Katrina's Wake: Restoring Financial Services

CRS Report for Congress
Katrina’s Wake: Restoring Financial Services
William D. Jackson and Barbara L. Miles
Specialists in Financial Institutions
Government and Finance Division
Summary
In the wake of Hurricane Katrina, damage to the financial infrastructure appears to
be largely confined to small depository institutions. Directives stemming from the 9/11
attacks require most banking and securities firms to maintain off-site redundancy for
significant personnel and daily data backups. The damaged area is sufficiently wide,
however, and the possibility of long-term loan delinquency sufficiently high, that greater
harm may yet surface. To date, most depository institutions are functioning to some
degree and, despite concerns over large withdrawals, regulators say they do not expect
any to fail as a result of the damage.
Regulators are working with banks and credit unions to provide considerable relief
to customers hard-hit by the storm. Some lenders have announced customer relief
programs ranging from waivers of ATM fees and increases in cash electronic
withdrawal limits to cessation of foreclosure procedures and automatic forbearance for
mortgage payments for the months of September through November.
Congress has been briefed by the major regulators, and hearings were held by the
House Financial Services Committee on September 14, 2005. In addition, there are
some calls for (1) an emergency increase in deposit insurance ceilings to reassure major
depositors that their funds are safe, (2) legislation providing temporary relief from anti-
money-laundering and know-your-customer requirements in aid of check cashing and
other needs, and (3) provisions for government-sponsored enterprises (GSEs) to make
affordable housing allocations to victims.
This report will be updated to reflect new developments.
Beginning August 29, 2005, Hurricane Katrina disrupted both power and
communications in parts of Mississippi, Alabama, and Louisiana. Cash could not be
withdrawn; checks could not be cashed; and debit and credit card networks — including
an unknown number of ATMs — were down. In addition, facilities of a number of
financial institutions were destroyed by wind, or made inaccessible by water. The latter
included the New Orleans branch of the Federal Reserve Bank of Atlanta, which supplies
check and cash services to southern Louisiana and the nearby Gulf Coast.

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Such effects, however, are mostly short term, and regulators have experience in
ameliorating the problems caused by physical destruction. The Atlanta Federal Reserve
instituted armored car deliveries of currency to operating bank locations, moved check
clearing operations to Atlanta, and maintained the discount window to assist all
depositories in meeting their needs for liquidity, among other actions.¹ By September 7,
in a briefing with House Financial Services Committee members, financial regulators
were able to report that the financial system was functioning well in the crisis, with banks
coming to the aid of other banks in handling cash and checks, and a variety of regulatory
relief initiatives beginning to take hold. Many protective protocols put in place following
the terrorist attacks of 9/11 and the hurricanes of 2004 appear to have proved their worth.
Those protocols, which were required of all but the smallest depository institutions,
included maintaining critical personnel and data storage (with at least daily backups) at
sites at least 20 miles distant from a bank’s headquarters.² Apparently, in almost every
case, backing up data has worked despite loss of electricity.
As of September 20, the Federal Deposit Insurance Corporation (FDIC) reported that
it had heard from all 280 insured depository institutions in the Gulf area, and that most
were operating, with 95% of branches in the affected area open.³ The National Credit
Union Administration (NCUA) had earlier said that all 139 federally insured credit unions
in affected areas were operational, counting those operating via back-up sites.⁴ Industry
representatives testified about resumption of operations before the House Subcommittee
on Financial Institutions and Consumer Credit on September 14, 2005.⁵
Regulatory Actions and Advisories
Joint guidance provided by federal bank regulators — the Office of the Comptroller
of the Currency, the Office of Thrift Supervision, the Federal Reserve Board, and the
Federal Deposit Insurance Corporation — advised a temporary easing of regulations,
although each financial institution is left to decide on its own how to follow this guidance,
and emergency procedures are to remain consistent with safe and sound banking
practices.⁶ Specific actions permitted under the federal guidance include
^!waiving ATM fees for customers and noncustomers;
^!increasing ATM daily cash withdrawal limit;
^!easing restrictions on cashing out-of-state and non-customer
checks;
^!waiving overdraft fees as a result of paycheck interruption;
^!waiving early withdrawal penalties on time deposits;

¹ See [http://www.frbatlanta.org].
² See CRS Report RL31873, Homeland Security: Banking and Financial Infrastructure
Continuity, by William D. Jackson.
³ “Tallying Katrina’s Impact Could Take Years,” American Banker, Sep. 20, 2005.
⁴ See [http://www.ncua.gov/news/press_releases/2005/NR05-0916.htm].
⁵ See [http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=415].
⁶ See [http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050901/default.htm].

^!waiving availability restrictions on insurance checks;
^!allowing loan customers to defer or skip some payments;
^!waiving late fees for credit card and other loan balances due to
interruption of mail or customers’ inability to access funds;
^!easing credit card limits and credit terms for new loans; and
^!delaying delinquency notices to the credit bureaus.
For credit unions, NCUA issued a temporary ruling waiving restrictions under which
they normally operate. Emergency services — including check cashing, and ATM access
— can be provided to nonmembers.⁷ Members may receive services at other institutions.
NCUA can use its insurance authority to guarantee loans to affected credit unions.
These agencies have also formed a working group to coordinate emergency
responses on both state and national levels to “provide institutions with clear, timely, and
consistent information on areas of concern.” It is associated with the Federal Financial
Institutions Examination Council.⁸
Depository Institutions
The view of most regulators is that the banking system, both in terms of safety and
soundness and in terms of financial infrastructure, is well on the way to overcoming the
short-term difficulties presented by Katrina. The system-wide view may miss serious
problems at individual institutions, particularly smaller banks whose business activities
were concentrated in the hurricane area. Banks whose depositors have an urgent need for
cash, and whose loan collateral is believed to lie under water or otherwise to have been
destroyed, could face at least temporary financial distress, if not failure. Federal Reserve
actions can maintain liquidity, but there is some anecdotal evidence that major depositors
are withdrawing their funds from smaller banks out of concern that the banks may fail and
they may lose amounts that are above the deposit insurance ceiling. Since no bank can
withstand a serious “run” on deposits, some bankers have called for a temporary increase
in the deposit insurance ceiling to reassure depositors during the emergency.⁹
Another concern is that the need to provide emergency services to hurricane
victims may conflict with anti-money laundering regulations intended to keep drug lords
and terrorists from using the banking system. The Gulf is said to have largely reverted
to a cash economy,¹⁰ and large cash transactions are normally subject to stringent
reporting and know-your-customer requirements. In addition, many evacuees lack the
records or forms of identification that a bank would usually require. While regulators
have issued advisories that appear to suspend or relax rules concerning money laundering,
customer identification, and other requirements,¹¹ they have also left banks some
discretion in following those advisories. Some bankers have expressed concern that if

⁷ See [http://www.ncua.gov/news/press_releases/2005/NR05-0831-2.htm].
⁸ See [http://www.ffiec.gov/press/pr091905.htm].
⁹ “Storm-Hit Bankers Carry Plea to FDIC,” American Banker, Sep. 7, 2005, p.1.
¹⁰ “Matter of Perspective,” American Banker, Sep. 12, 2005, p.1.
¹¹ See [http://www.fdic.gov/news/news/financial/2005/fil9105.html].

they expedite major cash transactions (those of $10,000 or more) by not completing the
anti-money-laundering paper work, or if they open an account for a displaced Katrina
victim with only minimal information, they may later be penalized for poor discretion.
There have been calls for temporary relief from these regulatory requirements.¹²
Finally, it is not clear that all existing financial institutions will ultimately survive
the disaster. The most important reason is the loss of assets in the area. Homes and
businesses that provide much of the loan collateral for smaller institutions are gone and
may not be revived, or insurance may not be adequate to make the loans whole. In
addition, many customers of the banks are gone and may never return. Either loss could
well prove sufficient to end profitability of some banks.
Banks and the finance units of the nation’s automakers are offering some relief to
borrowers affected by Hurricane Katrina. For example, Bank of America, J.P. Morgan
Chase, and Wells Fargo are letting their customers defer payments on mortgages and
home-equity lines for up to 90 days.¹³ General Motors, Ford Motor, and DaimlerChrysler¹⁴
are offering payment relief for customers who took out loans via their financing units.
Bankers also have some incentive to send longer-term funds into affected areas.
Under the Community Reinvestment Act (CRA), banking businesses are graded on their
socially-directed loans, investments, and services. Coincidentally, effective September
1, 2005, the scope of application of this act was expanded concerning community
development. The definition of community development now includes activities that
revitalize or stabilize distressed or underserved rural areas and designated disaster areas.
Federal or state governments designate disaster areas, which would include those severely
damaged in the hurricane, thus allowing banks anywhere in the nation to meet their CRA
obligations by assisting in the recovery. Assistance to displaced evacuees qualifies.¹⁵
Mortgage Lenders
Fannie Mae and Freddie Mac buy residential mortgages and either hold them (“in
portfolios”) or repackage them into mortgage-backed securities for sale. Both GSEs have
large numbers of mortgages secured by residences in the hurricane zone. Both have
announced that they will continue to make interest and principal payments due to holders
of mortgage-backed securities in a timely manner, despite likely disruptions of payments
from homeowners in the affected areas.

¹² “Matter of Perspective,” American Banker, Sep. 12, 2005, p.1.
¹³ See [http://www.bankofamerica.com/newsroom/press/press.cfm?PressID=press.20050901.03.
htm], [http://www.wellsfargo.com/jump/hurricane_relief.jhtml], and
[http://investor.shareholder.com/ j pmorganchase/press/releasedetail.cfm?ReleaseID=172182].
¹⁴ See [http://www.generalmotors.com], [http://teamusa.ford.com/], and
[ h t t p : / / w w w . d a i ml e r c h r ys ler.com/ dccom/ 0,,0-5-7145-1-538484-1-0-0-0-0-0-9-0-0-0-0-0-0-0-0
,00.html].
¹⁵ See CRS Report RS20197, Community Reinvestment Act: Regulation and Legislation, by
William D. Jackson. This policy is applied to Katrina explicitly at [http://www.occ.treas.gov/
H u r r i c a n e Q A . h t m# C o mm] .

Fannie Mae¹⁶ has announced that its relief provisions include directing its primary
lenders and mortgage servicers to suspend mortgage payments for up to three months, and
reduce payments to up to 18 months (or longer in severe cases). All such assistance is on
a case-by-case basis and will take into account uninsured losses, extended unemployment,
and extraordinary expenses related to the storm and its aftermath. It has also told lenders
to suspend any reporting of delinquent mortgages to credit bureaus where the
delinquencies are attributable to the disaster and are encouraged to waive penalties or late
fees against borrowers with disaster-damaged properties.
Freddie Mac¹⁷ has announced an immediate suspension for three months of
mortgage payments for all borrowers in affected areas (unless the homeowner indicates
otherwise) and lender discretion to reverse any September payments back to the
borrowers’ accounts. Freddie Mac has stopped any late payment collection activities or
foreclosures underway before the disaster. Lenders are to suspend reporting of delinquent
mortgages to credit bureaus, and may not assess late charges or other penalties for storm-
damaged properties during the three-month period. After the three-month period,
lender/servicers are to decide on a case-by-case basis if properties warrant additional
forbearance or reduced payments (for up to nine more months). Workouts are also
available beyond one year. Freddie’s Multifamily Division is additionally offering a 90-
day moratorium on apartment loans affected by Katrina.
The Federal Home Loan Banks (FHLBs) are lenders to the banks that are
members of the FHLB system. The most immediately affected Bank is the Federal Home
Loan Bank of Dallas, which covers Louisiana and Mississippi. While the Dallas FHLB
does not directly buy and sell mortgages, it does claim bank assets (mainly mortgages) as
collateral for the loans it makes to its member banks. The Dallas FHLB has announced
that it is making special disaster relief funding available to the affected areas in its¹⁸
jurisdiction, as has the Cincinnati FHLB for evacuees moved into its area. Specifically,
the Dallas FHLB will lend funds to the local member banks below its cost of funds to
assist in recovery efforts in all federally designated disaster areas. The funding is
available from overnight to as long as thirty years. In turn, FHLB system member banks
make low-cost loans available to individuals and families with incomes up to 165% of
area medians whose homes or businesses Katrina damaged or destroyed.
FHA-insured loans are run via the Department of Housing and Urban
Development (HUD). The department has had long-standing policies to deal with a
Presidential Major Disaster Declaration, remaining in effect for one year after the
declaration, on a county-by-county basis. It can allow for 100% financing to reconstruct
or replace destroyed property; relaxation of income requirements for borrowers; mortgage
modifications; forbearance; waivers of late charges; and a 90-day moratorium on
foreclosures for the covered mortgages. The Department of Veterans Affairs,
separately, has requested a 90-day moratorium on foreclosures for its VA borrowers, and

¹⁶ See [http://www.fanniemae.com/newsreleases/2005/3593.jhtml;jsessionid=LCQWW1M0S
DM AZJ 2 FQSHSFGQ? p= M e di a &s = Ne ws + Re l e a s e s ] .
¹⁷ See [http://www.freddiemac.com/news/archives/corporate/2005/20050908_hurricanekatrina
.html].
¹⁸ “FHLBs to Give $20M,” American Banker, Sep. 22, 2005.

additional forbearance such as waiving late charge payments and suspending bad credit
reports.¹⁹ The Small Business Administration is making physical and economic²⁰
disaster loans, which may include home as well as business and commercial realty loans.
Securities
Katrina’s impact on securities investors appears to be much smaller than on banks
and their customers. New Orleans is not a market center, and the securities industry has
been subject to data backup rules since the pre-2000 preparations for Y2K. The Securities
and Exchange Commission (SEC) took steps to ease compliance deadlines and to ensure
that individuals with sudden financial needs are able to contact securities firms.²¹
The National Association of Securities Dealers (NASD), which lost its New
Orleans office, provided guidance to its broker/dealer members, including
^!emergency office relocations;
^!books and records;
^!handling customers funds and securities; and
^!customer communications.
As for stock and bond prices themselves, the markets have exhibited resiliency,
with stock index prices showing little change from pre-hurricane patterns. Interest rates
on long-term securities actually fell during the period. If aid receipts are insufficient to
overcome economic shocks, holders of municipal bonds issued by affected jurisdictions
may face losses, but these should not have a major impact on the bond market as a whole.
Louisiana is actually planning to sell a new series of bonds to aid recovery projects.
Hotlines for Further Information
The following are official sources of information on matters addressed in this
report, at least as points of first contact, for affected parties and government bodies.
Banks: Federal Deposit Insurance Corporation, 1-877-275-3342.
Credit Unions: National Credit Union Administration, 1-800-827-6282.
Mortgages: Department of Housing and Urban Affairs, 1-888-297-8685.
Stocks and Bonds: Securities and Exchange Commission, 1-800-SEC-0330.

¹⁹ See [http://www.homeloans.va.gov/katrina.htm].
²⁰ See [http://www.sba.gov/disaster_recov/basics/faqs.html].
²¹ U.S. Securities and Exchange Commission, “SEC Announces Assistance to Katrina Victims,”
press release, Sept. 2, 2005, at [http://www.sec.gov/news/press/2005-125.htm].