COVID-19 Crisis Calls for Liquidity and Credit Controls for Banks

As the economy continues to strain from the COVID-19 impact and the government seeks to provide relief, banks are facing challenges they probably did not anticipate just a few months ago. Business customers and borrowers have significant credit needs that may weastretch limited bank staff and pressure liquidity, and this could strain your internal controls.

To help manage risks currently facing banks, we recommend the following processes and controls.

Liquidity

• Review your contingency funding plan (CFP) and determine whether an event trigger has been met. If a trigger has been met, then review established action plans to determine whether any of these should be executed. It is important to discuss these action plans with the defined crisis management team and ensure that decisions are formally documented.
• Evaluate and test all funding sources. As the economic impact of COVID-19 continues to be felt, banks may need to utilize contingent funding sources. These sources should be documented along with necessary contact information, terms, and access instructions. Additionally, all funding sources should be tested to confirm accessibility and to ensure bank staff know how to utilize the source.
• Prepare forecasting more frequently and include potential impact of increased loan fundings and decreased loan payments. The frequency for liquidity forecasting varies by bank, but most banks should increase that frequency until the economy normalizes. In preparing forecasting, banks should consider the anticipated impact of loan fundings through the SBA and other government programs, a slowdown in loan payments due to modifications, and drawdowns of customer deposits.
• Increase both the number and severity of stress testing scenarios to model the impact of COVID-19. In preparing liquidity stress testing, banks should consider additional scenarios that stress the bank’s liquidity profile. Additional scenarios that may need to be considered include:
  • Steep decline in loan paydowns
  • Significant erosion of customer non-maturity deposit balances
  • Decreased growth in overall deposit balances
  • Reduced availability from wholesale funding sources due to outstanding balances with these sources

• If stress scenarios indicate that sufficient liquidity is not available, then a documented plan for how the bank would manage such an event is critical for discussion with the crisis management team and/or the ALCO.

• Evaluate the adequacy of daily monitoring procedures and determine whether additional reporting is necessary to fully consider the impact of anticipated loan fundings, loan payments, and deposit balance changes.  Banks should also consider whether daily monitoring responsibilities should be expanded to include the crisis management team and/or the ALCO.

Credit — Paycheck Protection Program (PPP)

General:

• Forecast the impact of potential PPP fundings on liquidity and capital. If current liquidity is not sufficient to handle volume, then verify contingent sources are available and that usage is consistent with the CPF and capital plan.
• Establish procedures to ensure SBA fee receivables are recorded and reconciled to ensure timely clearance and receipt of fees.

Origination:

• Utilize a checklist to assure completeness of applicant documentation (such as SBA application Form 2483, tax returns, and documentation of payroll records) and completeness of verification steps performed. 
• Establish a clear definition of how average payroll is to be calculated, and perform a review of calculations for accuracy. 
• Secondarily review inputs to assure accuracy of applicant data entered into E-Tran/SBA solution.
• Perform a pre-funding review to ensure the loan has been approved in accordance with policy and by SBA, completion of requisite checklist(s), and disbursement of proceeds consistent with loan approval.
• Perform an independent, next-day review of the system-generated new loan report for accuracy of system set-up and validity of loan (for loan approval and against documentation). In this review, verify that ticklers to obtain payroll data, mortgage/rent, and utilities at the end of the forgiveness determination period have been properly created in the system.

Servicing:

• Regularly review exception reports to ensure ticklers for receipt of eight-week documents and forgiveness calculations are timely addressed.
• Secondarily review loan forgiveness calculation reported to SBA for accuracy.
• Perform reviews to ensure forgiveness proceeds are properly applied to loan balances.

Credit — Modifications

• Any loan modifications need to be considered for troubled debt restructure (TDR) classification with that consideration formally documented. Many modifications will not have to be classified as TDR at this time, and the reasons for not considering a modification as a TDR should also be formally documented. According to the FDIC’s Frequently Asked Questions, “the agencies have confirmed with staff of the Financial Accounting Standards Board (FASB) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.”

If you would like to talk through your processes, assess your controls or ask questions about your liquidity or credit risks in this COVID-19 environment, we welcome you to contact our team at Weaver.

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