Being an Effective Board Member
Observations from Seasoned State Bank Examiners
CSBS Deputy Seminar
August 18-21, 2002
- You are personally liable for all activities approved contrary to law...and for activities contrary to common sense.
- Common sense and fundamentals rule.
- Instill a corporate culture where problems are identified internally and acted upon.
- Beware of any insider transaction, such as:
- Purchase of repossessed collateral
- Transactions with affiliates
- Officer dealings with customers.
- Credit risk is likely the largest exposure
- Do not permit the combining of officer lending authorities.
- Insist on a list of loans made with exceptions to policy guidelines.
- Watch officer expenses. The looser they are with their expenses, the looser they lend.
- Know the largest problems credits, why they are a problem, and what is being done to collect or improve.
- Determine if loans are being kept current with liberal extensions, capitalization of interest, or additional loans, especially if delinquencies are low.
- Beware of industry and risk concentrations.
- Do not get into any business lines or loan programs unless the bank has the demonstrated expertise ("a loan is a loan is a loan" is not true).
- Audit and internal control are vitally important functions in the bank
- Make sure you understand what is covered and what is not covered in the audit program.
- Correspondent bank accounts must be reconciled with supervisory review.
- Segregation of duties and dual control are a must. Get certification from an independent party.
- Enforce a two-week leave policy.
- Maintain detailed records of the board's decision making processes.
- Take every opportunity to learn more about banking, including: credit risk, liquidity, interest rate risk, and financial reporting.
- The relationship between the board and bank management
- Your job is to ensure that bank management is following the directions of Board approved policies and goals.
- Insist on regular compliance reports that evaluate compliance with policies and regulations.
- Management information reports must be accurate and understandable.
- Do not get lost in the charts and fancy presentations. Insist that bank officers tell you what they mean in 10 words or less.
- Know the management of the bank, their personality, thoroughness & honesty. What motivates them in daily functions?
- The board manages the CEO. The CEO should not manage the board.
- The relationship between the board and the bank examiners
- Meet with the examiners regardless of the bank's rating.
- Be open and honest as examiners and directors have the same goals: safety & soundness, protection of the depositors, and a fair return to investors.
- Use examiners and auditors as a tool for learning.
- Review and approve management's response to the examination report.
- Be wary of dominate personalities on the board.
- Arguing with an examiner is like wrestling in the mud with a pig. Eventually, you figure out that the pig enjoys it.