M E M O R A N D U M
TO: THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED
FROM: FRANK WHITE, BANK
COMMISSIONER
SUBJECT: DIRECTOR TRAINING
DATE: SEPTEMBER 6, 2002
We are looking at more Director Training Seminars. One in November 2002 and another next May 2003. Continued problems in the banking community have convinced us a strong, active, knowledgeable board is the best way to keep banks from getting in trouble.
These
tips were released by the Conference of State Bank Supervisors. Please send each of your directors a copy of
them.
CSBS conducted its inaugural training session for bank directors this week in Coeur d’Alene, Idaho. Fifty-two directors participated in the two-day, intensive session. As part of the session, CSBS released its 14 tips to being an effective bank director. The tips are a collection of tips from state examiners based on their many years of experience.
“To put this together we tapped the experience of 125 seasoned state examiners who have been in thousands of institutions,” stated CSBS Vice President Michael Stevens, who coordinated the project. The examiners were asked what advice they would give their mother. Who can’t relate to that? “The pointers are in plain language and easy to implement,” added Stevens. The most common tips centered on insider transactions, managing credit risk, audit and internal control, and interacting with the examiners. Some of the more interesting suggestions include:
• Make sure you understand what is covered and what is not covered in the audit program.
• The board manages the CEO. The CEO should not manage the board.
• Meet with the examiners regardless of the bank’s rating.
• Read the examination report. Where it says “bank management said…”, ask yourself, “is it true and did I know it?”
The most profound statement came down to: “Arguing with an examiner is like wrestling in the mud with a pig. Eventually, you figure out that the pig enjoys it.”
1. You are personally liable for all activities approved contrary to law…and for activities contrary to common sense.
2. Common sense and fundamentals rule.
3. Instill a corporate culture where problems are identified internally and acted upon.
4. Beware of any insider transaction, such as:
a. Loans
b. Purchase of repossessed collateral
c. Transactions with affiliates
d. Officer dealings with customers.
5. Credit risk is likely the largest exposure
a. Do not permit the combining of officer lending authorities.
b. Insist on a list of loans made with exceptions to policy guidelines.
c. Watch officer expenses. The looser they are with their expenses, the looser they lend.
d. Know the largest problems credits, why they are a problem, and what is being done to collect or improve.
e. Determine if loans are being kept current with liberal extensions, capitalization of interest, or additional loans, especially if delinquencies are low.
f. Beware of industry and risk concentrations.
g. 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).
6. Audit and internal control are vitally important functions in the bank
a. Make sure you understand what is covered and what is not covered in the audit program.
b. Correspondent bank accounts must be reconciled with supervisory review.
c. Segregation of duties and dual control are a must. Get certification from an independent party.
d. Enforce a two-week leave policy.
7. Maintain detailed records of the board’s decision-making processes.
8. Take every opportunity to learn more about banking, including: credit risk, liquidity, interest rate risk, and financial reporting.
9. The relationship between the board and bank management
a. Your job is to ensure that bank management is following the directions of Board approved policies and goals.
b. Insist on regular compliance reports that evaluate compliance with policies and regulations.
c. Management information reports must be accurate and understandable.
d. Do not get lost in the charts and fancy presentations. Insist that bank officers tell you what they mean in 10 words or less.
e. Know the management of the bank, their personality, thoroughness & honesty. What motivates them in daily functions?
f. The board manages the CEO. The CEO should not manage the board.
10. The relationship between the board and the bank examiners
a. Meet with the examiners regardless of the bank’s rating.
b. Be open and honest as examiners and directors have the same goals: safety & soundness, protection of the depositors, and a fair return to investors.
c. Use examiners and auditors as a tool for learning.
11. Read the examination report. Where it says “bank management said…” Ask yourself: “is it true and did I know it?
12. Review and approve management’s response to the examination report.
13. Be wary of dominant personalities on the board.
14. Arguing with an
examiner is like wrestling in the mud with a pig. Eventually, you figure out that the pig enjoys it.