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Law360 (May 8, 2020, 8:02 PM EDT) -- The Federal Reserve released its annual report on regulatory developments on Friday, highlighting that it has deferred or canceled "non-critical" examinations even for the nation's largest financial institutions, and that any exam activity through the end of the year will focus on the impacts of COVID-19 or issues that predate the pandemic.
In response to pandemic containment measures, the Fed said it has "deferred or cancelled non-critical examinations at large financial institutions" with total assets exceeding $100 billion and that any new exams will be focused on pandemic-related risks relating to capital management, contingencies planning and continued lending in the current environment.
"For the remainder of the year, examination activity will reflect operating conditions and will continue to target areas of heightened risk due to containment measure-related developments as well as known deficiencies that existed prior to the current crisis," the Fed said.
Exams already in progress at the large institutions before the pandemic are being completed offsite. Meanwhile, any new exams will focus on "risks that are elevated due to the current environment," the Fed said.
The report follows a March announcement from the Fed that said exams for institutions with less than $100 billion in assets would cease unless "critical," defined at the time as those impacting "less-than-satisfactorily rated" institutions with liquidity, asset quality or consumer protection issues posing an immediate threat to the bank or consumers.
In that announcement, the Fed had said it would defer "a significant portion" of planned exams for institutions above the $100 billion threshold based on its assessment of the burden on the bank versus the exam's importance relating to supervisory, consumer protection or financial stability concerns, a set of criteria that was echoed in today's report.
A Fed spokesperson confirmed that all regular exam activity for both large and small banks has ceased unless it's deemed critical.
The Fed outlined in the report how it has used "existing flexibility in the regulatory and supervisory framework" to address the impacts of COVID-19 on the banking industry, which it said has faced significant operational challenges as well as first quarter earnings and capital declines.
A sampling of large banks showed that earnings declined more than 50% compared with the first quarter of 2019, the Fed said.
On more positive notes, the Fed noted that the sector came into 2020 "in a healthy financial position" with strong capital positions and a high aggregate of liquid holdings following a prolonged period of steady profits, and that banks' strains in funding markets have eased since March.
"The global banking system is more resilient and better placed to sustain financing to the real economy as a result of regulatory reforms enacted, and measures taken by the banking industry, in the aftermath of the 2008 global financial crisis," the Fed said.
The Fed noted it has tailored regulations during the pandemic to encourage lending to households and businesses, urging banks to use capital and liquidity buffers, access government liquidity facilities and work prudently with borrowers struggling to meet contractual payments, in addition to adjusting banks' leverage ratio requirements.
--Editing by Emily Kokoll.
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