As the COVID-19 pandemic wreaks havoc on businesses across the country, the banking industry has had to adapt to a rapidly changing landscape full of borrowers and clients in crisis. 

Many banks are offering relief to customers impacted by the pandemic. And since March 9, the Federal Deposit Insurance Corporation — better known as the FDIC — has encouraged financial institutions to help meet customer needs by waiving fees on late or missed loan payments, waiving early withdrawal penalties on savings accounts for people out of work, or allowing affected borrowers to temporarily skip payments.

Although it’s been more than a decade since the nation’s last wide-reaching financial crisis, many banks — as well as government regulatory agencies — are drawing upon the lessons they learned in the Great Recession to help them weather the storm of COVID-19.

The Business Journal spoke with two local banking experts about how previous financial crises prepared the industry to better respond to the coronavirus pandemic.

THE SAVINGS AND LOAN CRISIS

Over a 34-year banking career, Jim Harris — a regional community bank president for U.S. Bank — has witnessed some of the United States’ worst financial crises and seen how each left its mark on the banking industry.

Harris was a fairly new banker in 1986 when the industry was rocked by the savings and loan crisis, brought on by government deregulation, volatile interest rates, speculation, corruption and fraud.

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Loosened lending standards also led desperate banks to take far too much risk with not nearly enough capital on hand. Between 1986 and 1995, 1,043 of the United States’ 3,234 savings and loan associations failed. 

The cost of the S&L crisis is estimated at about $160 billion and, along with the recession that accompanied it, it redefined the commercial real estate industry in the late ’80s and early ’90s.

“We had a collapse in the commercial real estate market and that was caused primarily by the government,” Harris said. 

The crisis eventually resulted in a substantial number of bank failures.  

“At the time, the Office of the Comptroller of Currency would go in and audit a bank, usually on the weekend, and they would downgrade their loans or downgrade their assets and it would wipe out the capital of these banks,” Harris said.

“And so they were closed, and then on Monday they opened up and they were owned by the FDIC.”

THE ’08 CRISIS

When the next big financial crisis hit in 2008, Harris said the banking industry’s response was molded by its handling of the S&L crisis.

“2008 was more of a bubble in the residential real estate [market] and that created a liquidity crisis in the banking system,” Harris said.

“There were a lot of people that owned homes back then who found they dropped 30 percent in value. They couldn’t get mortgage loans, it created a lot of issues of ripple throughout the economy. 

“The OCC made a bit of a different decision — learning from 1986 — and they didn’t immediately require the banks to write off those assets. So it preserved the capital on the banks and you didn’t see nearly the number of bank failures. You did see some, but not as many as you did in the 1986 savings and loan crisis.”

THE COVID-19 PANDEMIC

While this economic crisis is different — precipitated by a relentless virus rather than financial and regulatory factors and corruption — the lessons learned by the banking industry in ’08 are again shaping the nation’s response.

“[The COVID-19 crisis] really all came down in a week because so many people had to shelter in place and so many businesses were closed,” Harris said. “So that’s why the government had to take such drastic action.”

On March 27, President Trump signed into law the $2 trillion CARES Act — the largest emergency aid package in U.S. history — which allocates emergency funding for businesses and nonprofits, individuals, federal agencies, and local and state governments. 

Many banks are opting to allow clients to defer payments, offering interest-only programs and taking other measures to help out. In the past, Harris said, those allowances would have been classified as Troubled Debt Restructures, or TDRs, showing the bank had to restructure the debt due to the borrower’s inability to pay.

“However, since so many of these are being done across the board, the government is not requiring us to classify these as [TDRs],” Harris said. “So that’s also helping both clients and the banks as well.

“In 1986 so many banks and savings and loans failed because … this loan was worth $100,000 then it was worth $50,000, so you had to write off $50,000 in value on that loan, and it would wipe out the capital of the bank.

“So then in 2008 they said, ‘Okay, you don’t have to recognize those losses right away.’ So that’s why there were a lot of banks that had trouble for a while, but they didn’t fail. 

“And then in 2020, they’re handling this more systemic issue and not … making the banks have to write off those loans. So I think that will ease us through and help ease the economy back into recovery quicker.”

THE IMPORTANCE OF LIQUIDITY

For Tom Ashley, a regional president for ANB Bank, banks took a simple but critical lesson from the ’08 crisis: Liquidity matters.

“An example of that, for us, is we maintain about a 60 percent loan-to-asset ratio. That is very important in times like this,” Ashley said.

“No one can ever plan for a worldwide economic and medical crisis like COVID-19 has presented, but what we have done is we’ve built up our liquidity and put ourselves in a capital position with the way that we’ve conducted ourselves over the past decade-plus. 

“We’ve maintained that 60 percent loan-to-asset ratio, which means that we have liquidity to withstand these times and can provide some relief to our customers.”

Only 60 percent of its portfolio is in loans, with the remainder made up of liquid assets and safe investments.

ANB is giving all of its term-loan customers — whether for residential mortgages, equipment loans or commercial real estate — a 90-day, no-penalty payment deferral.

Doing so comes at a cost and would likely not be possible without its current loan-to-asset ratio.

“Now when you quantify that, you look at the revenue that those loans generate for our loan portfolio across our organization … that equates to somewhere between $45 [million] to $55 million in the course of three months, of revenue,” Ashley said.

“And I think generally as an industry, banks have done a much better job in maintaining that liquidity [since ’08] to where they’re not … having those 95 percent loan-to-asset ratios. So I think banks have better positioned themselves today for events like this than they were a decade ago.”

LOOKING AHEAD

While efforts by banks — as well as assistance to businesses and individuals from the federal government through the $2 trillion CARES Act, signed into law March 27 — are designed to provide relief in the short term, it’s still unclear how sustainable those efforts will be if COVID-19 continues to surge — or even disappears for a period of time only to come back with the change of season.

Ashley said ANB officials have no definitive plans in place for after the 90-day period for payment deferrals, but the bank is continually monitoring developments and keeping in touch with its customers to keep them updated.

“The circumstances are ever-changing, and we’re going to have to be adjusting whether it goes positively or more negatively,” Ashley said. “So at this point, I would say we are very open minded to where we need to go from here, because we don’t have the crystal ball. I can’t tell you what’s going to happen after 90 days or whether this is going to be wrapped up, but I will tell you that we will continue to be proactive, staying in touch with our borrowers and staying out ahead of this, and we will make the necessary adjustments.”

If the coronavirus worsens or returns in the months or years ahead, Harris said banks — and the country as a whole — will at least have a body of information from this initial adjustment to COVID-19 to draw upon to handle the pandemic.

“It’s very difficult to plan for it,” Harris said. “But what are the chances that this virus could reappear, let’s say, next spring? I would say pretty good. Who knows if it will or not? 

“But if it does, here’s the benefit we will have: We will be prepared when it resurfaces. And we can learn from things we did right and things we did wrong this time.”