Regulators Tackle Board Effectiveness and Overdrafts

August 7, 2017

Authored by: Bank Bryan Cave

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On the latest episode of The Bank Account, Jonathan and Ken Achenbach discussed the Federal Reserve’s proposed supervisory expectations for boards of directors.

Before digging into the Federal Reserve’s proposed guidance, Jonathan and Ken first discussed the CFPB’s statistical analysis of frequent overdrafters.  As noted in the CFPB’s analysis, “very frequent overdrafters account for about five percent of all accounts at the study banks but paid over 63 percent of all overdraft and NSF fees.”  They also touched on the CFPB’s prototype model forms for overdrafts.   As might be expected from the CFPB, the sample forms do a good job of highlighting the economic consequences of utilizing overdrafts, but not mention the potentially significant benefits (tangible and psychological) that can be provided by allowing such payments to proceed.

As noted by Jonathan and Ken, the Federal Reserve’s proposed supervisory guidance identifying expectations for boards of directors of banking holding companies would only apply to institutions with consolidated assets of $50 billion or more.  However, we believe the guidance is appropriate for all bank directors to look at, particularly as it draws on the Federal Reserve’s experience with approaches that improve bank governance.

Per the Federal Reserve guidance, effective boards are those which:

  1. set clear, aligned, and consistent direction regarding the firm’s strategy and risk tolerance;
  2. actively manage information flow and board discussions;
  3. hold senior management accountable;
  4. support he independence and stature of independent risk management (including compliance) and internal audit; and
  5. maintain a capable board composition and governance structure.

We believe this Federal Reserve guidance is consistent with our advice that boards need to get out of the weeds and focus on the big picture, a topic we have addressed on earlier podcasts as well.

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