Examining Fed’s proposed guidance for bank boards

Let’s talk about board expectations.

The efficient thing about directors’ liabilities and their duties and responsibilities is that they are generally viewed in hindsight, by whoever is making the complaint.

If the bank fails, then FDIC as Receiver, or in its corporate capacity, reviews what the board did with 20/20 hindsight. If a shareholder sues, it is because the board did something they did not like. Again, the board is subject to a 20/20 hindsight review.

I profess to understand board expectations because of experience. First, I have served on the board of directors of a bank. Second, in my prior, regulatory, life I became immersed in director liability issues when I headed the FDIC group that sued bank directors and officers if their banks failed.

Now an interesting wrinkle has come out of Washington.

Fed steps into board expectations debate

Although there is a fair amount of material about the positive, proactive aspects of being on a board of directors, the Board of Governors of the Federal Reserve—sort of an ultra bank board—has now weighed in on the issue of directors’ duties and responsibilities.

On Aug. 3, the Fed published "Proposed Guidance On Supervisory Expectation For Boards Of Directors" for boards of directors of bank holding companies and state-member banks. 

Although this does not specifically apply to those banks without holding companies or those banks that are state non-members (federally supervised by FDIC or the Comptroller’s Office), it does provide good guidance for all directors.

The guidance is divided into three separate areas.

• The first part includes proposed guidance addressing effective boards of institutions with total consolidated assets of $50 billion or more. I expect these will become “best practices” for community bank boards.

• The second part is applicable to the board of directors of bank holding companies of all sizes.

• The third part contains proposed guidance related to the communication of supervisory findings.

Part 1: Board role versus management role

The first part of the guidance—again, officially applying to very large institutions—deals with the issue of the board’s relationship with management. This section certainly does not encourage micromanagement.

That was encouraged during the Great Recession by the federal regulators, particularly FDIC when it indicated a board entering enforcement actions must “significantly increase its involvement in the affairs of the bank”).

The guidance distinguishes the board’s responsibilities from those of senior management and sketches out these hallmarks of an effective board:

1. Set clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance.

2. Actively manage information flow and board discussions.

3. Hold senior management accountable.

4. Support the independence and stature of independent risk management and internal audit.

5. Maintain a capable board composition and governance structure.

Part 2: Where regulators meet the board

The second part of the proposed guidance, which is applicable to all bank holding companies regardless of size, indicates the Federal Reserve is “conducting a comprehensive review of all existing supervisory expectations and regulatory requirements relating to boards of directors…”

The guidance indicates the Federal Reserve is looking to revise or eliminate unnecessary, redundant, or outdated expectations to allow boards to focus more of their time and resources on fulfilling their core responsibilities.

The guidance distinguishes between the responsibilities of the board and management and indicates that the board is primarily responsible for the oversight of management, with management being responsible for the organization’s day-to-day activities.

Again, the Fed is not encouraging board micromanagement for institutions of any size.

Part 3: Talking to boards about “MRIAs and MRAs”

The final part of the proposed guidance relates to the communication of supervisory findings in examination reports and the like.

The Federal Reserve’s existing guidance requires all Matters Requiring Immediate Attention (MRIAs) and Matters Requiring Attention (MRAs) to be presented to the board so directors may ensure senior management devotes appropriate attention to addressing these matters.

• The proposed guidance would clarify the process and indicate that examiners and staff would direct most MRIAs and MRAs to senior management for corrective action.

• MRIAs or MRAs would only be directed to the board for corrective action when the board needed to address its corporate governance responsibilities or when senior management failed to take appropriate remedial action.

Some perspective on proposal

It is good to see the Federal Reserve Board being proactive with respect to the issues involving the relationship between the board and its regulators and the board and management.

Although many of these issues raised by the Fed are not new and have been covered previously by FDIC and OCC in their Supervisory Guidance, the Fed’s move is a positive one.

The proposal is out for comment for about another six weeks.