Now is the time for agents to protect financial institutions clients
Easement in oversight and recent community bank failures present a timely opportunity to provide expert guidance to clients in the banking sector.
The financial crisis of 2008 shook the financial institutions sector. Confidence in the market and institutions plummeted. In the years that followed, the sector underwent an evolution, working to rebuild trust in the once failing system with new regulations.
New guardrails were implemented, and new government agencies were established through the Dodd-Frank Act. Some of Dodd-Frank’s key requirements have been loosened in recent years, now allowing small and midsize banks to escape some of the more rigorous rules. Capital requirements were reduced, liquidity rules were weakened, and supervisory oversight of community banks was relaxed with the signing of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018.
Critics of this move cautioned this could make another financial crisis more likely. Bank failure history mirrors this caution — we’ve seen a historically low number of bank failures since 2012, but with relaxed regulations, we’ve seen 25 banks fail in just the last five years. All were community banks with less than $10 billion in assets. In 2018, we experienced a ‘period of calm’ with no bank failures; however, we saw four failures in 2019, with three of those just in the fourth quarter alone, indicating we may start seeing more frequent failures of community banks.
The easement in oversight, combined with recent community bank failures, presents a timely opportunity for independent agents to provide expert risk management services and guidance to their clients in the banking sector.
Agents can help their financial institutions clients review and update critical coverage elements by working with them to:
- Include lending portfolios in risk assessments: The type of lending a financial institution practices creates different potential liabilities. A consumer-focused portfolio may create more exposure for regulatory claims, while a commercial exposure may invite more litigation for claims based on “livelihood” arguments. Exposures also shift for lending programs that involve outsourced lending, participation, and indirect loans. Understanding these different lending arrangements can help guide loss prevention practices, and an assessment of policy language can help ensures an adequate response is in place for potential losses.
- Understand existing loan portfolios: Repossessions and foreclosures can generate counter-claims. Adequate protection should be in place to address mortgage impairment, mortgage errors, and omissions and liability from the administration of escrow funds, tax liabilities, and flood assessment scoring. An error in one of these areas can leave a financial institution responsible for claims, payments and fees. Agents who understand their clients’ lending activities and effectively insure against those can help best protect their clients.
- Have strong D&O liability coverage in place: With recent events, a high amount of market volatility can significantly influence bank profitability. Smaller firms are particularly susceptible to the impacts of the volatility in the capital markets, which can lead to potential bank failures and distressed situations. Having robust directors and officers insurance coverage in place is critical during these periods of extreme market volatility as various stakeholders, including regulators, will take an increasingly closer look at management’s actions during these volatile times.
Just as community banks play a critical ‘relationship-based’ role in their communities, offering specialized knowledge of their local communities and customers, independent agents play an important role as risk advisors, helping guide their clients in thinking critically about their risks and developing and implementing cohesive risk management programs.
Banking activities generally contain a high amount of inherent risk, but certain activities are more likely than others to increase those risks. Independent agents can offer invaluable counsel to help protect banks from both the inherent and residual risks they face.
Helen Savaiano is president, management liability at The Hanover Insurance Group, Inc. The opinions expressed here are the author’s own.
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