New York Chinese American Bankers Association
c/o Metropolitan Bank and Trust Company
October 21, 2002
Board of Governors of the Federal Reserve System
Re: White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System
Dear Sirs and Mesdames:
The New York Chinese American Bankers Association (the "Association") commends the four agencies involved in the development of the White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System for their thoughtful approach intended to protect and strengthen the resilience of critical financial markets against wide-scale regional disaster. While we strongly support the objectives and endorse the prompt implementation of sound practices to achieve the stated objectives, we also believe that the joint agencies should expand their review and analysis of the scope of and planning against disruptions caused by widespread disaster by helping to design and implement practices for the rapid resumption of critical activities that support smaller community institutions serving consumers and small businesses in affected areas.
Please note that while the Association's membership ranges from wholesale branches and agencies of large foreign banks to small retail community banks, many of our members maintain retail offices in lower Manhattan, providing vital financial services to consumers and small businesses in local communities and their residents that are otherwise largely underserved. Since many of the factors affecting the resilience of our larger member banks are similar to and have, to a certain extent, been addressed by other money center banks, we will confine our comments to the needs of the smaller banks that were and continue to be on the front line in delivering retail financial services to the local communities in and around ground zero. These were banks that were forced to shut down on September 11, 2001 when the telephone system collapsed, travel was restricted and security was cut off when the law enforcement agencies necessarily focused on the direct human toll at ground zero, only to be forced to resume operations under the same conditions in the days that followed because their customers might not otherwise been able to survive. Much can be learned from their experiences in the days, weeks and months following the terrorist attack on the World Trade Center on September 11, 2001 and we feel compelled to share their experiences with you in order to help define the assistance they seek.
First and foremost, we suggest that definition of "critical markets" should be expanded to cover the market for the delivery of retail banking services. Each day, millions of consumers and small businesses depend upon the retail banking market, including our member banks, as the sole interface with money center banks and the capital markets. These small banks must be guaranteed that they will not be cut off from the services provided by larger correspondent financial institutions and the markets that they represent. In a catastrophic crisis, the needs of the retail consumer and small businesses most directly affected must be addressed promptly, both for the practical economic reasons as well as in the interest of consumer confidence. Such confidence, particularly in smaller, often ethnic communities, can only be fostered by the rapid resumption of business as usual.
When called upon, our community bank members attempted to respond rapidly and confidently. However, due to the absence of immediate assistance from money center correspondents and vendors, they were often required to employ creative techniques designed on the spot in order to respond to the community needs. No one could have anticipated the specifics of the adverse conditions under which they were required to operate, and no amount of advance planning can substitute for the willingness of employees, officers and directors to pitch in on the spot and get things done. However, in many cases they were operating on their own, without their normal support systems. The White Paper should specifically address how, in the event of a future crisis, the major financial institutions and vendors will promptly resume communications with and the delivery of needed services to the community banks that are on the front lines.
We also note from our experiences that many money center banks with branches in our community were too willing to simply tell consumers to "travel uptown" to deal with their banking needs. Although this may have given our members who kept their local offices open a competitive advantage, it did little to serve the community or to restore confidence. An underserved community in crisis became an overlooked community. Therefore, we suggest that the White Paper also address the obligation of the "firms that play significant roles in critical financial markets" to resume providing local services to community banks and small retail markets as promptly as possible.
The prompt resumption of service also requires government interaction, both between and among government agencies and the financial markets. Thus, for example, the ability of downtown banks to continue to operate after September 11 was inhibited by street closures, travel restrictions and the lack of telephone service. Although life and death matters must take precedence, community welfare and confidence must also be remembered in the recovery process, and the ability of the community to have access to and security for its money and the availability of other financial services is a critical component of community welfare.
Moreover, individual institutions in the areas affected by crisis cannot be expected to address issues such as travel restrictions directly with emergency service agencies, public utility agencies, and other government departments. Thus, we recommend that the White Paper discuss the issue of advance co-ordination and planning between the financial institution agencies and other government agencies, with lines of communication to the financial institutions themselves. Financial institutions need to know in advance not only what is expected from them, but also what assistance they can expect to receive and when they can expect such assistance. Financial institution co-coordinators should be designated in other government departments in advance, those designations should be publicized, and meetings should be held with the co-coordinators in advance to discuss the specifics of local recovery needs. Only in this way can we prepare in advance to address infrastructure disruption that impedes the resumption of financial service delivery.
The experience of our members reveals the importance of those components of the retail delivery system which are network-based, and thus prone to disruption. Examples include ATM networks, check and credit card verification systems, and point of sale payment systems. All companies operating these systems must be directed to develop appropriate backup systems to allow for prompt resumption of their online systems and interim offline service delivery. This also serves to remind us of the importance of telephone service because so many of these systems operate on telephone lines. Centralized co-ordination with telephone utilities in advance is necessary so that each financial institution is not left to scramble for itself at a time of crisis, causing inefficiencies if not impossibility in the resumption of service.
We recommend that the White Paper also address specifically the issue of liquidity providers to community financial institutions. Any crisis puts temporary stress on the liquidity requirements of financial institutions in the affected area. Some institutions may experience substantial net cash withdrawals due to panic by local residents, necessitating immediate access to liquidity facilities. Individual institutional requirements should not be brushed aside simply because they only involve a few million dollars, not the billions of dollars which may be used as threshold for determining significance.
We note in passing that some of our members experienced substantial cash inflows when their merchant depositors were forced to do business for cash due to the breakdown of credit card networks. This was especially dangerous (and gladly not well publicized) when alarm systems were not operating due to utility system problems and cash could not be shipped out due to travel restrictions.
Perhaps the most important thing to learn from the recovery efforts in the aftermath of September 11 is the importance of the human element. The character of the people who must implement the recovery program is its most important component. Bank examiners cannot simply use a checklist to determine whether an institution will be able to recover. Criticism in the examination process for technical violations is unnecessary and can only serve to dishearten those upon whose performance the retail delivery system will depend. Examiners should be directed to look at how an institution has dealt with problems in the past as important evidence of how they may deal with a future crisis. On this standard we know from experience that our members have no need to worry.
Should you have any questions or if you would like to further discuss any of these matters, please feel free to contact me at Metropolitan Bank and Trust Company, New York Branch, at (212) 832-0855 ext. 229; Norman Jardine, Chief Financial Officer, United Orient Bank, at (212) 349-1100; or Jay Hack, Esq., Serchuk & Zelermyer, LLP, at (914) 761-2100.