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May 16 — Boards of banking institutions are struggling in the midst of increased regulations and enhanced penalties.
The heightened regulatory landscape, more oversight responsibilities, and an increase in personal liability exposure are some of the challenges that are making a bank director's job more difficult, practitioners told Bloomberg BNA.
Directors of banks have fiduciary duties that apply to all boards under state laws, said David Baris, a Washington-based partner at BuckleySandler LLP who also is president of the American Association of Bank Directors (AABD). In addition, bank boards are “subject to over 800 provisions in law, regulation, and regulatory guidance that impose burdens on bank directors that far exceed what would be required under fiduciary duty standards,” Baris told Bloomberg BNA in an e-mail.
The AABD earlier this year wrote to the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency to warn about the added regulatory burdens these agencies are placing on bank directors.
Among other recent measures, the FDIC, the Federal Reserve and other banking regulators recently proposed requirements to restrict risk taking by bank executives (78 CARE, 4/22/16).
In terms of sanctions, the Committee on Capital Markets Regulation found that financial institutions continue to face “historically unprecedented public financial penalties.” According to the group, public settlements and regulatory penalties for financial institutions amounted to $5.1 billion in the first quarter of 2016.
In the wake of the economic recession, bank directors also have to undertake more tasks. It is not uncommon for such directors to receive 900 pages or more in their board packages for monthly meetings, Baris noted. In addition, board members are expected to read hundreds of pages more in committee reports, while bank regulatory guidance requires them to approve more than 50 written policies annually.
Moreover, many of the regulatory guidance provisions, “which are often applied by the federal banking agencies as if they are laws or regulations,” are requiring bank directors to take on the traditional responsibilities of bank management, Baris continued. “None of the regulatory guidance acknowledges that bank directors, like other corporate directors, may rely reasonably on management, advisors, and counsel.”
The cause of the economic recession “seemed to be placed at the feet of the banking industry,” said Charles Stutts, a Tampa, Fla.-based partner at Holland & Knight. He added that there is a growing expectation on boards to pay more attention to basic lending issues, to better know their market, and to stick to their overall business philosophies.
The real challenge for banking institutions is to regain the trust of the public by showing that they are conducting business in a safe and sound manner, said Stutts, whose practice focuses on securities and banking law.
Meanwhile, bank directors are subject to heightened personal liability risks due to federal banking statutes, regulations and “regulatory attitude,” Baris said. “Regulatory guidance imposing burdens on bank directors continues to grow.”
Stutts noted that claims for damages against individual officers and directors arising out of FDIC lawsuits can add up to the $50 million- to $70 million-dollar range (13 CARE 38, 1/2/15). As a result, some directors may find it challenging to obtain director and officer insurance with high coverage levels, he said.
Stutts also observed that D&O policies containing exclusions for claims asserted by regulatory agencies are becoming more prevalent. Bank directors should strive to negotiate these clauses out of their policies because regulatory agencies are bringing the majority of lawsuits that impact such board members, he said.
The Clearing House, an association that is owned by the largest commercial banks, said it is critical for the board's oversight role to be distinct and to complement management's day-to-day role.
In a May 6 report, the group said that the “blurring of this distinction” takes away from effective governance by potentially reducing the board’s ability to focus on its core oversight functions, impairing the board’s ability to perform its critical oversight role objectively, and creating uncertainty as to roles and responsibilities.
In other best practices, Baris suggested that bank boards must decide how “unwieldy” board and board committee reports can be changed to better support decision-making. Moreover, boards must decide how board and board committee meetings should be conducted to allow for time to discuss the fundamental strategic and business challenges that banks face, he said.
To reduce personal liability, Stutts recommended that bank directors ensure that the minutes actually reflect what goes on in board meetings.
To the extent that the board deviates in any way from its established policies for making or approving loans, the minutes should reflect the basis for that decision, Stutts said. If there is discussion of the factors weighing for or against a particular loan, those factors also must be detailed in the minutes. Similarly, if there is dissension on the board for a particular action, the minutes must reflect that dissension, he said.
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