Banking and Finance Law Daily NYDFS issues guidance to regulated entities on coronavirus preparedness
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Thursday, March 12, 2020

NYDFS issues guidance to regulated entities on coronavirus preparedness

By Donielle Tigay Stutland, J.D.

The New York Department of Financial Services is requiring that each regulated institution submit a response describing the institution’s plan of preparedness to manage the risks associated with COVID-19, including plans to manage operational and financial risks.

The New York Department of Financial Services issued a series of Industry Letters to provide guidance on the risks posed by the outbreak of a novel coronavirus, known as "COVID-19," for NYDFS regulated entities and to address preparedness. First, NYDFS published an Industry Letter to regulated entities to address operational preparedness and operational risks due to the coronavirus outbreak. Additionally, NYDFS published an Industry Letter to regulated institutions seeking an assessment of financial preparedness in light of a COVID-19 outbreak. NYDFS also sent an Industry Letter to state regulated banks, credit unions and lenders addressing support for small businesses impacted by a COVID-19 outbreak. Finally, NYDFS sent an Industry Letter to entities engaged in virtual currency business activity seeking an assessment of operational risks for such entities.

Operational Risks. As the state of New York has been one of the first states to already have significant numbers of residents and businesses impacted by COVID-19, NYDFS guidance indicates that it wants to ensure its regulated firms are also a step ahead of any potential outbreak. Noted NYDFS in its industry letter to CEOs of regulated entities regarding managing operational risks, "it is critical that institutions establish plans to address how they will manage the potential effects of the outbreak and assess potential disruptions and other risks to their services and operations."

NYDFS is requiring each regulated institution submit a response describing the institution’s plan of preparedness to manage the risk of disruption to its services and operations. The guidance notes that preparedness plans need to be flexible to address a wide range of possible effects from a COVID-19 outbreak, and reflect the institution’s size, complexity and activities.

At minimum, the Department would like the following in each plan:

  1. Preventative measures to mitigate the risk of operational disruption, which should include identifying the impact on customers, and counterparts;
  2. A strategy addressing the impact of the outbreak in stages, so that the institution’s efforts can be appropriately scaled;
  3. Assessment of all facilities (including alternative or back-up sites), systems, policies and procedures necessary to continue critical operations and services if members of the staff are unavailable for long periods or are working off-site;
  4. An assessment of potential increased cyber-attacks and fraud;
  5. Employee protection strategies, critical to sustaining an adequate workforce during the outbreak, including employee awareness and steps employees can take to reduce the likelihood of contracting COVID-19;
  6. Assessment of the preparedness of critical outside-party service providers and suppliers;
  7. Development of a communication plan to effectively communicate with customers, counterparties and the public and to deliver important news and instructions to employees;
  8. Testing the plan to ensure the plan policies, processes and procedures are effective; and
  9. Governance and oversight of the plan, including identifying the critical members of a response team.

Financial Risks. NYDFS also issued an Industry Letter to its regulated institutions addressing potential financial risks that could arise from a COVID-19 outbreak. NYDFS is encouraging firms to plan for any impact on customers, counterparties, and service providers, including declining revenues, potential stock market declines and interest rate changes in response to the outbreak, increased credit risks and defaults, supply chain and service disruptions, and decreases in the value of assets and investments.

DFS also requested its regulated firms submit a response to the department describing its plan for managing potential financial risks:

  1. Assessment of the credit risk ratings of the customers, counterparties and business sectors impacted by COVID-19;
  2. Assessment of the credit exposure to customers, counterparties and business sectors impacted by COVID-19, arising from lending, trading, investing, hedging and other financial transactions, including any credit modifications, extensions and restructurings (including capitalizations of interest);
  3. Assessment of the scope and the size of credits adversely impacted by COVID-19 that currently are in, or potentially may move to, non-performing/delinquent status, including consideration of stress testing and/or sensitivity analysis of loan portfolios and the adequacy of loan loss reserves;
  4. Assessment of the valuation of assets and investments that may be, or have been, impacted by COVID-19;
  5. Assessment of the over-all impact of COVID-19 on earnings, profits, capital, and liquidity (including impact on loan-to-deposit ratio) of your institutions; and
  6. Assessment of reasonable and prudent steps to assist those adversely impacted by COVID-19.

Small Business Support. NYDFS noted that it issued the guidance related to small business support in an effort to encourage New York regulated banks, credit unions and licensed lenders to assist businesses that have been adversely impacted by COVID-19, including:

  • Offering payment accommodations, such as allowing loan borrowers to defer payments, extending the payment due dates or otherwise adjusting or altering terms of existing loans, which would avoid delinquencies and negative credit agency reporting;
  • Waiving overdraft fees;
  • Easing credit terms for new loans;
  • Waiving late fees for loan balances; and
  • Proactively reaching out to customers and those adversely impacted via app announcements, text, email or otherwise to explain the above-listed and any other assistance being offered to them.

Institutions Engaged in Virtual Currency Business Activities. DFS also issued guidance and a request for preparedness plans to all New York regulated institutions engaged in virtual currency business activity. NYDFS is requesting similar plans to address operational risks as required above. Additionally, NYDFS’s guidance made note to, "underscore, in particular, the risk to Virtual Currency businesses of increased instances of hacking, cybersecurity threats, and similar events, as bad actors attempt to take advantage of a COVID-19 outbreak, and the possible resulting need for heightened security measures, such as enhanced triggers for fraudulent trading or withdrawal behavior." The guidance also highlighted, "the possibility of custody risk for Virtual Currency, such as the possible need for special arrangements to move Virtual Currency from "cold" to "hot" wallets during times when employees may not all be working from their usual locations." The guidance also made note that some institutions may have obligations to notify NYDFS if positive net worth falls below a certain threshold above the minimum required capitalization.

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