5 Tips for Aligning Your Bank with the CARES Act

In March of 2020, as a direct response to the global pandemic that left countless Americans in precarious financial situations, the United States released the Coronavirus Aid, Relief, and Economic Security Act or CARES Act. The bill accounts for $2.2 trillion worth of economic stimulus funds for individual Americans, small businesses, larger corporations, and state and local government agencies. 

One sector that has had to carry a particularly heavy burden since the launching of the CARES Act is the banking sector. Of particular concern to banks in America are the CARES Act’s provisions for limited loan forgiveness, payment deferrals for principal and interest (as well as other fees) for one year, and the encouragement of further lending activities. The CARES Act also legislates measures for regulatory relief on the part of banks. These include a 0% capital risk weight for Small Business Administration-guaranteed loans under the Paycheck Protection Program and some temporary relief from the need to report modified loans as troubled debt restructurings (TDRs). But on top of other challenges, like modernizing and upgrading to digital banking environments, banks may have a difficult time coping with the demands of the CARES Act. 

Compliance to the CARES Act will undoubtedly affect your own bank’s operations with its retail customers and its corporate clients alike. While aligning your loan programs and credit facilities with the CARES Act, you’ll take on part of the loss incurred by both individuals and business entities in hard-hit industries, like dining, tourism, and hospitality. But adjusting to the CARES Act—as well as the evolving needs of your customers in the post-pandemic era—demands a “now or never” kind of approach for your bank. To that end, here are five tips for aligning with the CARES Act and becoming more proactive on imminent issues like liquidity risk and credit loss. 

Brace for the Effect on Your Bank’s Liquidity Management 

In consideration of the CARES Act and the increased probability of deferred loan payments, interest waivers, and loan term extensions, your bank will need to change its purview on its liquidity for the next few years. The goal is to be more aware of your liquidity risk in light of the CARES Act, and to bridge any current gaps in your ability to settle your bank’s outstanding financial obligations. The key will lie in strengthening your asset liability management, loan loss forecasting, and balance sheet management practices. When America’s financial situation normalizes, this handle on your liquidity management will serve your bank well.  

Maintain a Realistic Outlook for Your Capital Requirements

The second aspect that you should pay attention to is your bank’s capital requirements for staying compliant to the CARES Act. There’s likely to be a significant increase in the total capital required because of expected delinquencies, especially from your bank’s retail customers. It’s better to deal with the heightened probability of default now, and to be quick about your calculations for that probability. This is so that your bank has ample time to prepare for incoming capital-related challenges.  

Look to Existing Frameworks for Calculating and Managing Credit Losses

At first, it will be hard for your banking staff to wrap their heads around the numbers that represent credit loss, from both your retail and your corporate clients. But it will be immensely helpful to draw from existing frameworks, like the IFRS 9 standard, to bolster your organization’s ability to calculate and manage these losses. Consider accelerating your compliance for IFRS 9, as your familiarity with the standard will help you navigate your expected credit losses under the CARES Act. 

Improve Your Onboarding, Know Your Customer (KYC), and Customer Due Diligence (CDD) Processes

Given the impact that the CARES Act has on the banking industry, it’s easy to assume that it will result in industry-wide losses. But one good thing that will come out of the mercies granted by the CARES Act is customers’ goodwill. When their financial situations improve, customers may renew engagement with the bank and patronize its products and services. While it’s understandable for you to think about loss first, allot part of your efforts to Americans’ ongoing financial recovery. Aim to achieve smooth customer onboarding experiences, as these will sustain the banking partnerships that you will need in the long run. At the same time, enhance your KYC and CDD to help you conduct balanced risk assessment, as these will allow you to steer clear of risks related to unsavory activities like money laundering. 

Protect Your Banking Customers from COVID-19 Scams and Other Forms of Financial Crime

As part of the CARES Act, the US Internal Revenue Service (IRS) has been disbursing Economic Impact Payments (EIPs) to eligible taxpayers via direct deposit or check payment. The US Treasury has warned the public about scammers who may try to intercept EIPs before they go to their actual beneficiaries. Your bank can do its part to shield its customers from COVID-19-specific fraud by echoing the Treasury department’s caution, warning your customers of these scenarios, and fortifying your bank’s overall defenses against financial crime. Scams, phishing, fraud, and the like will run rampant in the years following the pandemic, and it is in the best interest of your bank to protect your customers’ assets. 

Though it may not be immediately apparent amidst the many challenges your bank currently faces, good things will come out of you aligning with the CARES Act. You will end up adopting a proactive mindset for managing the risks and losses brought about by COVID-19 pandemic. In the aftermath, you will emerge as a resilient and adaptable institution—and you will earn your place at the forefront of America’s financial recovery.

Share this post:

Leave a Comment