Greenville Business Magazine 2010 January issue : Page 15
Board Savvy ››industry trends BY BRANDY WOODS SNOW PHOTOGRAPH BY NILL SILVER PHOTOGRAPHY Paula King, BankGreenville O ccupying a bank board seat means more than being a figurehead. Responsible for the governance of the institution, a bank’s board of directors holds a tremen- dous amount of responsibility to ensure sound banking processes, fulfillment of fiduciary duties and compliance with a plethora of ever-changing laws and regu- lations, all while serving the best interests of the shareholders and depositors. Betty Temple, Partner at Womble Carlyle PLLC, says that now, more than ever, there is an increased scrutiny in the financial industry. “Though there were none in South Carolina, nationally more than 100 banks have failed this year. We’ve seen high- profile banks needing bailouts, resulting in a more regulated environment where financial institutions must be acutely aware of their compliance with ever-changing industry regulations.” Responsibilities of Bank Directors First and foremost, bank directors are charged with establishing and executing the guiding policies that serve the best interests of the shareholders and the community. “The board is ultimately responsible for all legal and regulatory oversight, and it is our obligation to have a thorough understanding of what the job entails and the expertise available to back it up,” says Paula King, Executive Vice-President, CFO and board member of BankGreenville. Additionally, the board must also appoint competent executive manage- ment, strictly adhere to established banking laws, adopt policies that position the bank at limited risk, remain abreast of industry changes and abstain from self-serving practices. Temple advises bank directors to go into the commitment with eyes wide open. “When you accept a board seat with a bank, you also assume the potential personal liability that comes along with such service. If the bank fails, the shareholders have a legal right to come after you. While unlikely, except in especially egregious situations, you should always understand that accepting a bank directorship could also mean the possibility of underwriting the bank to their losses.” Understanding the Legal Issues Legal statutes have established the regulatory compliance standards for directors of financial institutions as banks must be closely regulated and governed due to their pivotal economic role as well as their FDIC-insured deposits. These legal regulations govern all aspects of the banking business, including setting lend- ing limits, safeguarding client confidential JANUARY 2010 | GREENVILLE BUSINESS MAGAZINE 15
>>industry trends - Board Savvy
Brandy Woods Snow
Occupying a bank board seat means more than being a figurehead. Responsible for the governance of the institution, a bank’s board of directors holds a tremendous amount of responsibility to ensure sound banking processes, fulfillment of fiduciary duties and compliance with a plethora of ever-changing laws and regulations, all while serving the best interests of the shareholders and depositors. Betty Temple, Partner at Womble Carlyle PLLC, says that now, more than ever, there is an increased scrutiny in the financial industry. “Though there were none in South Carolina, nationally more than 100 banks have failed this year. We’ve seen high-profile banks needing bailouts, resulting in a more regulated environment where financial institutions must be acutely aware of their compliance with ever-changing industry regulations.”
Responsibilities of Bank Directors
First and foremost, bank directors are charged with establishing and executing the guiding policies that serve the best interests of the shareholders and the community. “The board is ultimately responsible for all legal and regulatory oversight, and it is our obligation to have a thorough understanding of what the job entails and the expertise available to back it up,” says Paula King, Executive Vice-President, CFO and board member of BankGreenville.
Additionally, the board must also appoint competent executive management, strictly adhere to established banking laws, adopt policies that position the bank at limited risk, remain abreast of industry changes and abstain from self-serving practices.
Temple advises bank directors to go into the commitment with eyes wide open. “When you accept a board seat with a bank, you also assume the potential personal liability that comes along with such service. If the bank fails, the shareholders have a legal right to come after you. While unlikely, except in especially egregious situations, you should always understand that accepting a bank directorship could also mean the possibility of underwriting the bank to their losses.”
Understanding the Legal Issues
Legal statutes have established the regulatory compliance standards for directors of financial institutions as banks must be closely regulated and governed due to their pivotal economic role as well as their FDIC-insured deposits. These legal regulations govern all aspects of the banking business, including setting lending limits, safeguarding client confidential information, prohibiting discriminatory lending, limit bank engagement levels and more.
Serious charges such as falsifying bank records and misappropriation of bank assets can potentially lead to civil and criminal liability for the director.
The Federal Reserve Bank of St. Louis (www.stlouisfed.org) offers a basic online course “Insights for Bank Directors,” educating board members about performance and portfolio risk. They have compiled a comprehensive listing of laws every director should know, including these important regulations:
››The Bank Secrecy Act requires banks to investigate and report suspicious monetary transactions
››Privacy of Consumer Financial Information safeguards confidential information provided by the customer
››Golden Parachutes and Indemnification caps severance payments and indemnification to protect assets of bank
››Lending Limits limits loans to single borrower in order to diversify portfolio and safeguard bank interests
››Equal Credit Opportunity prohibits discriminatory practices in lending decisions
››Truth in Lending establishes uniform methods and terms when issuing credit
When non-compliance issues arise, federal regulators will take corrective actions, either formal or informal, against the offending bank. Informal supervisory citations include a “Memorandum of Understanding” or a commitment letter which addresses the violation and the timetable for resolution. More serious violations warrant formal actions, including cease and desist orders, removal and prohibition orders and civil money penalties (CMP).
“If the bank receives a more serious enforcement, the regulators may place significant limitations on the bank, which could impact their ability to gain new business, resulting in a vicious cycle that could ultimately result in bank failure,” says King.
Steps to Avoid Liability
Temple says that an attitude of non-involvement, non-understanding and non-interest can be dangerous for the board member, the bank and the depositors, but a proactive approach and serious commitment to open communication is the recipe for successful compliance.
The FDIC’s “Pocket Guide for Directors” sets forth these simple steps for staying ahead of the curve and out of trouble with non-compliance of federal regulations.
››Maintain independence. Directors must independently evaluate the actions, performance and abilities of executive management in the responsible handling of bank business.
››Be informed. Ever-changing regulations and legal stipulations will be easier to understand and incorporate with keen awareness of industry trends and institutional activities as well as a commitment to continued educational opportunities geared toward directors.
››Ensure qualified management. Hiring an executive management team that has both the experience and capability to lead and grow the bank’s business will reduce the risk of non-compliance and ultimate failure.
››Supervise management. Directors create and maintain the bank’s legal and regulatory policies and procedures and monitor executive management’s adherence to these guidelines.
››Avoid preferential transactions. Offering preferential transactions will open yourself and the bank up to significant civil and criminal liability.
“Maintaining good, open communication between the bank board and the regulators is key in staying abreast of updates to the law, as well as industry changes,” says King. “They are the most direct and reliable source in keeping your regulatory slate clean.”
She adds, “Despite the degree of responsibility, serving on a bank board is stimulating, and there is great pride in watching your efforts come to fruition with a successful bank.”
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