August 31, 2017
Authored by: Jonathan Hightower
Bank directors have played a crucial role in the turnaround of the banking industry, an accomplishment that deserves recognition in light of the fact that it has been done under tremendous regulatory burden and tepid economic growth. Given that, why do we continue to question why the country’s most respected business people would be willing to serve as bank directors? Respected attorney and industry commentator Thomas Vartanian recently asked in an opinion piece in The Wall Street Journal, “Why would anyone sane be a bank director?” Well, sane people are serving as bank directors every day, and in doing so they are benefiting the economy without exposing themselves to undue risk.
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The regulatory environment for bank directors is clearly improving. The Federal Reserve’s recent proposal to reassess the way in which it interacts with boards is appropriate if overdue, and the other banking agencies should follow the path that the Federal Reserve has set forth. We also witnessed the FDIC acting very aggressively in pursuing lawsuits against directors of failed banks in the wake of the financial crisis. However, suggesting that the FDIC relax its standards for pursuing cases against bank directors is not only unrealistic, it misses the greater point for the industry in that it needs to continue to refine its governance practices in order to provide for better decision-making by bank directors and to enhance protections from liability for individual directors.
In order to fully understand the point of this position, it is important to clear up a couple of commonly-held misconceptions. First, when the FDIC sues a bank director after a bank failure, it does so for the benefit of the Deposit Insurance Fund, which is essentially an insurance cooperative for the banking industry. As a result, the FDIC should be viewed as a purely economic actor, no different from any other plaintiff’s firm in the business of suing corporate directors. Lawsuits by FDIC should not be given any higher profile or greater credibility than any number of other suits against corporate directors that inevitability occur during market downturns. There should be no additional stigma, and certainly no additional fear, with regard to a claim by the FDIC on the basis that it is “the government.”