Manatt Partner Interviewed on the Risks of Bank Directors Approving Loans
“Should Bank Directors Approve Loans?” Bank Safety & Soundness Advisor
August 29, 2011 – Bank Safety & Soundness Advisor interviewed Manatt’s Harold P. Reichwald, co-chair of the firm’s Financial Services and Banking Practice Group, on the risks of bank directors approving more loans than required.
Bank Safety & Soundness Advisor reports that though bank board directors are required to approve certain loans, recent FDIC lawsuits filed against directors of failed banks raise flags as to whether directors should approve more loans than required. Many in the banking community have noticed that the lawsuits create a higher level of responsibility for loan-approving directors, and the American Association of Board Directors now advises board members to avoid approving any loans they are not required to.
Reichwald thinks the FDIC’s expectations are out of line with most directors’ skill sets, as most directors are not professional bankers or lending officers.
“Often community bank directors are less able to supervise lending functions, primarily because in many cases, they don’t have the expertise,” he says. “To put a director on a loan committee and expect them to analyze the loan file and come to conclusions on their own is asking a lot of these people. For loan committee members to come in and listen to a presentation by a bank officer who is promoting acceptance of a proposed credit, to have the package in front of him and spend 20 minutes on 10 loans – how can he do justice to the analysis that must be done?”
Reichwald adds that it is becoming harder to determine whether the benefits of loan approval outweigh the risks. “I’ve seen several cases where board members were held out for special liability,” he says. “What if it turns out that the decisions you made to approve the loan, based on hindsight, turn out to be wrong or inept or overtaken by unforeseen circumstances? Why put yourself in greater harm? FDIC is putting members of the loan committee in a special category. It’s holding them out for a liability that others don’t have.”
Read the article here.
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