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THE FINANCIAL SERVICES sector started girding up for Katrina well before the storm inflicted its 90,000-square-mile path of destruction. But no institution had an airtight plan for dealing with so fierce an onslaught.

“This was an extreme circumstance, so banks with even the very best, most thorough, and well-thought-out disaster plans found where the weaknesses were,” says Peter Gwaltney, chief executive officer of the Louisiana Bankers Association.

In New Orleans, bank buildings wallowed under eight feet of water in some of the hardest-hit areas, such as St. Bernard Parish. Of the 165 banks in Louisiana, 45 were directly affected by the storm.

In Mississippi, banks struggled with power outages and fuel shortages, while on the Gulf Coast several branch offices were annihilated. “Some of them lost everything they had in their main offices,” says Chad Driskell, director of government relations for the Mississippi Bankers Association.

Incommunicado

Communications quickly became the major issue crippling the financial services sector. In New Orleans, the entire 504 area code was wiped out, cutting off interplay between bank executives and their staff, and leaving customers trying to access their money with no way to do so.

“It’s clear that whether it was banking or emergency services, we were all subject to the inability of the 504 area code to work. That hurt,” says Biff Motley, senior vice president of marketing and retail banking at Whitney Holding Corp, a major New Orleans financial institution.

Customers who tried to use their credit or debit cards found them inoperable since they could not be authenticated over the telecommunications network. Cellular phone towers were also lost.

Relocations

Banks tried to set up alternative sites, but ran into barriers there as well. Getting to staff was one problem. “They had trouble communicating [with] and finding their people because of the way the evacuations went. I had one banker who had staff in 13 states,” says Gwaltney.

Another problem was the slow response time of telephone vendors. One solution was to go to other areas where there was telephone service and purchase boxes of cell phones to bring back to senior staff working out of places such as Baton Rouge or the North Shore. Whitney Holding Corporation bought a few hundred cell phones with Houston’s 713 area code and advertised the numbers for clients on its Web site. Satellite phones were also used, although selectively, considering their expense.

Many banks relocated their center of operations to places like Covington and Baton Rouge. Whitney initially placed 125 recovery people at its disaster recovery site in Houston, and it doubled the number after the storm hit.

Safe in Cyberspace

Motley says online banking served Whitney’s customers best during the emergency, allowing them to pay bills and conduct general banking. The bank added server capacity to handle the increase in the volume of online activity.

It was also forced to increase its call center capacity to cope with the flood of telephone queries. At a time like this, Motley explains, “People want reassurance. They want to make sure the bank is still there, that their money is safe and sound.”

Gathering Greenbacks

The need for the public to get cash did not arise immediately, and when it did, demand was satisfied in creative ways.

“It took a few days before anyone thought about cash,” says Gwaltney. That was simply because “before a storm, what typically happens is that people go to the grocery store, stock up their pantry, buy bottled water, and get some cash,” Gwaltney explains.

Driskell says that Mississippi customers who needed to write checks or access cash were able to do so within two days after the hurricane. Louisiana officials concurred. “There were never lines at banks and people clamoring for cash,” says Gwaltney.

Working Together

Community banks that lost entire branches partnered to share buildings. As many as five banks were squeezed into one branch, each putting out their plaques in front of a teller window.

“Depending on where you were, the size of your bank, [and] your specific disaster plan, every bank had their own issues,” says Gwaltney. “But the common denominator was that banks leaned on each other to ensure consumers were served.”

Banks also furnished temporary manufactured housing branches to replace destroyed branch locations and brought in mobile ATM networks.

Banks forged agreements between themselves to cash the checks of each other’s customers up to a certain amount. Community banks in particular relied on each other to serve as points of contact for their clients until they could get back on their feet.

Relaxing Red Tape

Financial institution standards were relaxed to allow people to receive payments, open accounts, and put debts on hold. The Federal Deposit Insurance Corporation (FDIC) called on banks to waive ATM, overdraft, and late fees; extend repayment terms; restructure existing loans or ease terms for new loans; defer payments; ease credit card limits; ease restrictions on check cashing; and be reasonable in verifying the identity of displaced persons trying to open accounts.

The evacuees posed an immediate problem since many had fled the storm minus their wallets and purses. To deal with that situation, banks slackened the identity process. Potential bank customers could be vouched for by friends or relatives, or were asked to get a duplicate driver’s license.

“They will enter the banking system in a less secure mode than banks are typically comfortable with, and that is something we don’t have answers for right now,” says Gwaltney. Commonly accepted practices under the Bank Secrecy Act were also skirted to serve immediate needs of customers.

In addition, the FDIC urged banks to take “not-on-us” checks, handwritten and typewritten Social Security checks, and handwritten Red Cross checks. The Social Security Administration issued laser Social Security checks in their Louisiana, Mississippi, and Alabama offices, which the FDIC encouraged banks to accept. Social Security personnel also went to Red Cross shelters to identify recipients and give them their checks. More allowances in the banking system are likely to be made as local authorities work in tandem with the federal government.

Going Forward

There are many questions yet to be resolved. The extent to which regulatory changes will be made to deal with the aftermath of Katrina remains up in the air.

“We’re talking to members of Congress, regulatory agencies, all the way up to the President himself,” says Gwaltney. “A lot of issues have been proposed by the American Bankers Association, America’s Community Bankers, the Independent Community Bankers of America, and state associations like ours and Mississippi and Alabama. We will keep developing them.”

One looming regulatory headache is the ability of the banks in the disaster area to handle the federal aid money that will come their way. Congress has authorized $60.5 billion to the Federal Emergency Management Agency for Katrina relief. As of mid-September, the Homeland Security Department had spent or committed at least $16.8 billion for hurricane relief. “With all the government and Red Cross assistance that will be forthcoming, plus insurance payments, we know our banks will literally be flooded with cash deposits,” said Driskell.

“That sounds like it would be absolutely wonderful for banks, but it does create regulatory problems when banks have huge influxes of cash.” Driskell and other officials have been seeking advice from bankers in Homestead, Florida, and other areas via daily conference calls, tapping them for their knowledge gained during Hurricane Andrew in 1992.

The bottom line is that banks handled the situation fairly well. Banks facing the hurricane had extensive disaster recovery and business resumption plans, including the common practice of housing backup data files at locations hundreds of miles away. “I think our industry has a very good story to tell as far as being back up running rapidly after this catastrophic event,” says John Hall, spokesman for the American Bankers Association.

And while getting services up and running was a challenge, protecting customer assets was not a problem, says Driskell, whose association represents 108 financial institutions holding 99 percent of Mississippi’s $40 billion in bank assets. Gwaltney says banks in Louisiana were able to protect client assets even as looters targeted their computers and desks. “All the money is in the vault. With personal information, the safeguards are there, and the data centers are usually off in other locations,” he notes.

But banks, like everyone else, were hindered by communications glitches. Gwaltney notes that during Katrina, first responders, individuals, and businesses suffered a lapse in contact in much the same way as they had during the September 11 attacks. “We’ve got to get our arms around this,” he says.

Whitney Holding Corporation’s Motley agrees that the importance of reliable communications for the financial services industry was the chief lesson to come out of Hurricane Katrina, noting: “You have to be resourceful, but in order to be resourceful, you have to have the communications element.”

Robert Elliott is an assistant editor at Security Management.