WASHINGTON—A new Financial Stability Report from the Federal Reserve has flagged the operational risks facing financial institutions as a key source of risk in the near-term, while acknowledging the "tremendous human and economic hardship" caused by the coronavirus pandemic.
"Many operational challenges make it harder to operate efficiently or effectively," the report states. "Absenteeism has increased because of social distancing or illness and also because of competing responsibilities such as childcare. Some large banks have selectively closed branches or opted to alternate branch operating times. Smaller banks and those that operate in rural markets may have less flexibility and could be significantly impaired if a staff member were infected.
Potential For Mistakes
"Many financial infrastructures have switched to operating completely remotely at a time when transaction volumes have often been extremely high,” the report continues. “During periods when financial institutions operate remotely or with limited staff, the possibility of operational miscues or other mistakes may increase."
The Fed report does stress the benefits of having business continuity plans and actively testing them before a crisis hits. However, "banks have been following these plans for longer than anticipated and should continue developing new longer-term plans," the report states.
Other Key Risks
Other key risks identified in the report include:
- Prices of commercial properties and farmland were highly elevated relative to their income streams on the eve on the pandemic, suggesting that their prices could fall notably
- The high level of business-sector debt is likely to amplify the adverse effects of the COVID-19 outbreak
- Mortgage servicers will be put under strain as mortgage forbearance expands