A recent Wall Street Journal report highlights a dramatic increase in personal communication requirements between bank directors, and the Federal Reserve as well as the Office of the Comptroller of Currency (OCC). Shifting away from ‘light-touch’ oversight, these regulators have changed their approach, meeting with boards of directors of the banks it supervises as often as monthly. Additionally, regulators have requested detailed meeting minutes, internal communications, as well as succession plans, among other items. Coined by one bank executive as, “Occupy Board Room,” the increased level of scrutiny is inspired by the Frank-Dodd reforms following the 2008 banking crisis. While the increased communication may help to prevent a sequel, it has put a new set of challenges in front of bank boards, and requires a new level of top-down management for the industry.
As one board member said under anonymity, “Directors aren’t management.” In fact, U.S. banks have one of the highest rates of independent bank board members in the world, and that trend is increasing. Most American bank board members do not come from the financial services industry and while ultimately responsible for the bank’s affairs, according to the OCC, they are also responsible to shareholders, depositors, regulators, and the community. The new regulatory strategy increasingly requires directors to focus more on internal management and supervisory duties, which the same board member states is, “creating a ton of tension.”
In the aftermath of the economy-damning 2008 crisis, it is possible to feel both contempt and sympathy for current bank executives. Perhaps, the foremost thought that comes to mind is that if these directors would have done their job in 2005, they wouldn’t be complaining about being babysat in 2015. While probably true, it doesn’t paint the entire picture. In 2008, many boards were unaware or unappreciative of the massive risks that their banks were undertaking. This will never be a permissible excuse from now on. Now, risk-avoidance is a top concern, perhaps even on par with capital-generation. Therefore, board-members by default must stay more informed of the cost-benefit analyses of every major decision. The IMF has concluded that Independent directors are more risk-averse than directors who are bank CEOs. This is noteworthy, given the increasing trend toward more independent-leaning boards.
While the regulation may bring benefits, it may contribute to an increase of board members abandoning their posts. According to a 2014 American Association of Bank Directors survey, 20 of the 80 banks asked had a board member either resign or decline to serve in some capacity out of fear of personal liability. Although some would argue good-riddance, it remains to be seen if the benefits of the new strategy will outweigh the loss of experience. With 2008 moving into historical narrative and the economy steadily improving, this might be the best time for bank directors to start from a fresh perspective.
Wall Street Journal – Victoria McGrane and Jon Hilsenrath