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In the aftermath of Hurricane Katrina, banks' disaster recovery capabilities are put to the test.

Amidst the chaos following Hurricane Katrina, at least one entity had its act together - the financial services sector. Even before the floodwaters began receding, banks in the disaster zone were working to restore operations.

Although there was no mass disruption of the large-value payments systems and core systems, as occurred after 9/11, Katrina's effects were no less significant from a retail banking perspective. Consumers' ability to simply subsist depended largely on their being able to access their funds, and this became a top priority for banks.

"With 9/11, it was a matter of seeing if the payments and settlement systems worked," explains Doug Johnson, senior policy analyst with the American Bankers Association (Washington, D.C.). "With Katrina, it's more, 'My ATM doesn't work - how am I, as an individual, to accomplish the banking services I need to enable me to survive?'" he continues. "It's about being able to affect smaller-value transactions to enable individual customers to survive."

The ABA is just one of the organizations that has been working with government agencies to assist its member banks and consumers in the hurricane's aftermath. "There is enormous support from the state bankers associations, state banking commissions, the FDIC, the NCUA and the national trade associations," comments Don Donahue, chairman of the Financial Services Sector Coordinating Council for Critical Infrastructure Protection and Homeland Security (FSSCC; www.fsscc.org), a public/private sector partnership. "Katrina affected the ability [of banks] to directly meet the financial needs of people."

At press time, banks' disaster recovery plans and backup systems seem to have passed the test. Though many banks in the hurricane zone sustained physical damage, observers say that, so far, they have not heard of any data-recovery problems.

"All the banks in Mississippi were up and running" two days after the hurricane hit, according to Chad Driskell, director of government relations with the Mississippi Bankers Association (Jackson, Miss.). "Our banks are operating - they all recovered to their backup sites."

"There was only one institution as of [Sept. 8] that wasn't picking up ACH files," says the ABA's Johnson. "That speaks for itself."

It also speaks well of the industry's third-party service providers, adds Bob Schmermund, EVP of corporate communications for Washington, D.C.-based America's Community Bankers.

Power Outage

Despite banks' ability to bring their systems online, there was one problem - a lack of power. Although banks were ready on their end, the local infrastructure proved to be the weak link in the chain. The issues affecting banks were basic, explains ACB's Schmermund - communications, physical facilities, utilities, security, and transportation.

"We've heard about some cash and liquidity problems, but it wasn't due to bureaucratic inefficiencies but to the basic issue of there not being enough armored trucks and fuel to haul in the cash," Schmermund says. "There was no news about data processing issues. It's more that the basics just weren't being taken care of."

Still, things are not completely back to normal. "I'm sure the smaller retail financial institutions were significantly impacted by Katrina," notes FSSCC's Donahue. "A big national bank can fall back on other locations. But the industry and the regulatory community have responded very strongly to help the banks."

For ongoing commentary on Hurricane Katrina's impact on banking, visit www.banktech.com/blog.

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