Magazine article American Banker

Fed Proposal Won't Let Boards off Easy, but Here's Why That's OK

Magazine article American Banker

Fed Proposal Won't Let Boards off Easy, but Here's Why That's OK

Article excerpt

Byline: William W. Lang

The Federal Reserve Board issued an important, long-awaited proposal on Aug. 3 designed to revise and clarify expectations for boards of directors at Fed-supervised institutions. The Fed has noted that board ineffectiveness at large banks was a central contributor to the financial crisis, but clear Fed guidance in this area has been slow in coming.

Following the crisis, regulators in practice increased scrutiny of large-bank boards, but the demands became too expansive, diverting board time and attention away from their central function of setting a bank's strategic path. The new Fed proposal is welcome news for the industry since it would redirect supervisory expectations more squarely toward senior management.

Initial press reports highlighted the proposed narrowing of board responsibilities so board members can concentrate on strategic issues. Superficially, this may appear to be the case, but it would be a misreading of the Fed's objectives to interpret the proposal as an overall lowering of supervisory standards for boards at large financial institutions. Banks shouldn't mistake a clearer statement of expectations as an easing of standards. Indeed, by establishing more focused expectations -- the new proposal provides five main measures for assessing board effectiveness -- supervisors will have better tools to hold boards accountable.

From a supervisory perspective, setting clearer criteria of what the Fed expects from board members will help correct weaknesses in board oversight of their institutions. Clearer direction from regulators is all the more important as memories of the crisis increasingly fade. Strong implementation of these supervisory policies will give the public more confidence about the financial industry's safety and stability.

For banks, a more focused articulation of Fed expectations is good news in light of how the less formal supervisory policy coming out of the crisis led to substantial misplaced demands on board time and attention.

But have no doubt: The new requirements will require large banks to do some substantial legwork. They face significant regulatory risk if they only concentrate on the narrowing of Fed demands for boards and fail to properly address the new expectations.

Yet the new expectations appear aimed at effecting real improvements in board operation.

For example, the proposal promotes improvement in how management communicates with the board. Communications to the board should be sharply focused on key strategic and trend information that allows directors to prioritize their strategic role. The far too common practice of bank management producing voluminous data-laden board materials needs to be overhauled to better enable directors to home in on key information. …

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