FDIC OIG: Top Challenges Facing the FDIC in COVID-19 Emergency Relief and Response Efforts — June 2020

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This document, dated June 2020, contains the Federal Deposit Insurance Corporation (FDIC) Office of Inspector General's identification of the top challenges facing the FDIC in light of the COVID-19 pandemic, under the heading Top Challenges Facing Federal Agencies: COVID-19 Emergency Relief and Response Efforts. It says the FDIC examines most of the financial institutions in the country, approximately 3,400 of the 5,300 banks. It identifies three primary challenges, ensuring the FDIC's readiness for crises, resolving financial institutions, and guarding against financial fraud and cybercrimes at banks. It notes that from March to May 2020 more than 33 million American workers filed for unemployment compensation and more than 4 million small businesses sought economic relief under the CARES Act.

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    TOP CHALLENGES FACING
    FEDERAL AGENCIES:
    COVID-19 Emergency Relief and
    Response Efforts
    As reported by Offices of Inspector General across government


             This document contains the Federal Deposit Insurance
             Corporation (FDIC) Office of Inspector General’s
             identification of the top challenges facing the FDIC in
             light of the COVID-19 pandemic.

             The full report is available at: https://oversight.gov/
             report/prac/top-challenges-facing-federal-agencies-
             covid-19-emergency-relief-and-response-efforts


   June 2020
FEDERAL DEPOSIT INSURANCE CORPORATION

The Federal Deposit Insurance Corporation (FDIC) plays a critical role in maintaining the stability of the nation’s financial
system and ensuring the safety and soundness of its supervised financial institutions. To accomplish its mission, the
FDIC examines most of the financial institutions in the country (approximately 3,400 of the 5,300 banks) and manages
the resolution and receivership of failed banks. The FDIC also manages the Deposit Insurance Fund (over $110 billion at
the end of December 2019) and insures approximately $7.8 trillion in customer deposit accounts.

In recent weeks (March to May 2020), more than 33 million American workers filed for unemployment compensation
(14.7 percent unemployment rate in April 2020), and more than 4 million small businesses in the United States sought
economic relief under the CARES Act. As a result, many financial experts are forecasting an economic downturn,
whereby borrowers may experience difficulty in repaying loans to banks. Such hardships may cause significant
economic pressures upon the financial institutions of this country.

Based on its oversight experience and a review of other relevant materials, the FDIC OIG identified three primary
challenges facing the FDIC:

e Ensuring the FDIC’s readiness for crises (including modeling potential effects on financial institutions and
conducting examinations remotely).

e Resolving financial institutions (including executing off-site bank resolutions and receiverships and resolving
large, complex institutions pursuant to Dodd-Frank Act responsibilities).+

e Guarding against financial fraud and cybercrimes at banks.

Ensuring the FDIC’s Readiness for Crises

The FDIC must be prepared for a broad range of crises that could impact the banking system. In an April 2020 report on
the FDIC’s readiness for crises, the OIG identified seven best practices that could be used by the FDIC in its crisis
readiness framework: (1) Policy and Procedures, (2) Plans, (3) Training, (4) Exercises, (5) Lessons Learned,

(6) Maintenance, and (7) Assessment and Reporting.”

While this report was not conducted in response to the current pandemic, the OIG found that the FDIC should fully
establish the seven elements of crisis readiness. Although the FDIC maintains certain policies and procedures, and
conducts some training and simulated exercises, the OIG found that the FDIC:

1. Did not have a documented Agency policy and did not have documented procedures to provide for a consistent
crisis readiness planning process.

2. Should develop an Agency-wide all-hazards readiness plan as well as Agency-wide hazard-specific readiness
plans, as needed.

3. Did not train personnel to understand the content of crisis readiness plans.
4. Should document the important results of all readiness plan exercises.

5. Did not have a documented process to monitor implementation of lessons learned.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (2010).
2 FDIC OIG, The FDIC’s Readiness for Crises (EVAL-20-004, April 7, 2020).

Federal Deposit Insurance Corporation 16
6. Should establish a central repository of plans to facilitate periodic maintenance.

7. Should regularly assess and report on Agency-wide progress on crisis readiness plans and activities to the FDIC
Chairman and senior management.

The OIG made 11 recommendations for the FDIC to improve its crisis readiness planning. The FDIC has actions underway
to address these recommendations.

With respect to the current pandemic crisis, the FDIC represented that it has supplemented its existing staff and
contractors and prioritized its workload to focus on mission-essential matters. In addition, the FDIC has reconstituted its
Resource Management Committee to focus attention on emerging needs.

Modeling Potential Effects on Financial Institutions

Given the variables and uncertainty related to the current pandemic as well as the dynamic and fluid nature of the
economic situation, the FDIC faces challenges in forecasting the economic impact of the pandemic and its financial
effects on banks. According to the FDIC, its economists and financial analysts have developed analyses to assess the
potential effects of the downturn with respect to liquidity and credit quality. Such insights into troubled or failing
institutions would help the FDIC to plan accordingly, supplement resources, and allocate supervisory staff appropriately.

Conducting Examinations Remotely

The Federal Deposit Insurance Act requires on-site, full-scope examinations of every FDIC-insured financial institution at
least once during each 12-month period (with certain limited exceptions).? In March 2020, pursuant to the presidential
declaration of a National Emergency and in accordance with mitigation guidance from federal, state, and local officials,
the FDIC mandated telework for its staff and continued all examination activities off-site. Prior to the current pandemic
crisis, the FDIC stated that it had conducted approximately 40 percent of its safety-and-soundness examinations off-site
and approximately 60 percent of its consumer-compliance examinations off-site.

Current social distancing guidelines place an unexpected reliance on information technology systems to conduct FDIC
examinations. Although the FDIC frequently swaps data with banks through file exchange systems, these systems will
come under additional stress due to the increased data flow and volume. Such dependence on remote off-site
examinations also places a greater emphasis and focus on information security protocols and the reliability of the FDIC’s
information systems.

Resolving Financial Institutions

Executing Off-Site Bank Resolutions and Receiverships

When a financial institution fails, the FDIC is responsible for facilitating the transfer of the institution’s insured deposits
to an assuming institution or paying insured depositors directly. The FDIC’s goal is to provide customers with access to
insured deposits within 1 or 2 days. Carrying out this responsibility during the pandemic presents challenges because
this activity requires FDIC personnel to be present at the failed bank’s offices and branches. In April 2020, the FDIC
changed its processes and now deploys a small on-site team (with a health and safety officer available for consultation)
that relies on conferencing software, scanning, and file exchange platforms. The FDIC must ensure that its on-site
employees have an adequate supply of personal protective equipment and are trained on its proper use. Also, the FDIC
will need to reevaluate such procedures in light of the current pandemic environment.

Resolving Large, Complex Institutions Pursuant to Dodd-Frank Act Responsibilities

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted and contained
provisions regarding the Orderly Liquidation of large, complex financial companies known as systemically important
financial institutions (SIFI). These provisions allow for liquidation of a bank where its bankruptcy would have serious

3 12 C.F.R. § 337.12 (2018).

Federal Deposit Insurance Corporation 17
adverse consequences on the financial stability of the United States, and where there is no private-sector alternative to
prevent default.

Pursuant to this Dodd-Frank Act authority, the FDIC is appointed as a receiver to carry out the liquidation of SIFls. As
receiver, the FDIC may take steps to transfer or sell assets, create bridge financial organizations to assume assets or
liabilities, and approve claims against the company to be paid. To help fund this liquidation process, the Dodd-Frank Act
includes a separate fund created by the U.S. Department of the Treasury to cover administrative costs of liquidation.
Because the federal government has never invoked these Orderly Liquidation provisions, the FDIC may face challenges in
executing the novel provisions of Orderly Liquidation under the Dodd-Frank Act. Further, social distancing guidelines
may hinder the FDIC’s coordination and execution of the Orderly Liquidation processes.

Guarding against Financial Fraud and Cybercrimes at Banks

The economic shocks associated with the Savings and Loan crisis (late 1980s to early 1990s) and the recent financial
crisis (2008 to 2013) uncovered certain fraudulent activity committed by banks, bankers, customers, and other related
parties, such as bank fraud, bribery, embezzlement, investment schemes, obstruction of bank examinations, and
falsification of bank records and reports.

Financial institutions may face a recurrence of such threats and risks to their operations. Through the CARES Act and
subsequent law, the federal government, at present, has injected more than $2.4 trillion in stimulus funding into the
economy, including approximately $670 billion in guaranteed loans to small businesses under the Paycheck Protection
Program. Of this amount, approximately $30 billion is set aside for mid-sized banks and credit unions, and another
$30 billion is set aside for small banks and credit unions. Based on our prior experience, we have seen that the
guaranteed-loan programs (such as the Paycheck Protection Program) may lead to an increased risk of financial fraud
and criminal activity, because the fraudsters know that such loans are backed by the U.S. government. The FDIC may
face challenges in ensuring the proper level of supervision and examination scrutiny for guaranteed loan portfolios at
supervised institutions.

In addition, during this pandemic crisis, customers and financial institutions are increasingly dependent on remote
mobile and online banking services, which may increase the risk of cybercrimes, such as phishing and email fraud. The
FDIC has issued publications to assist consumers in using mobile and online banking services and to raise awareness
regarding such threats. Further, banks’ use of third-party service providers to support technology systems may increase
cybersecurity risk at institutions. The FDIC must ensure that banks secure and protect multiple avenues of digital
interconnections, because a cyber incident at one digital juncture has the potential to infect other institutions in the
banking system.

The OIG notes that these challenges will require continued attention and vigilance by the FDIC for the foreseeable
future, and hopes that this document will be informative for the American people to learn about the operations of the
FDIC and understand the challenges it faces.

For more information on the FDIC
Office of Inspector General visit
https: //www.fdicoig.gov/.

Federal Deposit Insurance Corporation 18

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