Law360 (May 8, 2020, 12:01 PM EDT) -- Blake Paulson has worked through plenty of economic peaks and troughs during his more than three decades at the Office of the Comptroller of the Currency, but he asserts that the effects of COVID-19 have been unique, requiring unprecedented steps to keep banks running smoothly.
In part one of this two-part interview series, Paulson addresses how both the agency and banks have adjusted to the challenges the pandemic brings, including working remotely, as the banks dole out much-needed financial assistance to their communities through the Small Business Administration's Paycheck Protection Program relief effort.
"We don't want to unduly burden them during these stressful times, but we also have a critical responsibility to fulfill our mission," Paulson said.
He details how the agency has near-seamlessly adapted to remotely conducting exams, which typically take 90 days for community banks, how that work is likely to create long-lasting procedural changes, while touching on recent changes to Bank Secrecy Act examination procedures.
What impact is COVID-19 having on the OCC and your examination process?
We were pretty well-prepared, and banks enter this period from a position of strength with high capital and liquidity, and generally good asset quality. Over the last several years we have been working to do more of that examination work offsite. For example, among community banks, which represent the vast majority of banks we supervise, we were probably doing 40% or 50% on average of that bank exam work offsite versus being in the banks prior to the pandemic.
We've now gone to what we call maximum telework, and about 95% of the staff across the OCC has been teleworking for the last several weeks. That goes for examiners and all the important support functions we have at the agency. The exams that were in process were completed offsite. We sent the reports out to banks and wrapped up with meetings via conference calls.
We're starting new exams as well, with bankers sending us requested information electronically and the examiners teleworking while communicating via email and conference call. We've had a lot of discussions with bankers about the exams because we know they have a lot going on and are very busy.
We don't want to unduly burden them during these stressful times, but we also have a critical responsibility to fulfill our mission. The bankers I've spoken to appreciate that we have to continue to do our work. They are happy to have the discussions with us on how to fulfill that mission with the least amount of burden on the bank.
How might this opportunity to do more work remotely change the process beyond the current pandemic?
We're continuing to find more and more ways to do our work offsite. In the last year or two we've had a lot of success finding ways to connect into bank systems from our OCC computers in a way that's secure for both the agency and the bank.
I think the current experience will accelerate some of that and will encourage banks to be even more open to allowing us to find ways to do more work offsite. It has shown us that we can do even more work offsite than we've done in the past, so I would expect the percentage of offsite work to continue to grow over time.
But I don't envision a day when 100% of the work is offsite. This is inherently a people kind of business and there's an element of what we do that can only really be done in person.
This includes in-person meetings with bank managers and speaking with bank employees to really understand their culture and how their risk management works. Having face-to-face meetings with a board of directors is certainly a much more productive discussion than it is via phone or even video.
What have been the most significant impacts of COVID-19 on midsize and community banks?
We've had a lot of ongoing discussion with banks, whether in the process of doing an exam or not, to find out the steps they're taking to address concerns around COVID-19. Obviously for the OCC and the banks the first concern is for the health and safety of staff and customers.
A lot of banks took action early on to limit in-person interaction and to leverage electronic ways of accessing accounts and doing banking, using drive-up windows, closing lobbies and all sorts of operational things.
They've done a lot to make sure they can continue to serve the needs of their communities and customers, but just in a different way. Early on, some of that was reassuring customers that their money was safe in the bank. There was some initial concern that seems to have died down quite a bit.
Banks having a high level of staff working from home is a challenge, but from what we hear they've worked through those challenges very well and are continuing to meet the needs of customers and communities.
The other big challenge for these banks is trying to support and implement the relief programs like the Paycheck Protection Program, to ensure customers are getting their economic impact payments, whether those are coming in through direct deposit or whether customers are coming in and depositing or cashing checks.
Now they are looking forward, like the rest of society, to how to start reopening again and moving back to a more normal way of doing business. So I think all of our banks are in the process of doing that right now.
What are some of the concerns from the banks relating to PPP, and how do they view the program from a risk-reward standpoint?
The feedback I've gotten from bankers is that they don't view this as a direct benefit for their banks. They are incurring significant costs to get their programs up and running, get the applications from small businesses in their communities, get the loans funded, and do the work on the back end.
Banks across the country have really stepped up, devoted a lot of resources and spent a lot of money on personnel and systems to make this work for their communities and to get this money out. From that perspective I've been very impressed with the level of effort and the understanding of how important this was.
I don't believe any of them see this as a profit at all, but I think universally they believe this is their role and responsibility in our economy as bankers — to help serve their communities and get this money out into the communities to help save jobs.
How are you addressing the PPP within the framework of conducting examinations?
OCC's role initially was to get input and feedback from our bankers about the challenges they saw with the program and implementing it. We provided a lot of feedback to the Treasury to help them understand what would be challenging, and some important changes were made based on that. Since then we've been providing feedback to the SBA regarding the challenges bankers are facing, and I think that's helped with some of the rollout.
Our examiners will be monitoring the liquidity and capital levels in our banks to support this level of lending, but as these loans are forgiven and repaid or sold through the Federal Reserve's liquidity program, that should be a relatively short-term impact on our banks.
Our role has been to support the program, but there won't be a ton of work on the back end for our examiners related to this program.
Bank regulators, the OCC included, recently issued some changes to the BSA/AML manual calling for a more 'risk-based' approach. What's the rationale there?
Bank Secrecy Act and anti-money laundering has been a big focus of regulators for many years to keep bad actors from using the financial systems to do things like launder illicit funds, finance terrorism and drug trafficking.
The recent update was an effort to make that exam process more risk-based, and it really goes back to the fact that the regulators are all required to examine every bank for BSA compliance every examination cycle, so every 12 or 18 months, depending on the size of the bank.
A high percentage of community banks have low or moderate levels of BSA risk based on their customer base and the products and services they offer. We've examined their BSA risk management many, many times and in the vast majority of the cases they have satisfactory risk management around BSA.
The updates to the manual really give us more flexibility to conduct more focused and efficient exams for those banks that have lower levels of BSA-related risk with established and proven risk management programs. It allows us to put less of a burden on the low-risk banks while allowing us to focus our resources on banks with a higher level of risk.
--Editing by Brian Baresch and Rebecca Flanagan.
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