Washington, D.C. —
Bank boards serve a critical oversight function. Legal and regulatory frameworks should enable banks to recruit the most qualified directors and bank boards to devote their time and efforts to the highest-level organizational priorities. The FDIC issued proposed corporate and risk governance guidelines as part of its response to the spring 2023 bank failures. Unfortunately, the FDIC’s proposed guidelines neither explain how its proposed vastly expanded board duties would promote bank safety and soundness nor take into account their conflicts with state law. This proposal would have a chilling effect on the ability of covered banks to recruit qualified directors. Rather than impose a prescriptive, one-size-fits-all approach to governance, the FDIC should withdraw and reissue the proposal only after correcting fundamental process and substance deficiencies, the Bank Policy Institute and American Association of Bank Directors said in a comment letter submitted today.
We recognize the importance of corporate and risk governance structures and how they further safety and soundness at covered institutions. The proposal, however, would create obstacles to the prudential management and performance of covered institutions . . . the proposal also lacks any cost/benefit analysis, particularly with respect to its impact on the ability of covered institutions to attract and retain qualified directors. – BPI and AABD
The problem: The proposal departs from existing law and corporate governance principles in several ways and is significantly flawed. Among other issues, it:
- Creates director recruiting challenges for covered banks by inappropriately expanding responsibilities, increasing personal liability for directors and introducing a novel director qualification requirement that at least a majority of bank directors be independent not only from bank management, but also from the board of the parent company (contrary to well-established principles of “independence” and fundamentally altering the current structure of many impacted boards).
- Distracts both boards and management from performing their core functions for the bank by inappropriately conflating their responsibilities, including by implying that bank boards may be expected to approval all a bank’s policies (contrary to existing regulatory guidance and practice), and requiring boards to confirm compliance with all laws and regulations (contrary to existing regulatory guidance and practices, and effectively impossible in practice).
- Overrides state corporate law creating confusion, presenting major questions of public policy and contradicting obligations for boards by requiring covered bank directors to consider the interests of a broad array of “stakeholders”, undermining the ability of boards to meet their fiduciary duties to their banks and shareholders under state law.
- Strays far afield from corporate and risk governance guidance issued by the OCC and Federal Reserve — which is better tailored to the individual business model, size, complexity, and risk profile of banks subject to the guidance — imposing significantly different board and risk management requirements on state non-member banks compared to similarly sized national banks and state member banks.
- Takes the wrong lessons away from the spring 2023 bank failures. The deficiencies in those cases were not the processes and formats prescribed by the FDIC’s proposal, but insufficient focus on core financial conditions and certain key risks that threatened the failed banks’ financial integrity, combined with too much focus on non-financial risk management and associated processes.
Why it matters: The FDIC has not demonstrated a justification to override long-standing, foundational principles of board responsibilities and state law as described in BPI’s Guiding Principles on Corporate Governance. Indeed, the absence of any cost-benefit analysis is particularly glaring in view of the extensive studies conducted by the FDIC and other government agencies on recent bank failures. The proposal fails to draw any linkage, and we believe there is none.
Recommendation: The FDIC should withdraw the proposal. Any reissuance of the proposal should only occur after correcting its fundamental process and substance deficiencies.
About Bank Policy Institute
The Bank Policy Institute (BPI) is a nonpartisan public policy, research and advocacy group, representing the nation’s leading banks and their customers. Our members include universal banks, regional banks and the major foreign banks doing business in the United States. Collectively, they employ almost 2 million Americans, make nearly half of the nation’s small business loans, and are an engine for financial innovation and economic growth.
Bank Policy Institute