The Impact of Hurricanes on Banking Operations

By Mo Ramani

My hometown is Miami, Florida, and Miamians are acutely familiar with the power of Mother Nature and her ability to generate significant destruction through hurricanes, typhoons, and other catastrophic storms. 

One of the few silver linings associated with these types of events is that residents have time to prepare. And over time, most residents in hurricane-prone locations have developed their own “risk management” plans, which are typically tailored to the type of storm and their specific personal needs. But creating, communicating, and practicing a natural-disaster plan is not just for families and business continuity committees. It has become increasingly important to a bank’s risk function as well.    

Often, a bank’s hurricane plan is largely operational in nature, including such things as managing branch closures and anticipating repairs. These operational plans are important, but often the logistical considerations tend to overshadow the broader issues that can prove costly during these events.

The difference between having a broad-in-scope risk management plan and not having one can be costly to shareholders and disruptive to clients, including families and small businesses that serve as the backbone of smaller coastal communities. The purpose of this article is to share a playbook developed at SunTrust, in the hope that other financial institutions, regardless of size, may benefit.

Pre-Storm Preparedness

  1. Leverage weather-forecasting tools in your risk management plan. When Hurricanes Harvey and Irma were set to hit the U.S. mainland this past summer, we developed exposure tracking tools using a “cone of uncertainty” like those created by weather bureaus and the National Oceanic and Atmospheric Administration. This allowed us to target broad geographies and calculate the bank’s credit exposure by line of business and product in those areas.

    Just as the cone is designed to show increasing forecast certainty and narrow over time, our exposure zones were updated accordingly with each new forecast. Our maps of final exposure zones highlighted what would likely become disaster areas before they were declared so by FEMA. Again, time is a precious commodity and any advantage gained can aid in executional performance. Our final high-risk zones proved a near-identical overlay to the disaster areas declared by FEMA and other third parties such as property and casualty insurers and credit-rating agencies.

  2. Make sure data teams are engaged early on. Developing an internal forecast will be useless if data teams are not standing by to make real-time adjustments to exposures using borrowers’ zip codes and other spatial intelligence techniques. If those data teams are housed outside of the risk organization, make sure you have their attention and support early.
     
  3. Ensure teammate safety. Make sure leaders are ready to initiate business continuity through the use of call trees. Take advantage of the lead time typically associated with hurricanes by testing your call trees, even if you have done so recently. As leaders, set a calm, supportive, and reassuring tone through your internal messaging, and make sure teammates do not feel pressure to stay too late in a given area for the sake of the firm. Make it clear to your teams that they need to heed the warnings and evacuation orders of local officials. And establish a process for them to check in with their managers to account for their personal safety, whether they shelter in place or evacuate.

  4. Consult IT teams regarding remote access and other likely needs. Many employees, if they have power, may have to access bank systems remotely for a time. Make sure your systems can handle these higher volumes in concentrated locations. Also, work with your marketing and social media partners to make sure digital Web banners and social posts can be added or updated quickly in order to direct customers to key contact areas and resources, such as mobile ATMs or open branches in their area.

  5. Review current forbearance and fee-waiver policies. Who in the organization will have to approve payment waivers and forbearance plans in accordance with your current governance? If any policy changes need to be documented, do it before the storm. Ensure clarity around decision rights in advance, before your executives potentially scatter or become hard to reach.

  6. Ensure the adequacy of call-center plans. Having one Category 4 or 5 hurricane hit your markets is often challenging enough. What if two, three, or more storms arrive on its heels? What is your ability to redirect customer calls to other geographies if needed? Are current call-center scripts in line with your current policies and regulatory guidance? If not, you know what you need to do.

  7. Consult previous regulatory guidance. Take advantage of recent guidelines from the banking agencies that can provide insight into regulatory expectations during natural disasters and help identify potential gaps. One such example is Interagency Supervisory Guidance for Institutions Affected by Hurricane Katrina, which is available on the FFIEC website.

  8. Review key accounting policies. Be sure you communicate with internal finance and accounting teams on key definitions such as troubled debt restructurings (TDRs) and the potential accounting impact of increases in that regard.

hurricane table

Post-Storm Preparedness

  1. Prioritize customer needs. It’s worth remembering what a privilege it is to serve our customers, in both good times and bad. Often, the strongest client bonds are formed during crises. Impacted customers are experiencing what may be the most traumatic event in their lives. Leverage your pre-planning around fee and payment waivers and initiate your plans so that customers can obtain relief when they need it most.

  2. Monitor teammate needs. Employee-giving and company-matching programs can be powerful ways to empathize with affected teammates. Through your business continuity plans, make sure you identify people who may be most affected by the event and discuss with management ways to help them. Also, be sure to point teammates to resources for getting involved and volunteering in the recovery effort, whether that be through the American Red Cross and United Way or through local nonprofit organizations.

  3. Communicate, communicate, communicate. At SunTrust, we conducted structured incident-response updates, in which senior leaders make calls (multiple times per day and over several weekends before, during, and after the storms) to apprise key teams of various business issues. These real-time forums can also foster quick decisions on key problems, mitigating the traditional silos and processes that exist during normal business operations.    
     
  4. Review the nature of a storm as it relates to your book of business. Hurricane Harvey had a fairly narrow direct-impact zone, but was catastrophic owing to the flood-prone areas of greater Houston. While SunTrust does not have any retail branches in Texas, we do have a sizable portfolio in the state. We immediately focused on likely inbound calls related primarily to auto loans. 

    For Irma, we knew that many vehicles had evacuated Florida or had been moved to parking garages in nearby metropolitan markets, so the inbound calls were likely to be focused more on residential loan products. Understanding these basic differences can help make you more agile when trying to anticipate your customers’ needs. 

  5. Update your allowance forecast as appropriate. Use the intelligence you have gathered to develop base-case and downside loss estimates for the next several quarters. Look at the industry impact of prior hurricanes to get a sense of the potential impact of the current hurricanes. Adjust your base and downside cases based on the nature of the storm (flood versus wind damage, size and speed of storm, etc.) and the products offered in those geographies (mortgage, auto, small business, etc. will all react differently based on the type of damage). Using your projections, determine which adjustments to your allowance may be needed. Keeping your external auditors (and regulators) in the loop on your assumptions will be critical as well.

  6. Monitor social media. Customers could experience various forms of personal and financial distress during these catastrophic weather events. Monitoring social media for—and having the ability to respond appropriately to—reputational risk concerns is a necessity in today’s media environment. Often, a minor “fix” for a customer who has posted on social media can result in positive praise and increased brand affinity. Conversely, unresponsiveness can quickly damage reputations that take years to build. 

  7. Keep regulatory supervisors updated. Be transparent and timely with your regulators. Leverage their internal intelligence to corroborate your views on key impact areas and issues. Being timely and thoughtful with your postings to them will likely earn their appreciation since they also must provide updates within their organizations. They will also appreciate that situations are often fluid immediately after these events, but using your playbook to demonstrate “this is our best intelligence as of today” will go a long way.

  8. Help other institutions when possible. While in the course of normal business they may compete to win deals, financial institutions should come together during a crisis for the ultimate benefit of the communities they serve. We at SunTrust have fielded numerous calls from institutions of all sizes, and we are always happy to collaborate with other organizations to compare notes and answer questions. That way we as an industry can continuously improve and be even more prepared for the next significant weather event.  
     
  9. Conduct ongoing customer monitoring. Inbound call volumes and requests for forbearance can be a good predictor of consumer loan issues. From there, monitoring delinquencies and roll rates will be an important part of tracking against your base case. For wholesale clients (which we define as corporate, commercial, and business banking), leveraging front-office teams for client outreach can help sharpen visibility into problem areas before they show up in financial statements. For example, we were able to use our client teams to confirm that our primary commercial real estate projects were not impacted meaningfully by Hurricane Harvey. Using the front office through a “one team” approach can pay big dividends. 
     
  10. Monitor third parties. Are any of your key third parties materially impacted by recent events? For example, if you outsource real estate appraisals, can those be handled internally or by another vendor if your usual third party is experiencing issues? Are third parties behaving in accordance with your bank’s culture and principles, especially if they are interacting with your clients?

  11. Anticipate deposit swings. As insurance payouts are received by customers, their deposit balances at your bank are likely to increase. These balances will decline, however, as customers apply the proceeds to rebuilding or replacing personal property. Work with your finance teams to help monitor the potential impact on bank liquidity.

  12. Recognize the teams. Invariably, there will be teammates who went above and beyond the call of duty, working extra hours or even cancelling a personal vacation to help with storm forecasts. Recognize these teammates and use them as the “culture carriers” for future storm preparedness.
     
  13. Prepare an “after action” report. After the crisis subsides but is still fresh in everyone’s mind, conduct an “after action” report to openly discuss with key personnel what worked well and what didn’t. Use your findings to improve your pre-storm plan. What would you have done differently? Did the storm impact your views on any strategic risks relative to certain products or lines of business? Include first-line management in the discussions.   

Small organizations may have to prioritize these activities based on available resources. Large organizations can go further by potentially incorporating the results into their stress-testing models (do you have a specific hurricane scenario?) and other activities.

Residents of hurricane-prone areas are often savvy enough to have “pre- and post” storm preparedness plans. Similarly, risk managers would be well served by developing their own plans in advance of these events. A hurricane playbook can help mitigate credit, operational, reputational, and other risks. 

While you may not leverage each aspect of your playbook with every storm, you will be glad you have one when the next major hurricane hits. 

The above is from The RMA Journal, December 2017 - January 2018 article “The Impact of Hurricanes on Banking Operations: Preparation and Recovery” by Mo Ramani, chief credit officer and head of financial risk management for SunTrust Banks Inc.

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