Finding and Keeping Community Bank Directors in the New Regulatory Environment

Community banks across the U.S. may be finding it hard to recruit and retain outside bank directors, the Federal Reserve notes in its latest issue of Community Banking Connections. But strong directors are more important now than ever, and banks must make sure they are providing the necessary training and education to ensure proper oversight, the article advises.

Banks must conduct periodic board assessments to review directors’ responsibilities, determine the effectiveness of strategic planning and monitor policies and procedures. Such assessments can reveal important questions about “the engagement and contribution” of individual directors, the article notes.

The Federal Deposit Insurance Corp. has named 793 former directors and officers as defendants in lawsuits in connection with banks that have failed since the financial crisis. That means those directors could be found personally liable for mistakes banks made before they failed. And that has had a chilling effect on people who previously might have wanted to serve on bank boards.

In a survey last year, the American Association of Bank Directors found that 25 percent of banks that responded had lost either current directors or potential candidates because of fear of personal liability.  The AABD also identified more than 800 provisions in guidance and regulations that placed obligations on board members.

“Before the recession, directors were often prominent businessmen with a non-bank view, who could add an outside perspective and facilitate lending in their marketplace,” says Invictus CEO Kamal Mustafa. “That picture has changed. Because of both the legal and personal risk, directors must now understand banking, capital and the bank’s risk profile. It’s a clear-cut shift from board members that could create business to board members that can understand bank behavior.”

Every prudential regulator has emphasized how important it is to get board members trained: 

• The FDIC’s Director Resource Center is continually being updated, with technical videos on topics ranging from troubled debt restructurings to appraisals and evaluations, as well as a series on rulemakings, fiduciary responsibilities and risk management best practices.
• The Federal Reserve’s Bank Directors Desktop offers lessons for new directors, with quizzes to make sure they understand the topics.
• The Office of the Comptroller of the Currency  conducts workshops for community bank directors across the country on compliance, credit risk, governance and essentials of being a new director.

“Essentially, a bank director now must keep the bank out of the ditch,” notes former bank CEO Thomas Rideout, an Invictus executive adviser. “They must fully understand the bank’s regulatory mandates and operating risks. Most critical is focusing on business perspective to assure policies and procedures are in place for safe and sound operations and regulatory compliance.”

The Community Banking Connections article, written by Cynthia L. Course, the director of the Federal Reserve Bank of San Francisco, says that director candidates do not need to be experts in banking.  The Fed, however, does suggest that proposed directors of de novo banks have “appropriate” community bank expertise. The Fed notes that the inclusion of directors from failed banks can be a red flag in a de novo application.

She acknowledged that “recruiting new bank directors may have been easier to do in the past than it is today.” She said directors today “weigh the benefits against the potential burden or legal liability.”