty creditworthiness be addressed in existing contracts and arrangements?
• How are market intermediaries, such as clearing agents, responding to any decline in counterparty credit standing?

• Assess/revisit existing contracts with counterparties most at risk.
• Work with market intermediaries to stay informed about any changes to counterparties’ standing.

• Nonfinancial risks such as conduct risk/culture, model risk, third-party risk, and cyber risk may also become more pressing.
• Potential disruptions to trading infrastructure may require that trades be rerouted to other venues, locations, and countries.

• How can risk controls regarding conduct risk be upheld in alternate work arrangements?
• To what degree are recent market conditions impacting model risk?
• What would regulatory requirements look like under alternate trade routing?
• As business process and flows change, what is the best way to manage cyber risk?

• Rethink risk controls for alternate work arrangements and potential disruptions that could warrant a reassessment of conduct risk, cyber risk, and third-party risk.
• Revisit to what extent model assumptions reflect current and possibly future market conditions.
• Obtain clarity from regulators about alternate trade routing.

• If a bank’s operating model needs to change, it may become difficult for the board of directors to continue to meet governance obligations such as overseeing risk, providing credible challenge to management, and acting as responsible stewards of the organization.

• How should the board of directors adapt its governance?

• Management should err on the side of overcommunicating with the board of directors, keeping them apprised and seeking their guidance on alternate operating procedures.
• Flexibility in work arrangements and speed of decision-making among the board of directors could become paramount in these circumstances.

• Banks have been returning capital to shareholders in the form of dividends and share buybacks over the past few years.
• Recent market stress may put liquidity pressure on banks, which may want to preserve capital by halting or reducing dividends and share buybacks.

• What is the appropriate strategy for dividends and buybacks, given current liquidity preferences?
• If there are commitments in place about dividends and/or stock buybacks, and banks want to temporarily halt these actions, how should this be communicated to shareholders?

• Assess institutional shareholder interest and preferences for share buybacks and dividends and communicate any potential changes.

• The COVID-19-induced market environment may negatively impact banks’ credit rating profile.
• New systemic, country, or other business risk factors may intensify and affect the creditworthiness of banks, counterparties, and borrowers, especially in the high-yield grade.

• How are rating agencies accounting for the changes to these risk factors?
• How should any potential changes to the credit profiles of counterparties and borrowers resulting from COVID-19 be accounted for?

• Stay in active communication with rating agencies and apprise them of changes to the credit standing.
• Determine whether any rating actions flowing from COVID-19-induced stress would necessitate giving counterparties and borrowers some slack.

• LIBOR will be replaced with alternative reference rates in various jurisdictions by 2021.

• Does the current market disruption impact transition plans and timing to replace LIBOR?

• Stay abreast of regulators’ guidance and market developments in the alternate reference rate markets, such as the Secured Overnight Financing Rate (SOFR) in the United States.

Operational resilience

• COVID-19 is disrupting the operations of many banks and capital markets firms globally.
• Financial institutions have already taken a number of actions, but they may need to do more as the situation evolves.

• Has a comprehensive reassessment of exposure to the full vectors of threat been done?
• How is the playbook for pandemics being updated as a result of unfolding events?
• What is the best way to determine the appropriate organizational response?
• How is the COVID-19 task force empowered?

• Banks and capital markets firms should reexamine their crisis readiness, run tests, reexamine governance, and streamline decision-making and communication approaches.
• Determine what constitutes a proportionate response and encourage decisive action.
• Playbooks already in place should be reviewed with necessary updates made to ensure organizational resilience.
• Activation and deactivation triggers should be determined and continuity procedures reviewed.
• The COVID-19 task force should be empowered to make decisions at both the global and local level, where applicable. The task force should be connected to and actively align its priorities with the CEO and board of directors.
• Ensure empathetic responses to employees’ situations.

• Communicating regularly with various stakeholders may continue to grow in importance.

• How quickly can tailored communications be initiated with employees, customers, business partners, vendors, investors, regulators, etc., across offices, regions, and businesses, nationally and internationally?

• Appropriate communication mechanisms tailored to different audiences should be prepared and tested.

• The evolving developments regarding COVID-19 call for institutions to be agile/flexible.

• Is scenario planning being done proactively?
• Are plans, policies, and procedures adaptive and flexible, and are they in line with national and local regulations and laws?
• Is there a clear governance mechanism in place if the pandemic worsens?

• Consider testing preparedness using interactive, scalable crisis exercises.
• Actively monitor results and iterate as needed.
• Ensure that policies, procedures, and plans are in line with current local, state, and national laws, and any updates. These may include Leave of Absence (LOA), the Americans with Disabilities Act (ADA), the Family and Medical Leave Act (FMLA), the right to privacy, Occupational Safety and Health Administration regulations, National Labor Relations Act regulations, state safe environment laws, and discrimination laws.

• As the situation continues to rapidly develop, alternate work arrangements are being implemented to limit the spread of the illness and ensure employee safety.

• What flex and remote work policies are currently in place?
• For those with business models that preclude remote work arrangements, have flexible or rotating schedules been considered?
• What are the risks associated with remote work?
• Do organizations have tools and solutions to implement remote work?

• Based on the most up-to-date information, whenever possible, consider instituting work-from-home or flexible/rotating schedules.
• Ensure that technology options are in place to connect employees working remotely without compromising access/data security.

• To enable flexible or remote work, organizations need to have the right infrastructure in place.

• Is the necessary technical infrastructure in place to support alternate work arrangements, and how secure is it?
• Which existing tools could enable remote work collaboration?

• Review infrastructure that is currently in place, such as VPN connections, security tokens, bandwidth, and laptops.

• The spread of COVID-19 could result in further work disruptions and delays, as governments, public transportation agencies, and educational institutions adjust their practices and policies.

• How can organizations ensure that the quality of work and productivity remain high?
• How can organizations ensure they are nimble enough to adjust workflows if work needs to be reprioritized?
• How can they modify plans to sustain employee engagement, well-being, and motivation?

• Prioritize which projects, workflows, and deliverables matter most, and communicate these clearly to employees.
• Provide appropriate tools and employ relevant tactics to maintain quality of work/productivity.

• Many organizations have offshore delivery centers, from IT services to call centers.

• How can firms ensure delivery from offshore centers with minimal disruption?
• Are there alternate/secondary delivery options in case the offshore delivery center is compromised?
• What is the business continuity plan for offshore centers?

• Maintain frequent communication with offshore delivery centers and develop appropriate contingency plans if they are not yet in place.
• Consider testing alternate work arrangements from offshore delivery centers to determine if service performance is affected in any way.
• Find alternate venues for service delivery if a particular center experiences an operational disruption.

• Each market could experience varying levels of stress and disruption.

• How efficiently can critical activities be rerouted to local offices around the world?
• How resilient are global entities/offices operationally?

• Identify which operations and/or activities can be rerouted or sent to other global offices, or even third parties.

• There may be increased demands on organizations’ digital infrastructure to replace manual operations.

• Are digital banking, payments, trading platforms, and other systems robust and resilient enough to handle disruption?

• Consider testing and planning for alternate capacity to process and continue to deliver services whenever possible.

• At any institution, legal contracts that deal with labor, clients, counterparties, and/or vendors, may be at risk.

• Are there any work/projects/deliverables that are at risk of missing deadlines or not being fulfilled?
• What are the third-party and client implications?

• Confirm if existing contracts include force majeure clauses.
• Contracts or statements of work should be revisited or amended, whenever possible.

• Looming deadlines for tax filings, financial reporting, and regulatory compliance reporting may be jeopardized due to operational disruptions.
• There may be tax implications as employees work remotely, potentially in different cities or states.

• How would changes to operations and alternate work arrangements or reduced capacity affect tax filings, financial reporting, and regulatory compliance reporting?
• What are the tax implications from work being done remotely? What would the potential losses be for tax-loss carry forwards?

• Be realistic about meeting deadlines. Proactively communicate with tax authorities and regulators, such as the SEC or OCC in the United States, or the ECB, Bank of England, and local tax authorities in Europe.
• Gain an understanding of the tax implications.