1

ERIC R. FISCHER

SENIOR FELLOW

BOSTON UNIVERSITY CENTER

FOR FINANCE, LAW & POLICY

THE BANKING INSTITUTECHARLOTTE, NORTH CAROLINAMARCH 26, 2015

2

ERIC R. FISCHER

SENIOR FELLOW

BOSTON UNIVERSITY CENTER

FOR FINANCE, LAW & POLICY

EVOLVING GOVERNANCE REALITIES FOR FINANCIAL INSTITUTIONS===========================================THE LIKELY DIRECT AND INDIRECT IMPACT OF OCC’S HEIGHTENED EXPECTATIONS GUIDELINES ON BANK DIRECTORS

3

I. Evolution , Post- Financial Crisis, of Supervision of Bank Directors and Senior Management

A. Gradual shift in emphasis from moral suasion/ confidential supervision when material risk lapses/regulatory violations occur to greater likelihood of enforcement action/ public disclosure.

B. Greater supervisory focus on specific elements of bank corporate and risk governance. OCC’s Heightened Expectations Guidelines (the, “Guidelines”) are evidence of this increased attention to governance.

4

I. Evolution ,Post- Financial Crisis, of Supervision of Bank Directors and Senior Management (continued)

C. Congress, financial press and public opinion pressure bank supervisors to sanction individuals (and not only banks) when material risk management failures and/or legal or compliance violations occur.

5

II. Why Are Guidelines Important?

A. Most extensive and detailed articulation by a bank regulator of heightened supervisory expectations for risk governance by largest and most complex banks.

B. The Guidelines are likely to influence supervisory guidance and actions of Federal Reserve, FDIC and State banking agencies.

6

II. Why Are Guidelines Important? (continued)

C. Although not directly applicable to banks with less than $50 billion in total consolidated assets, supervisors are likely to expect that banks of all sizes and levels of complexity will have evaluated whether they should adopt scaled-down, tailored versions of practices required for the largest institutions.

7

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced?

A. Annual Self-Assessments Eliminate any “check-the-box” aspects. Measure and track whether the exercise results in

meaningful changes.

8

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced? (continued)

B. Board Composition. See that necessary skill sets, experience, diversity

and leadership talents are represented on the Board, in the aggregate.

Eliminate outdated reliance on mechanical mandatory retirement age requirement.

9

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced? (continued)

C. Director Training Program to reflect risk profile, products and services

and compliance requirements of the applicable bank. Program to take into account knowledge and

experience of the individual director Improved quality and efficiency of program through

use of qualified external resources and technological advances.

10

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced? (continued)

D. Resource Allocation And Organizational Stature. Increased organizational stature of and enhanced

resource allocation to internal audit, risk management and loan review functions.

E. Manager Accountability. Boards will increasingly hold individual managers

accountable for risk management and compliance breaches, and for delays in correcting such lapses.

11

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced? (continued)

F. Active Board Oversight/ Credible Challenge Additional and more clearly defined risk limits. More director requests on significant matters for

additional or clarified data and explanations and/ or second opinions from outside subject matter experts.

Lower levels of director tolerance for repeated or material exceptions to policy.

12

III. Post- Guidelines, What Board Governance Practices Are Likely To Be Enhanced? (continued)

G. Interactions With Regulators. More informal as well as formal director interactions with

bank regulators.

 

H. Increased Documentation. Board and Committee minutes will include more detailed

descriptions of Board deliberations on key items. When directors strongly disagree with a Board vote on a

material matter that has been adopted, the director is more likely to ask that dissent be recorded than to remain silent for social reasons.

13

IV. Will Fiduciary Duties Of Bank Directors Be Expanded?

A. Interactions With Regulators. On June 19, 2014 (before OCC’s release of final

version of Guidelines) Federal Reserve Governor Tarullo raised the issue of whether fiduciary duties of bank directors should be expanded (at least for the directors of largest banks) to include a duty to meet regulatory and supervisory objectives (e.g., financial stability).

 

14

IV. Will Fiduciary Duties Of Bank Directors Be Expanded? (continued)

B. Expanding bank directors’ fiduciary duties would require action by state legislatures that I believe are unlikely.

Politically, there is no longer any strong public outcry for such actions.

15

IV. Will Fiduciary Duties Of Bank Directors Be Expanded? (continued)

B. Expanding bank directors’ fiduciary duties would require action by state legislatures that I believe are unlikely.

Strong arguments against such a change include: would deter capable individuals from becoming or remaining bank

directors; would engender additional litigation and related defense costs; would lead bank directors to get more involved in matters that go

beyond oversight, i.e., that are more properly within the purview of management;

it is not clear why, if adopted, such expanded duties should apply only to directors of banks ,e.g., why would they not apply to directors of bailed-out auto companies and insurance companies?

16

IV. Will Fiduciary Duties Of Bank Directors Be Expanded? (continued)

C. Guidelines do not seek to increase bank director statutory fiduciary duties (beyond objectives of OCC).

17

IV. Will Fiduciary Duties Of Bank Directors Be Expanded? (continued)

D. Although statutory duties of bank directors may not be expanded, bank regulators have, I believe, in practice, heightened their expectations of all bank directors . In general, bank directors will spend more time on bank matters, will be more insistent that management keep them fully-informed, will play a more prominent role in establishing an ethical culture at their institution and will more frequently and more actively oppose management recommendations that they perceive as involving acceptance of high levels of risk.

18